Some portion of idle capacity cost is a cost to provide services while the remainder should not be assigned to services and customers. Only offlimits capacity cost should be considered a cost to provide capacity for services and customers. This is proper because otherwise, the capacity could not be provided at all. Capacity that is not usable due to obsolescence or that is otherwise usable for other services and customers is not a cost properly attributable to current services and customers. Yet many IT internal organizations expect their internal customers to pay for this capacity. External IT organizations cannot charge their customers because their pricing is based on market conditions and not on their cost to serve. Where significant idle capacity is present, the cost differences can be significant. Without proper understanding and treatment of these costs, management decisions will be misguided. In the worst alternative, CIOs ignorantly continue to believe inflated service costs and make decisions on that basis. Alternatively, proper understanding of idle capacity cost gives management an opportunity to know the real cost to provide services to their customer and then to find value-adding uses for any idle capacity. Exhibit 4.17 summarizes capacity costing where each customer (A E) uses capacity and has certain amounts of capacity reserved. In addition, IT maintains a certain amount of capacity to provide required services at peak usage times. This buffer benefits all of these customers. However, the remaining idle capacity does not support or benefit any customer. Its cost should not be assigned to any of them. Instead, it is an overhead cost of the IT organization. Exhibit 4.18 depicts a more advanced capacity consideration found in a commercial bank. In this case, service A requires a significant amount of additional capacity, and the month-end processing was a significant consideration in their purchase of a mainframe computer. The capacity requirement was to have enough power to process all month-end requirements between closing time on the 31st of the month and opening time the next day. This requirement was the basis for purchasing a larger and more expensive machine and supporting infrastructure. In this case, management recommended the creation of two capacity models. The first capacity model considered the applications and services that required peak month-end processing. Capacity was assigned to the various categories according to usage during the peak. The cost assigned to this

A n A d v a n c e d C a p a c i t y M o d e l S e p a r a t e s t h e I m p a c t o f Pe a k C a p a c i t y D e c i s i o n s

capacity model and its capacity states was the incremental cost of the larger computer and its support over the cost had it been sized only for non-peak requirements. The second capacity model considered all applications and services during normal operations. Capacity was assigned to these categories according to non-peak usage. The cost for this model was reduced by the cost assigned to the peak model. This model resulted in a good understanding of the consequences of the peak requirements as well as a good understanding of the real cost of off-peak processing. With these insights, off-peak applications no longer received the peak cost and were evaluated on their own merits.

IT can be greater than the sum of its parts. Overcoming the historic practice of managing by domain and technology expertise calls for new strategies, new approaches, and a new role for IT Financial management. The dated domain and technology approach to management leaves each of the domains operating in isolation: not only from each other but from IT s management and IT s business customers. To compound the situation, the isolation approach to IT management hides the fact that IT has key management sections missing even from the CIO. Strategy overcomes the mixed management message delivered by the industry s mindshaper community. One camp advises a Bottom-Up, operational concentric process maturity index that delivers business value at the end of the maturity process. Another camp advises IT to deliver business first and immediately. Rather than choose one approach over the other, SAS advocates a two-prong strategy that delivers maturity and value simultaneously. IT Finance plays a crucial role in both prongs of the strategy. From a financial perspective, the immediate business value strategy prong follows capital expenditures for new business applications while the maturity strategy prong concentrates on the expense portion of IT. For IT Finance to deliver upon this new role, new approaches are necessary. For both strategy prongs a new approach to Service Level Cost Management is needed. Equally important, IT Finance needs to overcome the traditional shortcomings of General Ledger based accounting and budgeting in favor of service-based financial outcomes.