Decoding the Cost Allocation Model with a Practical Example of Global WAN Links

A slightly longer post but worth the read..

The TBM Cost Model empowers organisations to make data-driven decisions about whether IT spending aligns with strategic goals by providing transparency, traceability, and actionable insights.

Understanding and communicating IT costs to business partners or directly to the business is pivotal in Technology Business Management (TBM). When I managed WAN costs of $120 million annually, breaking down these expenses using the TBM model significantly improved transparency and provided for a very interested business conversation. However, it wasn’t a quick task, building my original model took a full year of effort and collaboration with others to achieve our goal.

In this post, we’ll explore a real world example of Global WAN Links using a Cost Allocation Model. This comprehensive framework demonstrates how IT costs are categorised, justified, and aligned with business outcomes, providing stakeholders with clarity and actionable insights.

I have provided a link below to the full pdf file for your review.

Cost Relationship & Allocation Model Example

costmodel2.pdf

Download PDF • 144KB

Here's how it achieves this.

The Scenario

We’re analysing the cost allocation for Global WAN Links, a critical IT service enabling communication between six sites. The total annual cost for this service is $5.6M, which is broken down across components, cost pools, and usage metrics, all linked to measurable business outcomes.

Stage 1. Sub-Pools Where Costs Begin

Sub-pools represent granular cost categories, such as Internal Labour, Telecom Expenses, and Software Licensing. In this example...

• Internal Labour accounts for 10% of the total, equating to $560,000.

• Telecom Expenses dominate at 25% or $1,400,000, reflecting the high costs of leased lines and MPLS circuits.

Each sub-pool aligns with specific financial activities, forming the foundation for cost allocation.

Stage 2. Cost Pools – Aggregating the Building Blocks

Sub-pools roll up into broader cost pools like Labour, Hardware, and Software. For Global WAN Links...

• Labour combines Internal Labour and External Labour, totaling $840,000.

• Hardware, encompassing components like Edge Routers and Firewalls, sums up to $1,232,000.

This stage simplifies reporting while maintaining traceability to granular cost drivers.

Rolling up sub-pools into cost pools simplifies complex IT cost structures, making them more digestible for stakeholders. Sub-pools capture granular details like labour or licensing costs, while cost pools aggregate these into broader categories such as Labour or Software, aligning financial data. This process enhances transparency and traceability, allowing you to analyse spending patterns and link operational costs to business outcomes. By consolidating costs, it becomes easier to communicate financial data to non-technical stakeholders and support informed decision making. Ultimately, rolling up sub-pools ensures clarity, efficiency, and alignment in managing IT investments.

Stage 3 & 4. Towers & Sub-Towers Categorising IT Domains

Costs aggregate further into IT Towers, such as Network Services. Here, the entire $5.6M is assigned to the Network Services Tower under the WAN Connectivity Sub-Tower. This categorisation helps stakeholders focus on specific IT domains.

Towers and sub-towers in the TBM framework should be tailored to fit your organisation’s unique structure and needs, but they are best aligned with TBM's suggested taxonomy as a starting point. The TBM recommendations provide a standardised framework for categorising IT costs, enabling bench marking and consistent communication across organisations. However, adapting towers and sub-towers to reflect your specific services, technologies, and reporting requirements ensures the model remains practical and relevant to you and your org. Striking the right balance between customisation and adherence to TBM standards helps maintain transparency while meeting your organisation’s operational and financial goals.

Stage 5. Service Name Defining the Purpose

The service name, Global WAN Links, represents what IT delivers to the organisation. It encapsulates all connectivity between the six sites, providing a clear purpose for stakeholders to understand the service's role. I haven't split out the 6 sites into offerings, but I explain in the PDF what could be done.

Services and service offerings are often a complex and misunderstood area. It’s common to encounter scenarios where services are inconsistently named, technical teams call it one thing, on-site teams use another term, and enterprise architecture teams label it differently. In some cases, there are no service offerings at all, or everything is grouped under broad application names, creating confusion. This lack of consistency can make communication and alignment across the organisation a nightmare. To avoid this, it’s essential to define services in a way that the business can easily understand and relate to, ensuring clarity and a shared perspective across all stakeholders.

Stage 6. Components The Physical and Logical Elements

Breaking down the service reveals its components, such as...

• MPLS Circuits ($1,120,000)

• SD-WAN Appliances ($560,000)

• Firewalls ($280,000)

These represent the physical and logical building blocks that make up the service, providing granular insights into cost drivers.

Obtaining components requires a thorough inventory of both physical and logical elements that contribute to the service. This process often involves collaboration with network engineers, IT managers, and finance teams to identify key assets like circuits, appliances, or firewalls. Tools such as network monitoring systems, asset management platforms, and vendor contracts can help uncover these details. Once the components are identified, assigning cost allocations requires linking them to specific financial data, such as invoices, usage reports, and operational budgets. This ensures each component’s cost is accurately reflected, providing a transparent and actionable foundation for further analysis.

Stage 7. Usage Metrics Justifying Costs

Each component is tied to usage metrics, ensuring costs reflect actual utilisation...

• MPLS Circuits. Bandwidth Utilisation (Gbps), Circuit Uptime (%)

• Edge Routers. Number of Connected Devices, Peak Traffic Handled (Gbps)

These metrics demonstrate efficiency and allow stakeholders to justify costs with data.

The purpose of usage metrics is to provide measurable data that links IT costs to actual utilisation, ensuring transparency and accountability. By demonstrating how resources are consumed, such as bandwidth utilisation or the number of connected devices, these metrics help justify expenses and identify opportunities for optimisation. Creating usage metric data involves gathering information from monitoring tools, operational logs, and performance reports. For example, network monitoring systems can track traffic volumes and uptime, while device logs can record user connections or peak loads. Collaborating with IT and business teams ensures that the chosen metrics are both relevant and aligned with organisational goals, enabling data-driven decisions and improved cost efficiency

Stage 8. Annual Cost The Financial Impact

The financial impact highlights the dollar amount for each component, providing transparency...

• MPLS Circuits: $1,120,000

• Leased Lines: $840,000

• WAN Optimisation Tools: $448,000

This focus ensures stakeholders understand the relative weight of each cost driver.

The similarities between component cost and annual cost arise because both represent the financial value tied to each element of the service; however, annual cost focuses purely on the total dollar amount without breaking it down into allocations or percentages. Showing the annual cost is crucial for transparency, as it provides stakeholders with a clear understanding of the financial weight of each component in the overall budget. Collecting these costs involves reviewing vendor contracts, invoices, and operational budgets, and collaborating with finance teams to ensure accuracy. This information is essential for identifying high cost areas, prioritising resource allocation, and aligning spending with business goals, ensuring IT investments deliver measurable value. Most of the data you would already have so its often a no-brainer to action.

Stage 9. Business Outcomes Connecting Costs to Value

Every component is tied to a measurable business outcome, such as...

• MPLS Circuits: Supports global communication and data transfer.

• Redundant Links: Ensures business resilience by minimising downtime.

This alignment links IT spending to organisational goals, such as productivity and reliability.

When discussing costs with the business or your partners, having a clear business outcome tied to each component makes the conversation much easier and more productive. For example, rather than focusing on a line item like "network monitoring tools," which the business might initially see as unnecessary, you can explain how these tools ensure uptime, detect potential issues before they impact operations, and directly support critical services. Framing the conversation around value, such as improved productivity or minimised downtime, shifts the focus from "why am I paying for this?" to "this is worth the investment." Clear, value driven communication fosters understanding, alignment, and acceptance of IT costs as essential enablers of business success.

Communicating the Model

A well structured table or flow diagram can effectively showcase the relationships within the cost model, making it easier to comprehend and discuss. In my experience, I’ve used tools like the attached PDF as a walk through to demonstrate the steps toward clarity and understanding. However, when creating a model for your business, I recommend using tools like MS Excel or similar applications. These tools offer flexibility, ease of use, and the ability to adapt the presentation to meet the specific needs of your audience.

Key Takeaways

• The Global WAN Links Cost Allocation Model exemplifies how IT costs are categorised, justified, and linked to business outcomes.

• By breaking down costs into granular components, tying them to usage metrics, and aligning them with business goals, organisations gain transparency and control over their IT investments.

• Stakeholders can use this model to identify high-cost areas, optimise spending, and ensure every dollar delivers measurable value.

This example underscores the power of TBM in bridging the gap between IT and business.

I'm happy to take any questions you may have on this process, good luck!