1. 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 organization’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 organization. Doing this analysis requires having
the right information to make decisions.
Cloud Concepts
Cloud computing provides dynamically scalable and
often virtualized 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 environ-
ments 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 organization. The infrastructure for
a private cloud resides within the IT organization,
and a business service that needs additional com-
pute or storage resources can dynamically provision
for it. A private cloud enables an organization 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
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 organizations also
anticipate financial advantages from cloud computing.
FINANCIAL TRANSPARENCY:
The Starting Point for
Cloud Computing
By Steve O’Connor, general manager for IT Business Management,
and Michael Coleman, business management executive, BMC Software
b m c i N D U S T R Y INSI G HT s
2. 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 under-
stand 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.
I.T. Complexity
Private clouds can help you achieve operational efficiencies.
However, because the deployment of computing resour
ces becomes easier in cloud environments, you run the
risk of uncontrolled demand as well as service and ap-
plication sprawl. In such cases, you might not save the
money you thought you would by using cloud computing.
Furthermore, technologies such as server blades, vir-
tualization, 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 environ-
ments 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 run-
ning, how long it’s running, and who’s using it, so that
the IT organization can properly allocate the costs to
the person who is getting the benefit from that service.
Financial Tools
Many IT organizations have built sophisticated applica-
tions, dashboards, and metrics for the business units
within an enterprise. Yet most IT organizations lack
the tools that provide the financial insight to help IT ex-
ecutives 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 organizations have a consolidated
place for financial data. As a result, IT organizations
cannot easily determine what it costs them to provide
IT services. Manual, spreadsheet-based attempts to
manage and analyze 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 organization 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 under-
stand 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 logi-
cal approach designed to help you achieve financial
transparency within your IT organization, so you can
make informed decisions about the cost-effectiveness
of cloud computing. This process is also based on
Business Service Management (BSM), a comprehen-
sive approach and unified platform for running IT. As a
result, IT organizations 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.
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.
3. 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 im
portant, you will need a centralized 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 cost-
ing models. Specifically, you will need to graphically
lay out and tie together all the financial components
of a service (hardware, software, people, shared infra-
structure 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 utilization 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 con-
sumption metrics of the service. Then you can answer
the following types of questions:
Which service is being utilized 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 con-
sumption 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 consump-
tion 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 organization 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 utilization data from het-
erogeneous data sources, compare costs against in-
dustry benchmarks, and generate an explanation of
charges — or a “bill of IT” — that you can use for
chargeback or “showback” with your IT clients.
b m c i N D U S T R Y INSI G HT s
With a well-defined
cost model in place,
you can begin to
apply metrics on
the utilization and
benefits of that service.
