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How to translate network usage to cost

Converting network usage data into monetary terms will help network professionals prove their worth to an organization. This article is the third in a series that explores ways in which network professionals can use ITIL best practices to help their business partners make more informed decisions when reacting to tough financial times. In this installment, we discuss translating usage to costs. The final installment will discuss establishing sound working relationships with your business units.

In trying times, the scramble for profitability can cause senior executives to take extraordinary steps to ensure the organization's survival. Since most of those decisions will be based on the costs and value to the organization, IT infrastructure usage needs to be translated into monetary terms. Armed with your information, senior executives can make more informed decisions -- and, in the process, realize the value of your contributions to their success. In this tip, learn how to translate network usage to costs.

Associating costs to usage

Thanks to all our hard work, we now have a reporting process in place that itemizes usage by business process or unit. Unfortunately, business leaders do not yet relate packets, transaction rates and even percentage utilization to business processes. Most business leaders do not understand the scope of those numbers or the impact on IT resources. Since money is the language of business, we need to translate our network metrics into unitized infrastructure costs so business leaders understand the implication of certain decisions. Doing so will reveal the value of your work.

First, let's discuss different types of IT costs. Variable costs are just what the phrase implies; they vary with usage, and costs can be directly attributed. Fixed costs are costs that remain the same independent of usage. For example, if you have a fractional T1 coming into a branch office, the base connection would be a fixed cost. It isn't going away if you add or reduce staff and will go away only if you close the office. The bandwidth charges are variable because you can reduce the committed information rate (CIR) when applicable, and those incremental (or variable) charges will be saved.

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Overhead costs can be included in fixed costs or broken out separately. Overhead costs could include any type of corporate allocation such as Human Resources or corporate-level staff. It could also include such things as line monitors and portable test equipment. Other costs incurred by IT organizations include hardware and software depreciation, hardware/software rental or lease, service contracts, hardware and software maintenance, support staff, network connect (voice and data) and bandwidth, and disaster recovery.

The good news is that your IT finance department already knows these costs. But unless they employ a chargeback system, they probably cannot break them down by business process or unit. Here is where you bring value to the process. You have already inventoried the infrastructure, mapped the business processes across it, and now publish usage reports. With a little work, it should be easy to correlate the costs to the usage.

There is one caveat in doing this work. Earlier, we discussed variable versus fixed versus overhead costs. Well, we need to understand what part of IT finance's costs is fixed, what is variable, and what is overhead. Business leaders absolutely need this information to make informed decisions. One choice may look better than another, but if fixed costs are higher, it could result in a bad decision.

Network costs: Variable, fixed or overhead?

So how do we determine whether a cost is variable, fixed or overhead? Some things just don't go away when usage drops to zero. Those are fixed costs.

Bandwidth, for example, can be reduced if lower transaction volume permits. That would be considered a variable cost.

SNMP trap information and certain types of email messaging traffic would be called overhead since they are not directly attributable to a business unit but are vital to network operations.

Allocating variable costs is easy. Just divide your total costs by the total usage measurement, leaving you with a per-unit cost. Then multiply each business unit's usage by the unit cost, and we have a variable number that is meaningful to the business. If business executives take actions on a particular business unit, they understand the financial impact of doing so.

Allocating overhead and fixed costs to business processes can also be easy. The trick is to allocate them equitably among all the business units. My experience has been that business units understand the need for sharing overhead costs. They do it themselves in other areas of the business. They just want the allocations to be consistently applied, accurately portrayed and equitably allocated. If you use the same allocation methodology that you used with variable costs, you maintain consistency and usually eliminate business unit questions and complaints.

Even better results can be obtained if you can correlate usage to business transactions. This permits you to allocate usage and costs on a per-transaction basis. Since most business units have a metric by which their success is measured, the per-transaction cost can be a powerful tool for business leaders. They can easily relate your results to theirs. That means you communicated in their language -- something they will appreciate.

Now that costs are correlated to usage, be proactive and merge usage and financial reporting. It gives your business leaders both technical and financial views. Armed with this new information and being able to relate to it, business executives have an easier time making difficult decisions. The reporting reveals the value of your contributions and reinforces the fact that you are more valuable to them in your office than in an unemployment line.

In our final installment, we will discuss the value of using newly defined reporting to help you build and sustain strong working relationships with your business leaders.

Ron Potter

About the author:
Ron Potter has been involved in IT for more than 30 years, working in a number of different roles and industries. Before retiring, he was closely involved with a multi-year IT improvement project at a large insurance company that embraced the ITIL framework and its best practices. He established a capacity-modeling process, working closely with business, applications and infrastructure teams. He is currently working part-time spoiling grandchildren and, when not tackling that tough assignment, he is Best Practices Manager at TeamQuest Corporation.

This was last published in June 2009

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