Cost Management Using ABC for IT Activities and Services: The IT Division of a Successful International Company Developed an Activity-Based Costing Model to Measure and Assign the Costs of the Initial IT Services the Division Provides, Enabling Better, More Accurate Productivity Measurement and Efficiency (2004)

EXECUTIVE SUMMARY: With the proliferation of computer-related services, the explosion in data communication, and ongoing trends toward globalization, managers in high-tech industries are considering new ways to manage and control costs. The fact that most Information Technology (IT) services have varied degrees of intangibility makes it a challenge to measure the costs of the services delivered. Activity-based costing (ABC), the alternative to the traditional accounting systems, has been applied to manufacturing and service industries. Successful implementations in the healthcare, insurance, and transport industries have been reported over the last few years, but few publications relate ABC to IT. This article reports on a management project using ABC modeling focused on an IT division of a publicly held software development firm. The needs of the company to establish accurate recharge rates and define appropriate activities pertinent to business culture were the main driving forces behind the project. The modeling process required the definition of resources, activities, objects, and drivers that correspond closely to the organizational functions within the IT division. The resulting model provides a managerial tool to measure productivity and efficiencyand is currently being used for IT chargebacks and process improvements. Such activities have not been reported in professional publications or activity dictionaries. Cost management is becoming linked to Information Technology (IT) more closely. The globalization and proliferation of the computer and Internet-related systems have changed the paradigm for how business is conducted. CIOs, CFOs, and managers in IT are aware that costs need to be controlled for companies to remain competitive and improve performance in a changing world. Managing costs is an operational necessity in forward strategic planning in the IT environment. John Shank suggests that management in a contemporary firm must not be internally focused nor should it use single drivers. (1) Instead, management should: * Be externally focused, * Add value, * Use multiple drivers, * Reflect unique drivers for each value-added activity, * Base management activities on drivers or linkages with suppliers and customers, and * Identify drivers at the individual activity level and pose strategic questions (outsourcing, forward/ backward integration, establish new linkages with suppliers and customers). The project we describe in this article reflects all of these dimensions of strategic management, ranging from benchmarking to establishing better communication and knowledge about recharge rates with an IT division's internal customers. We also explain how management was used to accomplish a variety of objectives relating to IT users in a major software firm, how the problems encountered by this company may help others, and how management processes can be utilized effectively for IT services. Other firms have had similar problems, but a literature survey finds that no similar solutions have been reported yet. Data centers and client-server architecture developers have started using more meaningful accounting terms. Instead of using CPU seconds and I/Os, new terms such as cost per transaction are becoming more common. But despite the new focus, IT has a long way to go in using accounting systems to meet the business needs of the organization at a level of detail that will satisfy every customer. Chargebacks for specialized IT services, such as CPUs, data storage, and communications, are not derived, for the most part, from strict accounting calculations. (2) Companies using chargeback systems often overestimate the value and accuracy of their accounting systems. Traditional systems have been known to distort costs and often provide inaccurate information while assigning costs to unrelated accounts. …