Much of the discussion with IT Financial Management (“ITFM”) refers to the different disciplines and outcomes or views of ITFM, but most research papers do not explicitly call out the need for or importance of a cost model, when in reality it is an enabler of many of the ITFM disciplines (such as Spend Management, Strategic Investment, Service Costing, Benchmarks, Cost Optimization and Business Value).
Gartner defines the purpose of a cost model as follows: "To define the data structure required to aggregate and allocate sources of spend and consumption data into a common data construct" (from “Build a Focused ITFM Cost Model and Use a Simple Allocation Approach to Deliver Rapid Value” by Robert Naegle & Chris Ganly, 2020).
In simple terms, a cost model achieves the following:
A cost model is an enabler of many benefits, as follows:
A cost model can be housed in many tools, such as Excel (which is a common birthplace for cost models) or the General Ledger (we cover this in this post). However, as data increases, allocation keys change, the model requires regular updating, new products and services are introduced, and stakeholders demand more insight and what-if scenarios, a tool like Excel is simply not agile enough or scalable to meet the needs.
This is when an ITFM tool like MagicOrange comes into play to automate your cost model and provide the flexibility you need to expand and evolve your cost model rapidly and at scale, while providing comprehensive self-service analytics.