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Understanding IT Cost A Primer

November 6, 2008

First, you need to understand cost drivers and cost dynamics. What creates cost? How do costs move? In particular:

· Which costs move mainly with revenue and how?

· Which costs move mainly with headcount and how?

· What are the main drivers of all other remaining big lumps of cost?

· What are the key cost trends, up and down?

Take a headcount hiring decision. Direct salary and bonus cost might be $50,000. Add in payroll taxes and benefits like healthcare or a equipment. Then include other fully variable costs (which would not exist if that person wasn’t on the payroll) like a mobile phone, travel and entertainment (T&E) for a salesperson, personal computer gear. $50,000 has become $80,000. Now you know how costs really change with changes in headcount.

A key metric to track is people-related cost (PRC) by department and level.

Headcount cost is one of the three key cost creators that drive cost dynamics:

· Revenue producing — the cost created by a production unit or a service activity, or by a customer or transaction.

· Headcount — as just discussed.

· Others — cost created by having a facility or a location, or by an enterprise process.

Once you have broken down the costs accurately in this way and understood the drivers and dynamics, you can:

· Work on driving down unit cost in each area.

· Accurately model and manage costs and financial outcomes, including what happens if volume changes from budget/plan.

· Price accurately, so as not to lose money unintentionally on sales and to stimulate “win—win” behavior from customers.

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