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IT Three Main Cost Drivers

October 3, 2008

The Main Categories of IT Costs

Let us review the activities behind IT projects and applications and summarize the various cost components.

A project is delivered by a software development team (from an IT department or an ESP) that designs, develops (in-house development), configures (off-the-shelf software package) and implements the first release or version. Once in production, the resulting applications physically reside on infrastructure (comprising hardware, system software and networks) and are run and supported by an operations or production team. Subsequent releases or upgrades are then brought out at regular intervals to meet new or changing business requirements, usually by the same development team which produced the first release, and are then put into production to replace the previous one. This cycle continues up to the end of the useful life of the application, which can be anywhere from 5-10 years.

This results in the following three broad cost categories for IT:

* PRODUCT DEVELOPMENT, which covers the costs to produce the first version (project phase) plus ongoing releases once in production (what the traditional business model calls “maintenance”);
* INFRASTRUCTURE, which covers the costs of the physical hardware, system software and networking on which the product runs;
* OPERATIONS, which refers to the day-to-day running and support costs of the finished product — or more specifically of the most current release of the product.

Not included in the above would be general IT overhead and indirect costs like staffing, career planning, training, analysis of emerging technologies, finance, budgeting and reporting.

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