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Cost engineering

Expected outcome

Accounting systems in place provide a static view of expenses, by nature: software, hardware, internal salary, fees, … Relying on this information, the only savings you can drive are  based on basic purchasing negotiations. If you want to further reduce the cost of IT while maintaining or increasing its value, you need to answer the following questions:

  • Do you make good use of your IT expenses ?
  • How much do IT services rendered to your clients really cost ?

ABC models provide a multi-level approach to costing, with complementary visions :

  • Activity level for internal, IT oriented analyses of the organization’s efficiency,
  • Service level for customer oriented analyses of the organization’s effectiveness

Such models provide an excellent ground for billing IT services with billing units in line with customers’ own processes and use of these services. For instance, ABC models will help you calculate the full IT cost of a  payroll application based on its consumption of activities (server processing time, data storage size, helpdesk support, …) ; once you know the cost of this application, you can define the price of processing 1 paycheck for your customer. From a customer’s point of view, it is far more interesting to know the price of processing 1 paycheck than the price of a P-series server.

Approach

A successful implementation of a costing and/or billing model relies on 2 key elements:

  • A proven calculation method
  • A model framework already tested by industry peers

Activity Based Costing

 

 

Activity Based Costing introduces 2 distinct levels for cost allocation : activities (actions performed both by people and machines) and services provided to customers.

  • Customers choose the services they need (from a catlog for instance)
  • These services consume IT and overhead activities.
  • The consumption of activities by services is measured with technical cost drivers.
  • These activities consume resources (expenses such as salaries for human actions, electricity bills for machine actions, etc …)

As such, ABC allows to identify cause and effect relationships between resources spent and services delivered. With the use of cost drivers, ABC adds a technical dimension to better match costs and real life.

 

The CIGREF model: a reality-proof, shared framework :

CIGREF is a society of CIO’s of major companies. This group of prominent CIO’s defined a general framework which can be used as a baseline to define your own model (set of activities, services and cost drivers).

 

  • Services are specific for each IT organization ; they can and should, however, be grouped in 4 reference families : User Equipment, Supply of functionning applications and services, Technical projects, User projects.
  • A set of generic activities or actions performed by all IT organizations (either internally or externally), with a clear segregation of human and machine actions.
  • The need to view costs from both a P&L and cash-out standpoints.

References

Amadeus, AG2R La Mondiale, Agric-Arrco, Areva, Bouygues Telecom, CEA, Chorégie, CNP, Cofidis, Crédit Agricole Cards & Payments, Crédit Agricole Monecam, Crédit Agricole SILCA, GDF Suez, GeoPost Telintrans, Gemalto, GIPS, JC Decaux, MMA,  Mutuelle Nationale Territoriale, Mutuelles Unéo, Systalians Réunica, UCPA, Veolia Eau, Vivéo.

 

Software solutions / Tools

Valoptia.ABC software solution was originally developed to ensure a quick, efficient and effective way of implementing an ABC costing/billing model from scratch. Continuously refined with our field experience Valoptia.ABC represents a very powerful application with a very fast implementation.

Activity Based Costing

 

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Publications

Modèle économique de la DSI


Modèle économique de la DSI - les clés de la performance

by Joachim Treyer et Olivier Brongniart,

Editions Hermès