What is cost allocation?
So, you’ve recognized the value of business process automation, especially when it comes to managing IT and telecom expenses. You’ve chosen and implemented a telecom expense management solution. Now, you need to know where to start managing your expenses to drive revenue and increase margin. A perfect place to start is with cost allocation.
For the uninitiated, cost allocation is the process of linking of a cost (or group of costs) with a particular company department or division, or a good/service produced by a company. At its core, cost allocation is about linking the cause of a cost to its actual cost. This may sound like a weird little thought exercise, until you actually run afoul of the challenges of cost allocation.
The thing is, cost allocation is simple only if there were no variability in how resources are structured. That’s simply not the case where IT and telecom are involved. Note, for example, the matter of scope. There are individually-ended services that logically are consumed by individual employees or departments. Examples of these include (among many others):
- Individual mobile numbers,
- Internet lines, and
- Fax lines.
You can see that, one end of each foregoing service is tangibly and discretely in the hands of a person or department and the other end is in the hands of a provider.
There are also services that (ideally) enable all employees in an organization to easily and swiftly communicate with each other and the outside world. Examples here include (again, among many others):
- MPLS circuits,
- Fibre optic lines, and
- Frame relays.
These are all technologies which simultaneously service many, many, many users across many platforms. How would you even begin to assign the cost of using these resources to employees? Especially if, at any given moment, they’re all using the MPLS circuit (for example) at the same time? The answer is that you can’t.
Logical separation of costs (i.e., cost allocation!)
Which brings us to cost allocation. In the above examples, individually-ended services can (and probably should) be assigned to an employee or department; non-individually-ended services should be assigned by site location. Of course, this can be a logistical nightmare. What happens when you have thousands of devices and services to track across different employees and sites?
Fortunately, technological advances are actually taking the guesswork out of such administrative tasks by letting you easily calculate all the permutations. That’s the magic of modern telecom expense management (TEM). It lets you simultaneously allocate costs by employee/department and by site for the entire company – painlessly.
Employee & department allocation
Employee/department cost allocation confers the following benefits:
- It provides transparency of usage and costs for all devices
- It lets you easily flag atypical usage for investigation
- It lets you identify services that aren’t being used (but for which you’re still paying)
- It enables easy reassignment of services from departed employees to incoming staff
Good TEM solutions brings all of the above to the attention of IT managers; they also empower the IT manager to manage all of these actions with a simple mouseclick. It all adds up to avoiding unnecessary and unwarranted costs!
As stated above, site location assignments work best for services of massive scope. Take for example, a fibre optic connection between 2 buildings. Under a good TEM solution, the fibre is assigned to one site and related to another site (on the other end).
In addition to the benefits listed for employee/department allocation, site allocation gives you one further advantage: If one site moves (e.g., a head office moves across cities or even countries, like Burger King just did), all its services will be identified (via the TEM software) and will also be moved, reassigned, or cancelled with very little fuss!
The final word for now…
Well, I hope that this helps clarify some of the nitty-gritty that goes on in TEM. Please feel free to share your experiences with cost allocation in the comments section below. In the meantime, I also invite you to complete our free TEM self-assessment checklist to see if your company has grown to a point where you’d benefit enormously from deploying a TEM managed service. Trust me when I say that it’s a pretty good sign of your business’ success if you need TEM!