Sunday, July 7, 2013

Accounting Analysis of IT Costs

Accounting for internal IT - Analyze Your Overlooked IT costs

Because of the many variables involved, many companies simply write off IT as necessary overhead
that’s too complex to track and analyze through cost and management accounting

Here are the key cost areas to watch and some practical ways to account for them.

1. IT labour

Projects ranging from a non-standard data query to the implementation of the latest business intelligence application may require hours, days and even months of IT labour time. Accounting  for this time alone will get organizations much closer to understanding IT costs. Establish a standard rate based on the average cost of an IT employee.  You need not overcomplicate this and with a standard average rate, you can get a pretty good picture of what it’s actually costing you without having to do overly  detailed cost accounting.

When coming up with a number, be sure to factor in staff turnover, absenteeism and training, as these costs can be substantially higher in IT than in other areas.

2. Data entry

The people who support IT systems are not exclusively in IT. ERP (enterprise resource planning) and other business support systems may require significant, regular data entry to keep current. As with IT labour, using an hourly rate to approximate what this activity is costing the organization. Some companies use  $20 an hour. Even at that rate, the costs can add up. If 100 hours a month is spend by various people to keep an ERP system up to date, the $24,000-per-year total might raise some eyebrows. “The big sin is to omit it,”

3. Training

If employees aren’t properly trained, even a routine software upgrade such as installing a new version of Microsoft  Outlook can wreak havoc on an organization’s workforce.People struggle to do things with new IT systems that they used to be able to do before with old process. A significant proportion of help-desk
calls — 25 per cent or more — occur because the end-user didn’t understand how to use the application. The true costs of neglected training are not directly visible. Instead, they show up in the poor use of software
features, buddy systems in which employees interrupt one another to get assistance and countless hours spent deciphering user manuals. It costs the organizations thousands and thousands of dollars in lost productivity, and most organizations don’t see that, and don’t track it.”

Real training costs, which include the training itself and employee time spent in classrooms, are substantial.  Two weeks per year is not unusual for IT people, and people who could be considered power users — administrators, coordinators, analysts — may require five days or more. Delegating end-user training to the
IT department is a common mistake. IT people are not necessarily good teachers, and they often can’t spare the time to train. [For more on IT training, see “Taking on the IT Training Deficit” in the July/August 2011 issue of CMA magazine.]

4. Change management

When an organization acquires significant information management capabilities that affect daily operations, big changes can occur in a workplace. Months can also pass before the workforce becomes comfortable with a new system.The costs can be especially high when the affected workforce deals directly with customers. This is the cost of disruption. You really need to have sufficient planning, testing and training to get people not just to a rudimentary level of user capability, but to a point where they are reasonably
proficient. Once again, labour costs should be approximated.

5. Infrastructure

Hardware and software quickly become obsolete, and because many organizations see annual data storage increases of 30 per cent or more, capacity is an ongoing concern. Changes in an IT system can also cause existing infrastructure to reach capacity and set off a spiral of upgrades. For example, a new software system might require more storage capacity which could trigger upgrades to operating systems, servers and network hardware.

The best way to stay on top of infrastructure costs is to create standard rates for machine capacity and storage, and track usage in dollars. This strategy prevents surprises. It also ensures that the cost of upgrading isn’t unfairly allocated to one department or project when an existing system reaches capacity or
is incompatible with a new application.

A rough system for estimating and tracking the costs of IT is far better than no system at all. By establishing standard rates and applying them continuously, organizations can bring  much-needed transparency to IT

In addition to allowing organizations to manage their recurring IT expenditures more effectively, this strategy also gives decision makers the cost benchmarks that they need to create business cases for new technology or outsourcing  options such as cloud computing.

Jacob Stoller
CMA MAGAZINE November/December 2012 pp.40-41

(To be revised once again)

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