Behind the Curtain of IT Cost Transparency - By: Carl Stumpf Managing Director, Technology Controller and Head of Purchasing at CME Group

© 2014 CME Group. All rights reserved.
Behind the Curtain of IT Cost
Transparency
Carl Stumpf, Managing Director, Technology Controller
and Head of Purchasing

Key Discussion Points:
•  Best practices in IT cost allocation
•  Insights into how to use cost allocation to engage business partners
•  Implications of Agile, Cloud and other industry trends
The Goal:
•  Insights that can help inﬂuence how IT engages with business partners
to inﬂuence business decisions
2
Objectives of Today’s Discussion

CME Group Overview

© 2014 CME Group. All rights reserved. 4
CME Group offers the widest range of benchmark  
futures and options products, covering all major asset
classes – and all kinds of risk.

From ﬂoor-traded,
open-outcry pit trading.
5

To electronically
transmitted and matched
computer-driven
systems.
6

And converted historically regional exchanges with time
zones limitations into a truly global, 24/7 business.
7

We work around the world, around the clock.
CME Europe
8

Best Practices in IT Cost Allocation

•  Understand how the CFO views the business
•  Solid “building blocks” of accurate data
•  Implement service costing to align with the business
10
Best Practices in IT Cost Allocation

How Your CFO Views The Business
Salaries
Salaries SOP 98
Depreciation &
Amortization
Parts +
Consumables
Profees SOP 98
Profees
Power, Rent +
Services
SW Maint.
HW Maint.
Outside Services
Telecom
Headcount
·∙
Positions
·∙
Fills by Service
·∙
<Virtual Consulting Headcount>
Capital Expenditures
·∙
Hardware
·∙
Software
·∙
Data Center Construction
·∙
Capitalized Software
Prepaid Hardware & Software
Maintenance
·∙
Individual payments amortized
over useful life
Commitments
·∙
Future payment minimums for
vendors under contracts
Asset Subledger
·∙
Hardware – by type, life,
unitized
·∙
Software licenses owned
·∙
SOP 98 assets in service
·∙
Data Center assets in service
Work in Progress
·∙
Unfinished major data center
construction
Other
Total Labor Deployed
Incremental Business
Investment
Payments to vendors
with future value
Obligations for
future years
Completed assets
depreciating
Physical Location

A Revenue and Expense P&L for Technology
Revenue
•  View 1 – “Real” revenue (cash reimbursements, asset sales)
•  View 2 – “Cost Plus” (tech division costs plus markup, needed for transfer pricing)
•  View 3 – “Unit and Service Based” (Rate*Value = Revenue, internal view not real cash)
Expenses
•  Salaries and Beneﬁts (all staff, loaded with insurance and taxes)
•  <SOP 98> (offset to salaries and beneﬁts for capitalized software development)
•  Professional Fees (all consultants at actual costs)
•  <SOP 98> (offset for capitalized software development)
•  Telecommunication Expenses (all circuits to telecom providers, wireless, international)
•  Outside services (third party expenses i.e. cloud applications, hosting, etc.)
•  Hardware and Software Maintenance (payments to vendors based on servers/gear and licenses)
•  Power, Rent, and Services (operating expenses tied to data centers owned by the company)
•  Depreciation and Amortization (depreciation on hardware, data centers; amortization on software and
SOP 98, measured by useful life)
•  Other (training, travel, meals, entertainment)
•  Parts and Consumables (may include: PC’s, tablets, phones, parts for repair of gear of building racks,
all items not capitalized in the general ledger)

“The Building
Blocks”
•  Telecom and
circuits, training,
travel, overtimes,
parts and misc.
other expenses
•  Optimally capture staff
time, consulting
spend, and open
positions on an
“apples to apples”
basis
• Properly capture hardware,
software, data center
costs, and capitalized
software development.
Includes maintenance and
depreciation
•  Logical conﬁguration for
department, project,
and account
Chart of
Accounts
Capital
Asset
Process
Other
Expenses
Staff &
Consulting
Mgmt

Implementing Service Costing
Applications and costs are categorized into Services
•  This organization creates terms that make sense to the end user. Items such
as “gigabytes of storage” or “data center sq. ft.” or “number of servers” are
eliminated and replaced with “email services” or “trading services”
•  These “services” are deﬁned in a manner that they can be compared in an
“apples to apples” manner with external options (i.e. if you outsource email
services, what are the total costs in staff, consultants, software, services, data
center, and telecom that would be affected by this migration? How do you
determine the transition was valuable?)
For us this is a multi step process consisting of:
•  Deﬁning the services
•  Putting the costs in the service
14

How Costs are Assigned to Services
General Ledger
Department
Project
Category
Allocator
MGMT
Allocator
System
Services
delivered by IT 20 Services
6 Internal
Owners
Costs driven or
consumed by each
customer/internal
sponsor
Cost View Customer View
Direct
Shared
Peak Orders/
Customers
Transactions,
etc.
Expense
Capital
Headcount
and Staff
Other
Expenses
15

Service Income Statement
Base Income
Statement
Revenues
Determine Units or
costing, or agree on
service level and price
Expenses
Direct
Some labor and
consulting, some third
party services, some
hardware and software
Indirect
Most hardware and
software, data centers,
monitoring and support
staff, etc.
Allocation and
assignment methodology
(servers, units, studies,
time estimation, etc.)
Service Income Statement
Service 1
(Billing
Services)
Service 2
(Customer
Support)
Service 3
(ERP
Financials)
Service 4
(etc.)
*Services must be understandable to business line
managers, cannot be “components” like servers, PC’s
data center space, etc.

Potential Customer Reactions to Service Costing
Paraphrased Comment Conceptual Response
“We already paid for this product
there are no savings from
modifying consumption”
In technology, there is no “build and forget” model. Servers
need to be patched, upgraded, and replaced. Systems
need to be re-written for performance and new interfaces
(mobility).
“I understand the direct charges
for my area but not the shared
costs, and I don’t feel they are
fair”
Overall, about half of the costs are “direct” and the other half
are “shared. The shared costs include infrastructure,
security, management, monitoring, and similar services.
They must be borne by each service.
“Your costs never change (or only
rise) no matter what I do. This is
all a charade”
If the technology division isn't listening to the customer and
isn't willing to consider alternate delivery methods (cloud,
outsourcing) you may get this feedback. If this is true, you
need an “apples to apples” view vs. the alternative and/or
performance/quality/SLA metrics to win them over.

Potential Customer Reactions to Service Costing
Paraphrased Comment Conceptual Response
“If you are charging me for these
costs, then I want to control the
service”
This is the “dark side” of a charge back model. Is the
customer qualiﬁed to act as a technology leader and make
balanced decisions on risk security, disaster recovery, etc.?
Probably not. You need to educate them on what is
involved, but you must anticipate this question.
“Even if I reduce my consumption
I get charged back the same
money because of the
“unallocated” cost pool”
This is due to an excessive reliance on ﬁnancial accounting
measures. You must use standard costs and not charge
unallocated costs back to customers, else there are no
incentives to change behavior.
“Your systems are more
expensive and lag what I have at
home”
This can be caused by relying too much on “enterprise”
technology and not trying to push towards consumer
technology adoption. Showing high costs (i.e. fully loaded
PC costs plus support) when the capabilities lag (Apple
products) makes it worse.

How to Engage Your Business
Partners?

Build a dialog that goes beyond costing
•  Show productivity of staff, consultants, and regional ofﬁces
•  Implement demand management
•  Track internal and external customer satisfaction
•  Track incidents and align to applications and impact
•  Align service costing with satisfaction and incidents to compare against
market based alternatives
•  Provide accurate project costing and implement earned value
•  Explain productivity linked to the structure of your staff “pyramid”
20
How to Engage Your Business Partners?

0
20
40
60
80
100
120
Staff- Main
Office
Consultant-
Main Office
Staff-
Remote
Office
Consultant-
Offshore
Cost per Hour of Standard Input
Overhead
Cost
Adjusted Cost
for Productivity
Service Sector Productivity
Productivity 100% 85% 90% 75%
(Numbers are for discussion purposes only)

5. Business needs to recognize
the source of the primary
demand and attack less
profitable customers/products
4. Drive down
instantaneous peak
and avoid this build
3. Build “lump” of
capacity to create
double of peak (Build
out DR to peak)
1. Activity prior to event such
as added marginal customers/
products lead to a peak usage
period 2. Peak event
occurs
Demand Management – Inﬂuencing Behavior
Inﬂuencing Behavior
Takeaway: Get the Business to Recognize “true” cost drivers before they trigger next “lump” of
capital
22

•  Bandwidth Peaks
•  Transaction / Messaging Peaks
•  Capacity Available as a Percent of Peaks (i.e. “2x capacity”)
•  Incidents / Severity of Incidents vs. a Baseline (prior year)
•  Application Counts / Cloud Applications vs. In House
•  % of Obsolete / EOL Gear (particularly on end user computing devices)
•  Security metrics (overall ratings, penetration testing results)
•  Self Service vs. Assisted Service Percentages
•  Targeted reductions in legacy platforms (servers, data center,
mainframe, etc…)
•  Service Level Performance vs. Expectations
23
Demand Management Units You May Use
Sample Demand Management Units

•  Satisfaction is measured as “how an application enables the business”
•  If an application requires extensive manpower or work-around efforts,
likely it will receive a low customer satisfaction rating
•  Applications that do not contain the attributes that the customer is
seeking such as mobility, high performance, automation, and flexibility
will receive poor marks
•  Where possible seek external customer feedback (through
mechanisms such as “sales calls”) on specific systems because these
are often drivers’ of executive priorities
•  Satisfaction scales should weight various components and receive
input from internal and external stakeholders where possible
•  Note that while satisfaction declines with poor reliability this is in fact a
different metric
24
Internal and External Customer Satisfaction
Without Measuring Satisfaction It is Difficult to Fund
Elimination of Poorly Performing and Low-Cost Applications

•  Incident trends and severity by system are important metrics and very
complimentary to satisfaction
•  Often older systems with less investment perform poorly, thus incident
metrics and trending can be used as a basis to justify investments in
upgrades
•  Many systems track incidents – for TBM the likely issue is how to
organize and present this information in a manner that is “digestible” to
non-technology executives
•  Use the method 1) what happened 2) who was impacted 3) what was
the negative outcome for customers – for major items to make them
understandable
•  It is critical to present information on a consistent basis so that trends
can be understood; do not lose your historical information and adjust
as needed to make it comparable
25
Incident Tracking and Trending
Many Systems Track Incidents in the Enterprise and Harvesting
This Data Is Critical

Aligning Costs, Satisfaction and Reliability
ApplicationQuarterlyCost(inMillionsof$):DirectandShared
The goal is to be green and in
this quadrant *All data for Display Purposes Only
Satisfaction
"< Par
"= Par
"> Par

Use Service Costing And Metrics To Explain Your Business
Annual
Cost to
Run
System Functionality Cost to
move to
Green
Reliability
and
Scalability
Cost to move
to Green
Efficiency
Opportunity
One time
Cost to
Efficiency
$75 M Trading N/A $3 M $10 M/Yr $15 M
$40 M Clearing $5 M N/A $5 M/Yr $8 M
$30 M Customer Service $10 M $6 M N/A N/A
$20 M Settlements N/A $4 M $2 M/Yr $1 M
$165 M Total “Base”
Budget
Includes “run” and
in the pipeline
“change” activities
$15 M Functionality
Opportunity
“Give you what you want to
quickly meet business needs”
$13 M Reliability and
Scalability Opportunity
“Improve performance,
reduce outages, and reduce
systemic risk of failure”
$24 M Efficiency Opportunity
“Spend money today to
eliminate old systems and
processes to reduce costs in
future years”
Questions:
•  What should the budget be?
•  How can choices be made and tracked along this spectrum?
•  What are the costs of external “apples to apples” products and would it be efficient to
use them instead?
*All Data for Display Purposes Only

•  This section builds upon the time entry and project costing data the
same way in that the general ledger is the foundation of service costing
•  Without getting ahold of projects and linking to execution you can know
“what you are going to spend” but not “what are you going to deliver”
•  Ideally your group would be the “scorekeeper” of project costing and
budgets and bring together data from your Project Management
organization (executive status, revised plans, completed deliverables,
beneﬁts delivered, and scope management) into an integrated
scorecard
•  The information has two key objectives
-  Provide actionable, forward looking information for executives to make
improved decisions
-  Provide “root cause” analysis of the causes of project failure and drive
solutions to improve performance in the future
28
Managing Projects, Earned Value and Productivity
Starts with Fundamental Costing and Time Entry Data

Projects
Effort Type Project Category Cost FTE
Change
Key Projects $3m 20
Other Projects $1m 6
General Enhancements $1m 6
Run
Support & Maintenance $2m 13
Overhead $2m 10
Total $9m 55
29
•  Main questions from the Business Line Managers:
–  “What do all the people in IT do?”
–  “Why can’t I have more people work on projects?”
•  Our questions:
–  “Are we executing effectively?” [Good question]
–  “Are we adding value to the enterprise with our investments?” [Great question]
Questions on our investment in IT

•  There are a variety of ways to calculate “run vs. change”
•  The current method we are using
-  Major projects are considered “change”
-  Minor projects and enhancements (too small to budget and plan individually,
but large enough that they add up) are considered “change”
-  Support and maintenance is considered “run”
-  Overheads and management time are considered “run”
•  The development departments should be heavily “change” and the
infrastructure and management departments are mostly “change”
•  High interest in ensuring that our professional fees are targeted on the
most impactful “change” projects
•  TBM tools can enable great analytics by area and there is high interest
on groups with high “run” percentages
30
Run vs. Change
Run vs. Change is a Ubiquitous Benchmark

Projects
Project
Planned
Cost
Projected
Cost
Percent
Complete
Earned
Value
Scope
Beneﬁts
Realized
Executive
Status
1
2
3
4
5
6
31
Analytics to measure success
•  “Earned Value” is the Key Concept
–  Spend can be budgeted, planned and forecasted
–  Just as important – what have we ACCOMPLISHED with this funding – are we delivering scope on time?
•  Beneﬁt Realization
–  Not just something that you calculate at the time the project is approved – must follow up and measure results

Labor Productivity
32
Cost, Productivity, & Structure
Cost
Productivity
Structure
Entry Level
Leads
Managers
Upper
Management
Biggest beneﬁt of restacking!
Almost 50% of cost is in the
management layer, whose work
product is meetings and
paperwork.
Lower levels are often
ﬁlled by consultants.
Location
Service Level Metrics for Success

Implication of Recent Technology Trends

•  Capable IT financial leadership can support the transition
•  Recognize how change impacts the power of IT
•  Understand the common financial dilemmas of IT
•  Specific areas of risk
-  Data centers
-  Mainframes and other legacy systems
-  Custom built capitalized software
•  The move from “balance sheet” to “income statement” and impact on
P&L in the short term
•  Plan for your model to “scale backwards” as in house demand declines
34
Implications of Recent Technology Trends

Two Key Components of Driving Value
•  Provide actionable, forward-looking recommendations to top
management
-  “This service is not competitive and we need to outsource it”
-  “We must de-emphasize on premise software and implement a cloud
strategy”
-  Our cost / unit in this domain is not efficient and we must find a solution”
•  Deliver root-cause analysis of failure and present solutions to solve
them
-  “We over-built our data center footprint and will should lease going forward”
-  “Our customers are not satisfied with our services and we need to take
corrective actions”
35
Obtain and Support IT Financial Leadership

•  Drive to reduce the cost / unit of all you encounter (“buying smarter”)
•  Reduce capital requirements by retiring systems and data centers and
not replacing these expenditures elsewhere in the system (“reducing
capacity”)
•  Enable the “build vs. buy” discussion and insert market-based
comparable data. Ensure that “buy” decisions are continually followed
up on since they often are ﬁlled with optimistic assumptions (“reducing
demand”)
•  Ask the business if they think the value is commensurate with the spend
and drive hard questions and change if there are real gaps
•  Remember – if nothing changes and you are just re-packaging the same
information in a “prettier package” nothing is really being accomplished
36
Actions Supported by Strong IT Financial teams

Finance
TechnologyThe Business
37
The Balance of Power
“Old” Way “Middle” Way “Future” Way
A “Black Box” Transparency IT Restructured
Unsatisﬁed
Customers
Cloud vendors,
“consumerization”
Third parties
Ascendant
No Real Choice Balance of Power
shifting
True Customer
Choice

•  Keep budget ﬂat
•  Reduce spending on “run” but keep systems running
•  Find a way to invest in innovation (cloud, mobile, productivity)
•  Continually advancing “commercial” IT raises users expectations
38
The Common Technology Finance Dilemma
After working with dozens of executives specializing in
Technology Finance here is a typical situation:

•  5-10 years ago many / most large firms were building their own data
centers
•  Now many of these same firms are turning to third parties to own,
operate and provide key services rather than doing it themselves
•  Unless you have sufficient scale to compete with the giants it seems
impractical to remain with the build / operate model
•  Third parties can manage demand much better than in-house providers
which increases utilization and decreases per-unit costs
•  If you have an existing data center footprint you likely need to assess
the value of the assets on the books and begin to consider alternatives
•  It is possible that on a cash-flow basis (ignoring depreciation) you may
be better off with an efficiently re-factored footprint at a third party
center than running your own center if it is sufficiently under capacity
39
Data Centers

•  New technologies (AWS and open source) offer vast scale and price
competitiveness
•  Even if you are getting “value” from your legacy systems and
technologies few would “build it from scratch” on those platforms today
•  Staff with the skills to maintain and improve these systems are
becoming harder to find
•  The firms that provide these tools and systems are not being valued in
the marketplace; cloud companies with negative income but growth
often have vastly higher valuations
•  Many of these systems and investments have long lives on the books
and this must be considered; is it really practical to run one of these
systems five years out?
40
Mainframes and Other Legacy Systems

•  Accounting rules require capitalization of internally developed software
•  The amounts that have been capitalized over the years and decades
are quite substantial
•  These applications may have very long lives (varies by company and
system)
•  You may be forced to 1) stop capitalizing new work on legacy systems
2) accelerate the lives of existing systems 3) write off existing systems
completely
•  These decisions will be pushed by your future strategy for meeting the
business objectives that these systems currently serve
•  This is something to think about today if your software lives are long
since you are betting on what happens many years from today
41
Custom Built (Capitalized) Software

•  A large portion of your “run” costs may be tied to prior investments
including data centers, software licensing and maintenance on legacy
technologies, legacy hardware and amortization of custom built
software
•  For many years you likely capitalized more than you “depreciated” so
that this level of investment was an overall positive in your income
statement
•  When the situation “flips” you may be looking at a large portion of your
“run” cost tied up in prior investments which limits your ability to fix the
situation (and doesn’t align with cash flow)
•  While any sort of “one time” write down is a difficult discussion all
parties may be interested especially if it can be combined with a
business M&A transaction or other type of restructuring
•  These sorts of situations are more unstable than you might realize and
change may come faster than you anticipate
42
Viewing the Income Statement and Balance Sheet

Plan For Your Model to “Scale Backwards”
•  You have specialized teams for IT management, security, deployments, monitoring,
architecture, and other groups
•  As customers leave (going to cloud applications) and more services move into the
cloud (storage) these teams have less "applications" to meet their "fixed costs”
•  You also may have difficulty with applications that you’ve traditionally built in-house
and “capitalized” under software development if you plan to phase them out in favor
of cloud or third party applications in the future
•  As you dis-invest, you will face limits and "stranded assets" such as data centers,
servers, networking, and other items with "book lives" longer than their actual "useful
lives” (including software, as noted above)
•  As you need to "write off" these assets, your total expenses will increase, even as
you "do less". Few companies have a "reserve" for these sorts of events
•  And while you are still spending on the legacy systems (or receiving expense
allocations form the past), you need to find funds to invest in innovative technologies
that overlap these systems and you may have a “dual burn” of expenses

•  Your “steady” budget becomes more variable and ﬁlled with surprises
•  On premise vendors may take more aggressive action to push you to
the cloud or charge “legacy” customers more to fund their cloud
transition
•  Your in house assets may become “stranded” or you may need to
shrink their useful lives to prepare for the cloud migration
44
Beware of Financial Traps
Issues that you may Encounter
YOUR CFO TYPICALLY DOES NOT LIKE SURPRISES

Behind the Curtain of IT Cost Transparency - By: Carl Stumpf Managing Director, Technology Controller and Head of Purchasing at CME Group

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Behind the Curtain of IT Cost Transparency - By: Carl Stumpf Managing Director, Technology Controller and Head of Purchasing at CME Group