- Overview of Step 4c
- How to use the screen
- How and where do I find out my IT costs?
- How should I handle the different types of costs?
- Can you give some real world examples of the data to enter on costs?
In this step you will be collecting and entering the financial costs associated with each of your systems and services for the selected financial year. There are two types of costs to collect and enter: Running Costs and Investment Costs. Together these costs across all systems and services should represent the entire spend for the chosen year on IT. We will be using these costs in the reporting to show the highest areas of cost across your business and compare these to complexity, and type of spend on licences and support. For definitions please refer to the Keywords section below.
Select your Financial Year from the drop list above the matrix and click Load Data. The default year is the one that you saved in step 4a – Setup. If you cannot see the financial year you want to enter in the list please first enter it on the setup screen at Step 4a before returning here.
Enter Running and Investment Costs associated to your systems. Note that Total Costs on the right column and on the bottom of the scroll region will automatically update as you enter your figures. You can only enter data for financial years that you have saved on the setup screen at Step 4a.
Once you have entered all your data, check that the total figures match the overall spend you expect for the year, then click Save and Continue to successfully store this information. You can click Save and Continue at anytime even if you have entered part of the list and return here to enter more information later.
Keep in mind that if you want to enter another year, you need first to click on Save & Continue, saving the current year data, then go back to this page and select the other year you want to enter the data for. If the year is not in the list please first setup the year on Step 4a before returning here to enter the data.
Running Costs: expenditure that keeps a business going without any change, projects or development. This will vary from business to business as each one will have different ways of budgeting. Typically this should include all regular recurring costs, or costs that are essential to keep the day to day operations of the business working, including essential maintenance and support services. It would not normally include costs of changing systems, renewing hardware or software, upgrades to new models or versions, or any project work. Some companies may include mandatory replacement of end of life IT assets and licences in the running costs. Some businesses will also include here the depreciation on any assets that were purchased in prior year. It should include costs that might be carried by non IT departments such as the facilities costs of machine rooms, or data centres and software purchased directly in business departments. The costs of IT management itself and internal teams and cost centres should be included in the list. We suggest using amounts that can be reconciled to the financial ledgers, the user should decide if these figures are cash budgets or include the effect of any amortisation and/or depreciation.
Investment Costs: all costs concerned with IT upgrades and change within a company. This would normally include all new, additional and replacement hardware and software, services to install them and any services to execute projects and change within the organisation. Some firms will refer to this as their discretionary expenditure or IT project portfolio. We suggest using amounts that can be reconciled to the financial ledgers, the user should decide if these figures are cash budgets or include the effect of any amortisation and/or depreciation.
Total Costs: the sum of the two above representing the total spend on IT within the organisation.
For more details see the Glossary.
You maybe lucky and already have a comprehensive IT budget broken out line by line for every application, software, hardware and service within IT that your organisation uses, if so great you should be able to complete the data table quickly and easily. If not, the place to start when collecting the information on costs for IT should always be the company’s or organisation’s financial systems and ledgers.
Start with a comprehensive review of the assets on the balance sheet related to IT including hardware purchases, and software contracts. Then add to this list any regular purchases for maintenance and licences within the IT costs centres of the organisation, plus the internal IT costs centres themselves. Finally work on the IT costs that maybe embedded in business areas such as the direct purchases of application services over the internet, any direct hardware purchases for desktops and printers and or any facilities costs related to IT. Having leveraged the financial ledgers for information add any information within the IT landscape itself,for example, licences and inventories may exist within the IT databases, e.g. the Microsoft SMS system may be a good source of desktop applications.
Most organisations will know that getting transparency and a comprehensive view on IT costs can be a difficult exercise, all too often the costs are hidden in non-IT areas or mixed within the accounting systems with non IT purchases and assets. The IT budget in the financial systems is always a good start but in many cases it is sadly only 80% of the story so interviewing around the organisation and digging deeper into the various sources is sometimes necessary if you want a comprehensive view.
Different accounting techniques around the world and different management practices mean that every firm will be different in how it handles management accounts, how the costs are structured, and how budgets are managed. With Strategy4IT we do not aim to constrain you in how you construct and enter the data. We have tried to separate running costs from investment costs so you can see the areas you can influence easily (Investment Cost) and have higher discretion to change and those that are less easy to change (Running Cost). We have not been prescriptive on how to fill in this data and it is something that you can use in the way that best fits your method of budgeting.
If you are unsure how to split between investment and running costs here is a list of examples of types of expenditure that could be expected in the different categories, this is not a fixed list but intended as a guide to help you categorise your spend:
- Costs of external or outsourced support services for all software, applications and hardware
- Internal cost centres, team costs and personnel costs for support and maintenance of hardware, software and applications
- IT management costs including the CIO, IT security, business continuity planning, IT financial management and other overheads
- Support and maintenance contracts for hardware and software
- Regular spend on pay-as-you-go and cloud services for applications and IT services
- Regular spend to third party carriers and providers for leased hardware, networks and software
- Legacy depreciation of hardware from prior year (if using amortised costs rather than cash)
- Facilities costs for data centres and machine rooms
- Heat, light power and air con within the machine rooms
- Spend on personnel related to projects and change whether internal or external/outsourced
- Spend on new or additional licences for hardware, software and applications
- Spend on capital investment for new hardware, software licences and applications costs
- One off / initial expenditure related to sign up for new services or to change services
- Spend on replacement of end of life environments including decommissioning costs of legacy environments
- Spend on additional IT capacity and licences to support the business growth
In our examples that we have been following in these help files we have been examining two companies, one a service company in the travel sector and the other the result of a recent merger in the retail sector. It would not be practical in this example to draw out all of the costs for both companies but we can use them to illustrate examples of the different types of costs and how to make choices associated with the entry of those costs.
Let us first look at the handling of costs for a typical business application. Consider the application Sage. This was used for the travel company for managing their finances and accounting. It had many components of cost:
1) the original project cost of installation and purchase of the original licences, in this case management had chosen to depreciate this over 3 years so there was one third of the original project costs showing as depreciation in the year we examined;
2) in addition to the original one off perpetual licence there was an annual licence and support fee covering 3rd line support and product upgrades based on the number of servers it was installed on paid annually;
3) the internal business application support team was supporting all applications including this one for 1st and 2nd line support and represented an internal cost spread over all applications;
4) there were two dedicated servers running the application and its associated database with corresponding costs of licences and support services
5) a project was planned to install additional modules of Sage for specific financial reporting, plus an upgrade to the main Sage version, which was being implemented in the year in question. Again this was depreciated/amortised over three years.
In this example, the first item of cost (prior year depreciation) in this case was treated as running cost on the application as it could not be varied/was not discretionary it was added together with the second (annual licence fees) and entered against Sage in the systems and services list. The fifth item above (the project costs) for the first year depreciation was recorded as the investment costs on Sage. It would also have been valid to ignore depreciation and record the items as cash expenditure, so in this case the first item would have been ignored (it was from a prior year) and the fifth would have been taken in its entirety The other items for the the application support costs and server support and licences were recorded as running costs against their respective areas in the list as it did not make sense to attribute them separately to this application.
Taking a second example for the desktop support for the retail company. In this case the desktop support was partially provided by an internal team and partially outsourced aligned to the original two companies that merged. The costs can therefore bee seen to be:
1) The costs paid to the outsourced company for the external desktop support for the dry cleaning business as an annual fixed price outsourcing contract.
2) The costs of the internally managed desktop support team of 5 people for head office and the retail business including their fully loaded salary and overheads costs,
3) In addition the team had two direct contractors on time and materials contracts billing monthly for additional capacity.
In this case all of these costs were added to give the running costs for the desktop support for the company. There were no investment costs as there were at that point no plans to rationalise the service.
1) I cannot see the year I want to enter in the drop down list?
Please make sure you have entered ALL years that you wish to enter costs for at Step 4a and press save on the step for each year before entering the costs.
2) I have found a cost that is not in the list of systems and services what should I do?
Press Save and Continue to save your data then use the menu to return the Step 4b and enter the missing lines on the systems and services list before returning to this step to add them to the table of costs. Do not forget to include the costs of planned software and hardware implementations in the investment costs list, these may have no running costs for this year but will of course have running costs once implemented.
3) Can I enter more than one year of history? Is it possible to enter future budgets?
Yes the system allows you to enter multiple years, for each year you must save the year in the setup page on Step 4a before entering the costs on this screen. It is up to you whether you work with budgets forecast or actual financial figures for the chosen year. It is possible to enter predicted spend for future years in order to see the result of change and investment.
4) How do I handle freeware, open source and other software or services with no costs?
Some organisations may use software such as Firefox or OpenOffice that has a licence or contract but there are no costs incurred. In this we suggest entering it in the systems list but entering zero on the cost lines for that system or service. For understanding complexity it is important to include all software, hardware and services irrespective of their costs.
5) Support and projects is provided by internal teams – how should I handle these costs?
We suggest treating each internal costs centre or team as a cost in itself, for example server systems administration team would be a service line for systems admin. with associated costs. If you expect or had project work then split this in proportion to the time booked or predicted.
6) I have a project plan to implement a new software how should I put that in the costs list?
For the project duration enter this as an investment costs, once implemented enter the actual or predicted running costs into the running cost fields. Do not forget to include decommission costs from anything it replaces.
7) Should maintenance be investment or running costs?
In line with industry practice we suggest including all small project work of less then 5 days or smaller than a suitable threshold in cash as maintenance. Normally we would expect maintenance to be included in the running costs, however some organisations will treat this for account purposes as investment. Each user of Strategy4IT can decide on how to enter this themselves in line with their organisations budgeting and accounting practices.
8) Do I need to enter amounts to the cent, pence or to high accuracy?
We do not use the absolute amounts you enter in this version of Strategy4IT. For strategy and assessment we use the data to compare areas of expense relative to each other, so it is not essential that the amounts entered are accurate to the cent or penny. It is acceptable to use rounded amounts whether to 1000′s, 100′s or 10′s depending on the size of your IT budget.
9) How should depreciation be treated?
Each organisation will have it’s own rules on the treatment of IT investment, this may depend on management choice or regulatory and tax accounting rules. Some organisations will treat all investments as cash expenditure, some may depreciate purchases over a number of years for hardware purchase, some will include initial software and even person time from investments in the amortisation. We recommend for simplicity of understanding using a cash accounting view on all costs, however it is also fine to follow the rules used by your financial department when entering the data. The most important point is that you and your management understand the data.
10) Can I compare budget, actuals and forecast for one year in the system?
As the focus of Strategy4IT is cost versus complexity rather than trend analysis and IT cost tracking we do not include this in this version of Strategy4IT, we are considering this feature for future versions but would be happy to discuss portfolio optimisation with you further so please contact one of our consultants for information and guidance.
11) Some of my systems were not/will not be implemented at times in the past/future for which I want to analyse data – how should I handle these?
If a system or service was not in use for the year in question then just enter the amounts as zero, but be careful to include project costs when looking back in time or predicted running and decommissioning costs when looking forward.
12) Does the amount have to reconcile to the IT budget/spend for the year entered?
No, but the it is good to try and get the view as comprehensive as possible.