DIT and Service Based Costing

DIT has been talking about Service Based Costing for a year. What is Service Based Costing? Simply put, Service Based Costing is an ITIL, consumption-based budgeting concept in which an organization calculates the accurate cost of their services and products through the analysis of both past and predicted consumption trends, customer needs, business volumes and required innovation.  This approach not only helps to determine rates, but also helps the organization stick to them.

There are three key benefits for utilizing Service Based Costing:  transparency, clarity, and cost management.  Through this model, everyone involved understands the direct and indirect costs consumed (and only consumed) by a service – that’s transparency.  The budgeting process itself requires the technical understanding of how services underpin other services and the financial understanding of the associated costs.  Using Service Based Costing adds clarity to this process, by following a plan that removes the guesswork, and allows a clear explanation to customers about the levers they can use to manage their costs.

The benefits of this new way of budgeting can also reach into the internal work culture.  From a leadership perspective, there is an advantage that service owners become “entrepreneurs” and can truly manage their services.  They can also fully understand how performance and quality impact the cost of their provided service.  For example, each service pays for the number of incident tickets associated with their service.  The fewer the tickets, the lower the service cost.  Therefore, it is imperative that the owners understand how the service is performing and look strategically at how to continue to improve it.

At DIT, we have implemented a structured, disciplined way of ensuring service reviews occur. The annual Service Maturity Assessment makes each service owner accountable for how the service performs (via tickets and customer satisfaction surveys), how the service compares to industry benchmarks (via Gartner reports), how costs are managed (resource management and consumption reports) and what the future roadmap looks like for the service (industry standards and emerging/retiring technology review).  Additionally, service owners are accountable via their performance evaluation for how their service is performing overall. If a service benchmark review determines DIT’s rate is not comparable, then an alternative delivery method must be considered.

Let’s not leave out our finance and budgeting functions.  Service Based Costing will not be successful without the strong collaboration between finance and services.  The importance of this partnership cannot be overstated.  Once the budget process is complete, regular reviews of consumption are critical.  Consumption of a service determines the rate.  If it fluctuates some, but in general remains the same, the recovery is consistent.  However, if it spikes or drops significantly, an over recovery or under recovery occurs.  By managing this consumption more closely, adjustments can be made to rates throughout the year to ensure the rate of recovery is correct.

For DIT, this new model improves accountability, leads to better decision making, and strengthens the budgeting process. Service Based Costing, if done correctly, benefits the State by improving transparency and clarity, making rates more competitive, ensuring budget credibility, providing customers more control over costs, and most importantly deriving a defendable, justifiable rate for our customers.

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