Like many IT executives, you might be considering cloud computing as a way to cost effectively deliver IT services to the business. You’re not alone. IDC predicts that revenue from IT cloud services will grow from $17.4 billion in 2009 to $44.2 billion in 2013; this is a five-year annual growth rate of 26 percent, which is more than six times the rate of traditional IT offerings.1 (These figures do not include spending for private cloud deployments. They only include information for public IT cloud services offerings.) While cloud service providers are poised to reap these forecasted revenues, enterprise IT organisations also anticipate financial advantages from cloud computing.

The on-demand nature of cloud computing can result in significant cost savings for an enterprise, because end users pay for only the services they use and because the IT organisation’s supply and demand model will be more effective.

However, the cost could actually go up unless you do a cost-benefit analysis so that you can determine what services to move to the cloud. But how do you determine which IT services or resources can be more cost-effectively delivered through the cloud?

To make that determination, you need to know your current costs to deliver specific services — you need financial transparency within the IT organisation. Doing this analysis requires having the right information to make decisions.

Cloud Concepts

Cloud computing provides dynamically scalable and often virtualised resources as a service over the Internet. Many enterprises are moving toward cloud computing so they can increase the speed of IT responsiveness to business needs as well as reduce the cost and use of the infrastructure, platforms, and applications.

The three main types of cloud computing environments are public, private, and hybrid. When you use public clouds, you’re essentially renting a virtual machine by the hour, eliminating capital expenses within the IT organisation. The infrastructure for a private cloud resides within the IT organisation, and a business service that needs additional compute or storage resources can dynamically provision for it. A private cloud enables an organisation to manage the infrastructure and have more control than would be possible in a public cloud.

A hybrid cloud is an environment consisting of multiple internal and/or external providers. The hybrid cloud offers IT the opportunity to provide the cost-saving benefits of public cloud services with some of the control and compliance required for private clouds. Cloud computing enables the consumers of IT services to consume just what they want and to pay for only what they actually use. The principle for consumption and payment is similar to a telephone service in which the customers pay for the basics of the service plus the calls they make and the time they are on those calls.

To make a rational decision about moving aspects of IT to the cloud — or to any third-party service provider to outsource IT capabilities — it’s important to understand what it costs to deliver the equivalent service internally, so that the economics of your decision are sound. If you

decide to provide IT services through private or hybrid clouds, you’ll need insight into what your services cost. Otherwise, you might never know whether you’re really saving money through leveraging the cloud. Even more important, in addition to the ability to calculate the cost of the service, you’ll also need to charge for the service and track the consumption of that pay-as-you-go service.

IT Complexity

Private clouds can help you achieve operational efficiencies. However, because the deployment of computing resources becomes easier in cloud environments, you run the risk of uncontrolled demand as well as service and application sprawl. In such cases, you might not save the money you thought you would by using cloud computing. Furthermore, technologies such as server blades, virtualisation, and shared services environments have increased the complexity of IT and have compounded the challenges in determining what IT services cost. For example, companies have deployed virtual environments so they can run more applications on the same computing device. If every device in the company is shared, how do you take the true cost of a service and charge it to the person who is getting the value and the benefit from that activity? IT needs to know what’s running, how long it’s running, and who’s using it, so that the IT organisation can properly allocate the costs to the person who is getting the benefit from that service.

Financial Tools

Many IT organisations have built sophisticated applications, dashboards, and metrics for the business units within an enterprise. Yet most IT organisations lack the tools that provide the financial insight to help IT executives run IT like a business. IT financial data often resides in silos associated with technology assets and resources rather than with the services that IT provides.

Spreadsheets are the primary source of financial data about IT, and few IT organisations have a consolidated place for financial data. As a result, IT organisations cannot easily determine what it costs them to provide IT services. Manual, spreadsheet-based attempts to manage and analyse the spending on services are costly, time-consuming, and often unsustainable. Without the right tools and data, IT will unlikely be able to provide financial transparency back to the business units and end users.

Financial Transparency

Financial transparency within an IT organisation is much like financial transparency within an enterprise. You need to know the resources and associated costs required to provide a service, and you need to be able to communicate to your customers what services they have consumed and what that consumption costs. Imagine if the cable or telephone company sent you a monthly bill that just said £300 when it’s usually £150, and the company gave you no breakdown of the charges. If the bill had included more details, you could understand why the charges increased. Then you could have a conversation about the service and the costs. Financial transparency can help you make better decisions, such as which IT services to deliver through the cloud.

The Approach

The following five-step process is a systematic and logical approach designed to help you achieve financial transparency within your IT organisation, so you can make informed decisions about the cost-effectiveness of cloud computing. This process is also based on Business Service Management (BSM), a comprehensive approach and unified platform for running IT. As a result, IT organisations can attain a single view, as well as a single system that bridges the financial, resource, and demand management gap between IT operations and IT business management.

Step 1: Inventory Services and the Component Cost

It’s important to create a service catalog. Take inventory of all the cost drivers for each service, such as devices, applications, IT staff, vendors, and computers. More important, you will need a centralised repository that can relate all aspects of IT to each other, so that you will have a fundamental understanding of the cost of a service.

Step 2: Build the Cost Models

You need to be able to design and support several costing models. Specifically, you will need to graphically lay out and tie together all the financial components of a service (hardware, software, people, shared infrastructure costs, etc.). The objective is to assign a cost to the service and understand the monetary value of that service.

Step 3: Identify Service Utilization and Consumption

With a well-defined cost model in place, you can begin to apply metrics on the utilisation and benefits of that service. The objective is to gain a businesslike perspective of the service and answer questions such as the following:

• Which service is the most profitable?
• How did the budgeted costs compare to the actual costs?
• Which service delivers the highest value at the lowest cost?

The higher-level business value will become apparent when you can associate the service cost with the consumption metrics of the service. Then you can answer the following types of questions:

• Which service is being utilised the most?
• Which business units or customers are consuming which service?
• Which service is trending up or down?
• Are costs properly assigned or allocated?
• How can we deliver more high value services?
• Should we do away with unprofitable services?

The end result is the ability to make fact-based decisions about the services you deliver to the end users. A good example is how some energy companies, which had used meter readers to track energy consumption, are now using smart meters to gather this data through automation. The smart meters can provide consumers with more detailed information about how they are using energy. With this data, the consumers can make informed decisions about how to reduce their consumption and save on their utility bills.

Step 4: Provide a User Bill or “Showback” Statement

A user bill or “showback” statement is very similar to the information a consumer would receive on a cable bill. The bill would show whether a person paid for Internet, phone services, and so on. For IT services, the statements provided to the end user should address the following questions:

• What are the services the end user is receiving in the language that the person understands as a consumer of those services?
• What is the cost of those services?
• What is the level of service that has been delivered?

Step 5: Benchmark the Services

With a detailed understanding of the cost and consumption of the service, you can now begin to apply detailed metrics and key performance indicators (KPIs) to that service. The objective is to apply your internal service cost data to external cost data, enabling you to make even better business decisions about the following:

• Is our service cost-effective?
• Is our service competitive in the marketplace?
• Which services are more cost effective to outsource?
• Is the IT organisation providing services above or below the industry average?
• How can we make our service more cost-effective or competitive?

How to Leverage IT Service Cost Management Solutions

IT service cost management solutions can guide you through the preceding five-step approach to achieving financial transparency. They can give you visibility into the resources and associated costs required to provide IT services. These solutions model service costs and cost drivers, collect cost and utilisation data from heterogeneous data sources, compare costs against industry benchmarks, and generate an explanation of charges — or a “bill of IT” — that you can use for chargeback or “showback” with your IT clients.

IT service cost management solutions that include a comprehensive set of reports and analytics enable you to quickly gain insights into critical cost drivers, collaborate with lines of business and finance on investment priorities, and make faster, fact-based decisions that positively impact the business and reduce IT costs. This insight also can help you determine whether cloud computing is a cost-effective approach for some of the IT services you provide to the business. If you establish cloud computing internally, you can use this information to set a foundation for charging users for the IT services they consume.

To achieve financial transparency faster, look for solutions that provide cost-model templates based on service-costing best practices for commonly offered IT services. These templates should define the recommended components and cost drivers, the information elements that should be captured, and the correct processes for managing the information. A solution that leverages structured and unstructured data from a variety of sources — such as data from spreadsheets, financial systems, and databases — enables you to combine, organise, and associate this data within the IT services and cost models to create a complete characterisation of service costs.

Strategies for Success

As you work toward financial transparency and develop your cloud computing strategy, here are a few recommendations:

• Ensure that financial transparency is incorporated early into your cloud strategy.
• Plan your short-term and long-term service-costing objectives.
• Gain business sponsorship for the types of financial reporting that  will be required.
• Consult with trusted resources with expertise in this area.
• Seek a unified platform that can meet your needs.

When you have visibility into the true cost of delivering IT services, then you can better determine which IT services can be cost-effectively delivered through public or private clouds. Plus, you’ll have the financial transparency that on-demand computing requires.

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