Indirect Costs in Mainframe Environments
Separating direct and indirect costs is a helpful approach for estimating the true impact on total IT costs for platform changes.
By Roger Rogers03/01/2019
Accounting for IT costs can seem straightforward, but lurking behind those are hidden costs that often aren’t properly quantified. Most teams consider IT costs to be servers, storage, software licenses and maintenance. However, a significant proportion of IT costs are committed to infrastructure support. These are often overlooked when considering the cost of new applications or the impact of changing application platforms. Separating direct and indirect costs is a helpful approach for estimating the true impact on total IT costs for new applications and platform changes.
Direct Costs and Indirect Costs
Direct costs are obvious and are easily identified and quantified. These costs typically include servers, software licenses, storage and any maintenance.
Indirect costs typically span multiple departments and are part of the supporting IT infrastructure. Indirect costs typically include networking (including network hardware, directory and address management, network software and operations); operations and monitoring (problem management or incidence management); security (hardware, software and people); physical infrastructure management (inventory, purchasing, lifecycle management, racking/stacking, uninterruptable power, generation, power and cooling); and software license management (entitlements, renewals, auditing and reporting).
Client IT assessments by the IBM IT Economics team show that indirect costs make up 40 to 50 percent of total costs in a typical IT organization. IBM IT Economics assessments also show significant differences in these costs between platforms and computing methods.
Indirect Costs Vary Between Platforms
It should seem obvious that mainframes and distributed computing platforms have different infrastructure support requirements. Mainframes use a centralized method of computing; most of the infrastructure elements for the platform are included already and are internally shared. Distributed computing relies on a shared infrastructure. Elements of a distributed application are deployed on separate servers and are connected through networks.
The lower indirect costs expected from a centralized mainframe model is affirmed in IT Economics assessments, which find that 80 to 85 percent of mainframe costs are directly captured in the platform and are typically budgeted with the platform. This would imply a 1.17x or 1.2x multiplier on top of direct costs to get to true total cost.
By contrast, distributed platform costs are only 50 to 60 percent directly captured with the platforms and applications, and indirect costs are often not budgeted to the platforms or the applications. This would imply a 1.7x to 2x multiplier to get to true total cost. Instead of attributing these costs appropriately, they’re frequently missed when they’re counted as overhead and charged back separately to business unit budgets.
Based on actual client engagements, a typical breakout from an IBM IT Economics assessment is illustrated in Figure 1, above (scaled to $100 million). Direct costs are in the blue rectangles and indirect costs are in the green and orange rectangles below them.
Avoid Common Oversights
It’s crucial to account for indirect costs when evaluating platform expenses and projecting costs for new applications. A bottoms-up approach will normally fail to account for indirect costs. One common oversight is to assume these costs are covered when planning for new applications or platform changes.
IBM IT Economics assessments show that direct and indirect cost proportions are remarkably stable when looking at both small and large IT operations. In other words, indirect costs grow proportionally with direct costs. So, what’s the takeaway for IT accounting? Indirect costs aren’t covered, are likely to grow with new applications and may increase with replatforming decisions.
In addition, a failure to consider indirect costs will lead to misleading comparisons between mainframe platforms and distributed platforms. When comparing costs, be sure to apply indirect cost assessments.
Finally, be careful when budgeting and assessing chargebacks by platforms. Spreading indirect costs equally among platforms will create a false impression of total platform costs.
Contact the IBM IT Economics Team
The IBM IT Economics team can help you understand IT costs by providing a no-charge assessment of your organization’s costs and cost allocations. Learn more about IT cost analysis by contacting the IBM IT Economics team at email@example.com.
Roger Rogers is a senior analyst and IT economics consultant on the IT Economics team, part of the IBM Competitive Project Office.
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