What is it?
Service costing is the process of identifying all costs associated with building, supporting and delivering business services to internal and external customers (Stanford, 2022). Consequently, billing and rate management is the process of determining optimal charging frequency (such as monthly recurring charges, one-time charges, and time and materials) and rates depending on the financial objectives of the business unit supplying these services.
For IT organizations, service costing involves defining the IT service portfolio (from a consumer perspective) and the associated costs for each of the services. It includes mechanisms for documenting and governing each service configuration, in addition to recovery rate and billing frequency (LaRocque, n.d.).
Why is it important?
Organizations developing service rates should use service costing as the starting point for setting rates (Stanford, 2022). In this way, the organization avoids setting arbitrary rates, and charges for the consumption of services are more easily justified to the rest of the business. Additionally, applying rates to specific services provides cost predictability to other business units as they typically are set once or twice per year. Even if there is no plan to charge for services, service costing provides the necessary financial benchmark to identify and act on changes in the service cost structure.
For IT, service costing improves awareness and accountability of the delivery and consumption of the IT service portfolio. Increased visibility into costs enables service rate programs — tying consumption of specific IT services to other business units — clarify the link between business units’ IT usage and their IT bill. Hence, the conversation about IT changes from, “Why IT is so expensive?”, to “What’s the right amount and quality of IT for the business unit?” A mature rate management program of IT services increases predictability for other business units in their planning, helping IT functions become valued business partners for the organization.
How can IT financial management strengthen service costing, billing and rate management?
ITFM introduces an approach to IT service costing which clearly defines the IT service portfolio and reveals the cost structure of delivering these services. Moreover, it aids in addressing the difficulties of managing and maintaining changes in data and allocation models, ensuring a true representation of IT spending and its distribution to the different services.
When the IT function is confident that costs are continuously captured and correctly distributed, meaningful rates for the services can be developed — the ITFM approach allows for charging models (show-back, charge-back, etc.) which in turn provides valuable insight into the consumption of each IT service.