Fixed Costs: Three Bad Habits that IT Finance Must Quit

911 views

Published on

What are fixed costs and why do they matter?
What are the 3 bad habits that drive fixed costs?
What can you do with Apptio to change those habits?
How does Apptio measure fixed/variable costs?

Published in: Technology, Business

Fixed Costs: Three Bad Habits that IT Finance Must Quit

  1. 1. Fixed Costs: Three Bad Habits that IT Finance Must Quit Todd Tucker Director, Strategic Marketing, Apptio Research Director, TBM Council © 2013 Apptio, Inc. All rights reserved.
  2. 2. Agenda What are fixed costs and why do they matter? What are the 3 bad habits that drive fixed costs? What can you do with Apptio to change those habits? How does Apptio measure fixed/variable costs? Questions? Where to learn more. 1 © 2013 Apptio, Inc. All rights reserved.
  3. 3. Variable Costs Illustrated The Truth about Variable Costs:  On-demand services (public cloud)  Some power & cooling  Few cloud services are purchased as ondemand  Many telecom costs (including mobile) Total Cost Variable Cost Examples:  Much power & cooling and telecom is fixed  Some hardware (depreciation and/or expensed amounts)  Capacity costs (investments) are not easily reversed  Purchased end-user software (amortization/maintenance/subscriptions) Volumes You Deliver 2 © 2013 Apptio, Inc. All rights reserved.
  4. 4. Fixed Costs Illustrated The Truth about Fixed Costs:  Enterprise license agreements (ELAs)  Some power & cooling Total Cost Fixed Cost Examples:  Almost all fixed costs are variable in the long-term (step-function costs)  Most facilities costs including data center networking (only within a particular volume range)  Fixed costs usually represent your greatest opportunity for both short- and long-term cost reduction  Developed end-user software (amortization/maintenance) Volumes You Deliver 3 © 2013 Apptio, Inc. All rights reserved.
  5. 5. Most Capacity Costs Are Step-Function The Truth about Step Costs:  Data centers including power/cooling equipment, data center networking  With smaller, more frequent steps, they appear variable  Support labor Total Cost Step-Cost Examples:  Like other capacity costs, the problem is they don’t always fall with declining volumes  Server/compute hardware and support software Volumes You Deliver 4 © 2013 Apptio, Inc. All rights reserved.
  6. 6. Why Do Fixed Costs Do Matter? On the negative side… On the plus side… • Hinder financial agility • • Distort your unit costs (when actual volumes don’t match planned volumes) Fixed assets (common source of fixed costs) sometimes improve corporate valuations • Fixed costs can be leveraged for unit cost benefits • Variable cost services are often more expensive on a price/performance basis • • 5 Contribute to under- and overrecovery of costs (for shops that charge back) Eliminate practical levers for BUs to alter consumption © 2013 Apptio, Inc. All rights reserved.
  7. 7. Fixed Costs Create an Opportunity with a Risk “One man’s variable costs are another man’s fixed costs.” 6 © 2013 Apptio, Inc. All rights reserved.
  8. 8. Agenda What are fixed costs and why do they matter? What are the 3 bad habits that drive fixed costs? What can you do with Apptio to change those habits? How does Apptio measure fixed/variable costs? Questions? Where to learn more. 7 © 2013 Apptio, Inc. All rights reserved.
  9. 9. Habit Making capacity decisions in silos without insights Failing to appreciate the “opex” hangover of new investments Delivery of services in excess of the demand for them Impact The Three Worst Habits Excess capacity consumes significant time and budget RtB grows or holds steady at 70% to 80% of IT budget Business value is not commensurate with total cost 8 © 2013 Apptio, Inc. All rights reserved.
  10. 10. Agenda What are fixed costs and why do they matter? What are the 3 bad habits that drive fixed costs? What can you do with Apptio to change those habits? How does Apptio measure fixed/variable costs? Questions? Where to learn more. 9 © 2013 Apptio, Inc. All rights reserved.
  11. 11. Apptio TBM. The Business System For IT. Apptio Technology Business Management Analytics, data and process to manage IT cost, quality & usage for value COST TRANSPARENCY IT BENCHMARKING Total & Unit Cost Peer Cost Metrics • • • • • • Subscription to data from more than 3,400 peers across 28 industries, e.g. GL & Cost Pools Tower & Products Applications Products Vendors Projects Spend Views • Budget Variance • OpEx & CapEx • Fixed/Variable • Time period, location… Sample Unit Costs: • Wintel • SAP per Employee • Mainframe MIPs • Network Port • SAN GB • Email • Mailbox BILL OF IT IT PLANNING Usage, Quality, Cost & Business Impact Showback/Chargeback of Cost & Consumption Demand & Budget • Infrastructure • Apps & Services • Vendors • • • • • • BUSINESS INSIGHTS Breakouts include • Infra use per app • % capacity utilization • Allocated / used • App portfolio attributes • Asset lifecycle status • Vendor performance Data Quality Reporting 10 © 2013 Apptio, All rights reserved • • • • • Business unit End user Service level Business capability Business metrics Rates management Cost center Budget center Business unit Service Resource Process Capabilities Process Capabilities • • • • • • BU self-service: w/ What-If Approvals Adjustments Data entry XLS upload Status & approvals
  12. 12. Make Better Capacity Decisions Give your decision makers insights, such as:  Total Cost and Unit Cost (Trend over time) and Cost of Used/Unused Capacity  Breakdown by Physical/Virtual, Type, Tier, Location , Application, Consumer, OS, Class, etc.  Median and Peak averages of utilization 11 © 2013 Apptio, All rights reserved
  13. 13. Enable People to Use TCO/Capacity Insights  Train tower owners, capacity managers and purchasing managers on using reports  Work with them to set capacity utilization targets/thresholds  Incorporate utilization and TCO data into purchasing decisions 12 © 2013 Apptio, All rights reserved
  14. 14. Know the TCO of Your Services Give app/service/tower owners:  TCO per App across the Portfolio  TCO Trends (MoM, QtD, YtD)  Cost Decomposition to Resources and Cost Pools  Budget Variance by Application  Application Run vs. Dev Cost breakdown  License/User Counts and Unit TCO of applications/services  Support Tickets per App/Service 13 © 2013 Apptio, All rights reserved
  15. 15. Enable People to Use App/Service TCO Insights  Train service owners, app owners, architects and others on using reports  Work with them to set unit TCO goals  Incorporate app/service TCO data into your portfolio management (rationalization) programs 14 © 2013 Apptio, All rights reserved
  16. 16. Be Transparent to Your Business Partners Give your business partners:  Cost and consumption of your services, technologies, projects  Ability to drill down to understand and verify details  Easy way to report errors or disputes  An understanding of which levers they can pull to manage their own consumption/costs 15 © 2013 Apptio, All rights reserved
  17. 17. Enable People to Use Showback/Bills  Train business partners and business relationship managers on how to use bills/reports  Create alternatives from which BU partners can choose more cost effective services  Consider chargebacks to drive accountability for consumption 16 © 2013 Apptio, All rights reserved
  18. 18. Other Things That Can Reduce Fixed Costs  On-demand cloud services to reduce purchased infrastructure  Use private cloud to drive up utilization rates and thus higher ROITA  Take smaller steps in acquiring new capacity 17 © 2013 Apptio, All rights reserved
  19. 19. Agenda What are fixed costs and why do they matter? What are the 3 bad habits that drive fixed costs? What can you do with Apptio to change those habits? How does Apptio measure fixed/variable costs? Questions? Where to learn more. 18 © 2013 Apptio, Inc. All rights reserved.
  20. 20. How We Measure Fixed/Variable  Tags are applied to cost source data (general ledger, fixed assets, labor data)  Imperfect…  But allows tracing of fixed/variable through model layers (e.g., up to services) 19 © 2013 Apptio, All rights reserved
  21. 21. Questions?
  22. 22. Where to Learn More  Download principal member teleconference summary on fixed/variable: bit.ly/tbmc_1303_telecon  Get a demo of Apptio www.apptio.com/get-started  Join the TBM Council bit.ly/JoinTBMC 21 © 2013 Apptio, Inc. All rights reserved.
  23. 23. Thank You! Todd Tucker TTucker@Apptio.com 22 © 2013 Apptio, Inc. All rights reserved.

×