Dan Woods' latest article on Forbes describes the need to run IT like an internal business (i.e. charging clients for services).  He indicates that one of the reasons this does not occur is that most IT shops cannot accurately esitmate the costs of the services that are provided to a particular group within an organization.  He makes the case for creating and maintining an accurate service catalogue that maps business functions to IT services.

I blogged about how Business Analysts are ideally suited to perform this task, and is one of the main values that BAs can provide to a business.  Do you agree?

Hi Tony,

Very good question - I'm by no means an expert in ITIL but here are my thoughts.  When talking about an IT service that is already in production, I think costs can be broken down into two main categories: people and hardware.  People costs can be further broken down into support (helpdesk), training and software maintenance (for bug fixes, patching of systems, etc.  Changes to functionality should fall outside of the scope of these costs). 

For a given set of hardware (cluster of computers to perform DB work, web hosting, etc.) and Service Level Agreements (availability, uptime, etc.), an IT shop should be able to estimate per CPU cycle costs based on factors such as on-call staff required to maintain SLAs, hardware failure estimation and replacement costs and the like.  Similarly, each type of person involvement beyond hardware should also be able to be broken down on a per-event basis (e.g. cost per helpdesk call, cost per bug fix, cost per training per user). 

If an IT shop does not want to charge a flat rate, then they can use these actual cost values to charge on a usage basis.  This adds variability to the business' budget (something they would not like), but also will get them to find and ask for ways to keep costs lower (for instance, having a good FAQ/knowledgebase for users to check prior to calling the helpdesk, or running a batch reporting job more often than is necessary).  I think the per-use cost basis is the most appropriate, and it's how more outsourcing companies are starting to charge their customers. 

Like any other service business, you would use all cost inputs to determine the amount to charge for the service.  People costs (salary + overhead) as well as equipment, supplies, etc. should all be included in determining the cost of a given task, then add markup as required.  In the case of internal services, there may be no markup.