Methods to keep your costs under control

Activity-based costing systems that measure the cost of each activity performed by an employee can help IT directors better...

Activity-based costing systems that measure the cost of each activity performed by an employee can help IT directors better manage expenditure.

IT Performance Management, by Peter Wiggers, Henk Kok and Maritha de boer-de Wit 

Controlling the cost of IT is an important part of performance management. One way to do this is by setting up an activity-based costing system (ABC). This can be defined as an "economic map of the organisation's expenses and profitability based on organisation activities".

To set up an ABC system, first create an activity inventory or dictionary. Describe the activities performed by the IT organisation. Each activity is described by a verb and an associate object, for example, answer helpdesk calls, develop applications, roll out new applications, monitor infrastructure, perform changes, solve incidents, develop and train IT professionals, create management information, and so on.

To create this inventory or dictionary look at each department and the activities it performs. This includes both production departments - operations, helpdesk, and application management department - and support departments - service level management department, quality and process department, human resources. The activities therefore can be divided into two groups:IT operating processes and IT management and support processes.

There are several ways of charging the resources to activities, based on measurements or estimates. Employees, or groups of employees with similar jobs, mark the activities they perform and estimate the percentage of their working time spent on each activity. A minimum percentage of 5% per activity is often used.

Another way to relate resources to activities is a time and motion study. While employees are performing their jobs, researchers register the time spent on the activities, or take a sample test to determine the time employees spend each hour working on the activities.

Another source can be time registration, which is used in most organisations, whereby timesheets describe the activities performed by each employee. For most studies, a combination of mechanisms will be used, but it is important to understand the balance between the cost of measurement and the cost of errors.

The third step in creating an ABC system is relating the activities to products and services. The relation between these is based on activity cost-drivers. There are three different types: transaction, duration and intensity/direct charging, where the cost of measurement increases in relation to the complexity of the cost driver.

A transaction activity cost could include the number of lines of code; a duration cost could include the number of helpdesk calls; intensity/direct charging involves charging business units for the use of IT systems.

The final step is relating the products and services of the IT organisation to its customers. Customers can be divided into market segments or internal business units. In other situations internal and external customers are combined.

Creating an ABC system is too expensive to be a one-off, isolated activity. Additional activities may be required. Using the system for continuous measurement, service analysis or as part of a balanced scorecard requires incorporation of the ABC system in the financial accounting.

IT Performance Management, by Peter Wiggers, Henk Kok and Maritha de boer-de Wit, is part of the Computer Weekly professional series. To order, call 01865-888180

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