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Mark Bodman
ServiceNow Employee
ServiceNow Employee

Overview

Developing Application TCO is a common need in Application Portfolio Management. There are a number of metrics that organizations use to make decisions on their application portfolio such as currency, risk, availability, usability, technology alignment, etc. but often the most conspicuous is the cost.  Organizations need to know what each application costs and how those costs break down into a number of common “buckets” or “cost pools” such as Hardware, Software, and Labor.  This important cost data is used to make strategic and tactical decisions, demonstrate value generated by technology investments, and/or used to recover costs from the business units or consumers that IT serves. Well-rounded decisions about the portfolio, and each application can then be made once a more complete cost picture is available.

In most organizations, TCO calculation at the Business Application level is difficult because in most cases costs are tracked by the Finance department in ways that do not make it easy to understand EXACTLY how each application attributes to those lumped together costs.  Highly shared costs such as the data center and management needs to be distributed to each application fairly, however some costs like specific software, hardware, and vendor contracts may be directly attributable to just one.  Business Application utilization of shared costs may be quite different as well; in one month datacenter costs may be much more for one application that undergoes greater utilization than in the previous month.

There are 4 approaches to TCO organizations typically embark on to get visibility on costs:

1. Thumb-in-the-air; often this approach comprises of asking the application owners to provide the cost data per application, without a direct traceability to the General Ledger or any rigorous process.  While this may be a quick approach for a first-blush comparison, often the results aren't too accurate, becoming untrustworthy after a few rounds of rationalization.

2.  Custom model; TCO calculated based on a unique set of sources, or based on a particular vendors / consulting organizations approach based on the data available and transformation decisions required.  This works OK, but often the required data is difficult to obtain, requires  proprietary vendor tools and integrations, and the adoption of a unique model that's not openly accepted making the approach difficult to sustain over time.

3.  Basic GL based model: This is by far the most common approach, leveraging actual financial data from the financial department.  Those costs are distributed across to the respective applications.  Not 100% accurate approach, but this is usually acceptable and useful enough to begin making strategic "directionally correct" decisions.

4. Hybrid Organic Costing: This is a hybrid approach that becomes more accurate over time, sourcing actual costs from sources where the costs originate, summing them up per Business Application in conjunction with an allocation model that distributes real shared costs.  This requires a higher degree of maturity and integration if cost sources are in disparate systems, however it ServiceNow is used for those sources like Vendor contracts, labor, software and infrastructure details, this can become a highly accurate and sustainable approach.

The ServiceNow approach to TCO

Within ServiceNow, we bring together 2 key solutions to address TCO; Application Portfolio Management and Financial Modeling.  With these 2 products, ServiceNow can address TCO option 3 above quite easily.  If customers adopt other modules within the ServiceNow platform, option #4 can also be attained with greater ease over time, providing a more accurate and realistic TCO.  

The Prescribed Business Application TCO model

As of the London release, ITFM Cost Modeling provides a number of prescriptive models that you can work with immediately.  For the most common TCO requirements, a model to calculate application TCO based on the most common 6 GL buckets is provided.  This TCO model leverages the Finance organizations General Ledger buckets as the source data, then allocates those financial buckets to each of the Business Applications using a accepted method that doesn't require many other sources of data.  Getting up and running with TCO that is rather complete and accurate so quickly hasn't been easier.

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Default APM Financial Cost Model

7 APM cost metrics by default in Madrid

As of our Madrid release, we have aligned the default APM metrics which are sourced from ITFM and our prescribed cost model illustrated above; See the 6 specific cost indicators below with one aggregate Application TCO cost indicator.  Prior to Madrid we only provided the high level CAPEX and OPEX indicators by default, requiring customers to change scripts to pull from the appropriate source cost tables which are more detailed. 

As of Madrid, we deprecated the original OPEX and CAPEX indicators in favor of providing better alignment with our default ITFM model which provides much more detail than the previous cost indicators in a more sustainable process. The indicators provided for APM are as follows: 

Facilities cost: Retrieves cost from the Facilities bucket of L2 Costing – Business Applications cost model.

Hardware cost: Retrieves cost from the hardware bucket of L2 Costing – Business Applications cost model.

Labor cost: Retrieves cost from the Labor bucket of L2 Costing – Business Applications cost model.

Other cost: Retrieves cost from the Other bucket of L2 Costing – Business Applications cost model.

Services cost: Retrieves cost from the Services bucket of L2 Costing – Business Applications cost model.

Software cost: Retrieves cost from the Software bucket of L2 Costing – Business Applications cost model.

Application TCO: Total application cost is the sum of all costs from all the buckets (Facilities, Hardware, Labor, Other, Services, Software).

New Financial Modeling Analytic in Madrid

Also in our Madrid release. we now provide an Application TCO dashboard to drill-down to see trends, outliers, and the individual cost break-downs per Business Application in addition to the cost model and ability to produce a reasonably accurate TCO quickly.  This allows reviewing the metrics in more detail to spot trends and anomalies in the cost metrics as they trend over time.

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Application TCO Dashboard

Conclusion

The ITBM suite provides a number of different products for planning, and when used together provide much more powerful capabilities that would otherwise be much more costly and difficult to obtain.  When implementing APM with ITFM as an embedded module, TCO calculations are a easily attainable, creating a baseline to build out additional maturity as specific costs are sourced from their natural origins.

For more information about the cost models for Business Applications:

Prescriptive Cost Models in London

 

 

 

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