Companies turn to IT cost analysis via SaaS model

IT departments are turning to new SaaS-based tools to map costs to providing IT services to the business, helping companies identify how to cut expenses.

If your IT department spends $2,000 to provision and support a laptop, but your CFO can buy one at the mall for $600, you’d better be able to explain why.

In this tight economy, business managers scrutinize technology spending carefully. IT executives need to put a value on the service they provide, so some IT departments have turned to IT cost analysis tools for internal chargeback, or to make technology costs more visible to the business.

John Hogan, director of the business management office in Motorola’s IT department, uses IT cost analysis tools to provide reports to his finance counterparts and the CIO’s office.

IT priority: Tracking back, itemizing expenses
Hogan said Motorola tackles IT cost management in two ways: The finance organization tracks IT cost centers in a traditional manner, tracking overall budgets and forecasting. And, second, within the IT department, Hogan’s team uses an IT cost analysis tool from Apptio, a Bellevue, Wash.-based startup, to report on IT services at the business unit level. Hogan identifies costs to provide applications for Motorola’s various divisions, like its supply chain or marketing departments.

“We’ve been live with Apptio since March 2010, and we’re still in the process of institutionalizing the system,” Hogan said. “Some teams are using it more than others. Some are still using Excel and we’re prying it out of their cold, dead hands. We look at it as a two- to three-year journey.”

Hogan said Motorola runs over 1,800 applications, and relies heavily on a homegrown configuration management database (CMBD) to define relationships between hardware and the applications (Motorola is moving to a BMC CMDB in the future). The CMDB helps Hogan map costs to services, but the CMDB can’t capture everything -- for example, the cost of desktop support -- so Hogan has to provide some manual input to the Apptio tool as well.

“Where we have gaps in reporting is where we have gaps in the CMDB,” Hogan said. “We’re providing greater value in the CMDB, because the numbers are getting more attention.”

Quantifying IT expenses makes it easier to prioritize
With this IT cost data, Hogan can talk to internal customers about the cost of the services they consume. “You can lower your costs by doing this: Cut the number of applications, cut the service levels. I can show your top 10 applications are consuming 80% of your budget.”

Hogan said the Apptio tool didn’t start the cost reporting project, as Motorola had pursued this model for a few years, but it has been key to moving the project forward.

Lisa Erickson-Harris, an analyst with Enterprise Management Associates, has seen more organizations tackling IT cost management, chargeback and other financially-driven disciplines.   

Erickson-Harris said IT cost analysis software has been growing over the past few years and particularly as the economy tanked. The other driver for adoption, according to Erickson-Harris, is that more IT organizations today have internal financial management departments, “many of whom are using spreadsheets and other primitive toolsets where automation and accuracy are required.”                                            

Kevin Birch, IT service cost manager at Severn Trent Water Ltd., a UK-based water utility, uses the cost management analysis tool from Service-Now.com.

“You want to get away from the concept that IT is free,” Birch said. “We want to make executives aware of the cost of infrastructure services, like service desk, the data center, the Unix enterprise platform, the desktops.”

Birch provides the costs associated with around 100 applications to the business managers. In turn, the execs can then weigh the cost to provide the service against the business benefit.

If Birch’s organization wants to replace, upgrade or decommission an application, then these costs will be used to help with the financial analysis and cost benefit of the business case.

Servern Trent uses a a third-party provider to benchmark IT costs against comparable companies called The Corporate IT Forum, and it allows Birch to see where his organization spends more on IT services than it should.

Birch said his IT department doesn’t do chargeback. “Some organizations may need to do that, because of the way their finances operate, but having a small army of people producing invoices wouldn’t give us any benefit.”

San Diego-based Service-Now.com added a cost analysis function to its SaaS-based IT service management (ITSM) suite with its Spring 2010 release. The company upgrades its software quarterly, and the latest release launched Oct. 1, 2010.

Both Apptio and Service-Now.com deliver their tools via SaaS-based model, and so does a startup called Digital Fuel. “SaaS is the future! More and more enterprises are shifting to this way of consuming and using software, which is much easier to deploy and maintain,” said Digital Fuel CEO Yisrael Dancziger.

More companies have turned to Web-based IT management software and shifted the burden of maintaining the tool back to the vendor, and shifted the cost structure from a capital expenditure to a simple, per-seat operating expense.

Motorola looked at options to host an IT cost analysis app in-house as well as SaaS options, and chose SaaS in the build-versus-buy analysis.

“We felt an in-house tool would take us much longer to build and fast time-to-market was a key requirement,” Hogan said. “The up-front investment cost to build was greater, but run costs are a bit higher with SaaS.”

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