The Squeezed Middle
The Squeezed Middle
You need real time intelligence to make fact-based decisions.
In a market place where the lines between consumer and enterprise products are becoming increasingly blurred the pressure on price points for Service Providers is only increasing. As long as customers are being fair in the evaluation of the functionality and especially security features then any decision they make comparing your price points are to be expected. Therefore you had better know and manage your cost of service or before long your organisation will become another member of the squeezed middle.
Why Cost To Serve (CTS)
As a business you make significant investment in your assets, platforms, people and your suppliers/partnerships. You are continually making one-time and ongoing decisions across your investments/products and customer lifecycles to ensure you are getting the right returns.
- Should you build or buy a service
- Capacity Management and tracking
- Optimum product mix
- Sales Plans and Channels to Market
- Mapping supply to expected demand
Identifying the customers, products and suppliers that add value to the bottom line is critical to attaining and maintaining a growth trajectory.
Before You Start
Need to be clear that creating and maintaining a CTS approach to your business is not to be taken lightly. You need to involve the right people in the business from Finance, Operations and Product Management.
Ensure you communicate the reasons why and remove any negativity (e.g. we have enough information already, things change to much to model realistically) as you will need to create a robust structured approach to the data capture and modeling.
Identify cost owners that are responsible, but also have the authority to define what the costs are
Management assumptions are a critical part of the process. Agree what you can at the outset, but also have a mechanism in place to make decisions quickly when they are required.
Define the precision you require from your CTS and that level of precision should be ubiquitous across your portfolio of services. If different levels of precision are implemented, the downstream decisions (e.g. discounting to a margin level) will not be consistent.
There are various methods each with their own pros and cons and level of resources and commitment to them.
- Traditional (Activity Based Costing) - http://en.wikipedia.org/wiki/Activity-based_costing
- Transactional (Rate Based) - http://www.mbaskool.com/business-concepts/operations-logistics-supply-chain-terms/2462-transaction-based-costing.html
- Time Based http://www.productcosting.com/time_driven_abc.htm
Also this is not a one-off adhoc process and needs to become a managed, repeatable process on a frequency required by your business. With the rate of change in the MSP world, you should expect this to be every 6 months and no longer than a year.
Building a CTS
You need to take an architectural approach and find an affordable, balanced effort to reward approach that is robust, maintainable, adaptable and reusable.
- Define how you will model costs in a unified way across the business
- Agree the level of precision you wish to achieve – this is the ratio of data to assumptions
- Capture existing data/information from ERP/Supply chain/CRM
- Define a location, structure and model for capturing the costs in a unified way – centralization is paramount
- Establish clear Units of Measure (UOM) for your costs (e.g. kW, person-hour, Gbps, etc)
- Document and agree any assumptions:
- Depreciation period for asset types
- Direct versus in-direct costs
- Variable versus fixed costs
- Cost recovery strategy
- Manpower baselines for service lifecycle
- Have an eye on the future to think about what is scalable, can be reused, is a building blocks for other
- Define and understand the cost items needed to derive the Cost to Serve across the portfolio, map to suppliers and cost sources
- Identify the levels/elements that is most directly linked to driving revenue
- Start with the widest reaching cost models (e.g. Data Centres) as they will be the foundation for the rest of the Cost To Serve.
- Build up from the foundation to define the cost model, leveraging the different levels and elements that comprise the service offering
Service Architecture to Cost Architecture
When we build a cost model for a traditional data centre, we following this general approach (of course it is different for each business)
- Manpower costs for bands, roles and resources (fully loaded)
- Connectivity and bandwidth (transit, MPLS, etc)
- Data centre facility and MEP
- Data centre technical area
- Colocation allocation of technical area
- Managed services allocation of technical area
- Cabinets and racks
- Structured cabling for copper and fibre
- Network infrastructure (L2/L3)
- Operational systems through to monitoring probes
The diagram below provides a simple example of costing a basic colocation service. We start with the data centre and work our way up to the service, but at every level we have a clear line of sight to our costs and how the contribute to the service value and in turn, revenue.
So if you are serious about growing your business the right way then you should be setting about creating, utilising and benefiting from a CTS model.
Follow us by here Insights for more insights with the “C-CPQ – The Evolution of CPQ” coming next week. In the meantime let us know in the comments of your CTS experiences (positive or otherwise).