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IT Cost Management Account Metrics that matter

October 6, 2008

A good set of management accounts is the single most important tool for cost management. It should be elegantly structured and crisply presented. Telling a deep and complex story in a few concise lines. With character and characters, narrative and mood.

You need management accounts that:

· Tell a rich story of what is happening with the business economics – history, today, future projections.

· Allow you to see what is going right and what is going wrong, and so where you need to take action.

· Let you model outcomes under different scenarios.

· Track progress against plans and targets, in ways that reinforce lead manager accountability.

· Do all this in an accurate, insightful and time-efficient way.

Management accounts should not be confused with other sets of accounts for corporate and tax reporting. Management accounts are internal operating tools for the CFO, the CEO and all line managers.

I like a one-page (one spreadsheet page) format that takes the P&L down to operating profit before interest and tax, runs through operating cash flow, and adds in underneath a selection of key operating statistics and metrics. I also like a quarterly presentation over a two-year period, with actuals for last year and budget vs actuals for the current year as the core format.

you limit yourself to only a dozen or so cost lines to play with, you have to decide what information you need most. My order of priority is:

1. Identify non-headcount costs that are or should be driven by revenue and that move very closely with revenue — cost of goods sold (COGS) or variable costs.

2. Identify all other costs that are driven by in-house staff headcount (payroll, benefits, T&E).

3. That leaves a bunch of all other costs that are not driven, in the short term, by revenue or headcount — like facilities, external services, marketing, IT and communications, contractors and outsourcing.

4. Report costs in buckets that align as much as possible with lead manager accountability.

This should let me see quickly that:

· COGS is X% of revenue — every dollar we sell converts into x cents of gross profit, to pay for all our fixed and semi-fixed costs.

· Headcount cost accounts for the vast majority of all our other costs; engineering cost per head is growing fast and is shown as a key metric.

· All the cost buckets are clearly assigned to one lead manager.

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