IT Services Cost Cheat Sheet - Part One


Introduction to IT Services

Most IT professionals do not know how organizations sell their services to the clients. While the topic is of great interest to the presales or architects, as an IT professional, everyone must be aware of the cost calculation.

This write-up highlights a few basic cost calculation components and methods but in future blogs, a more detailed description will be made available.

Let us start with a basic vocabulary related to the IT Services costs.

FTEFull Time Equivalent (Considered to be of 8 hours of efforts)
ResourcesPeople involved in service delivery
Support WindowThe anticipated support shift in hours
SkillTechnical capability of the resources (DBA, Server admin etc)
On-Call SupportGenerally considered as support required during off-business hours (outside of agreed support window).
Billing MethodDefines the method the way invoices would be generated.
ITSMIT Service Management methodology encompasses people, process, and technology and presents the way the monitoring, incident handling, change management, capacity, and problem management will happen.
Governance ModelA governing body structure which includes senior and relevant stakeholders from service provider and client. They together review the service delivery and work towards the improvement the overall quality and other strategic initiatives.
Transition PhaseEvery new service contract starts from the transitioning of services from an existing vendor or team. This phase is known as the transition or services transition phase. There are different sub-phases to complete the transition of services; Due diligence, Train the trainer, Onboarding of resources, Verification and Creation of Standard Operating Procedures, Sign-off of all the documents, Shadowing of services and reverse shadowing phase, Final cut-over of services to the new service provider.
Transformation PhaseThis phase revolves around IT infrastructure modernization, data center consolidation or anything which will impact the current IT infrastructure landscape. This phase automatically leads to the revision of managed IT Services.
TenureTranslates to the contract duration. In a general practice medium to large enterprises outsource the managed IT services for 3 to 5 years.

To understand the concept of service cost, let us consider a simple case where your company has to submit a quote for supporting the following IT infrastructure remotely with the following landscape.

  • The client has two data centers in Europe - Primary and DR Site. And, the workloads are equally divided between both the sites.
  • The client will have their own people to manage the local DC operations and only remote services are to be outsourced.
  • All software, hardware, and maintenance contracts will be owned and managed by the client.
  • The service quotes are to be submitted for 5 years for the following inventory,

    • 1000 Windows Servers
    • 200 SQL Databases
    • 350 Linux Servers
    • 300 MySQL Databases
    • 300 L3 Network Switches
    • 50 Large Firewalls

The very first thing to know before creating a service quote is to know how much does it cost your company to offer:

  1. A generic FTE cost breakup is something like below.
Employee cost65%
Workspace cost10%
Office expenses1%
Hiring cost4%
Bench coverage10%
Hardware cost2%
Software cost1%
Tech support cost1%
Connectivity cost4%
Communications cost2%
  1. Gross Margin – 12- 26 ( Varies from 12 to 26%)

  2. Skills Rationale
    For example, to support 100 Windows Servers, 1 FTE is required per shift, but what is most important is to know the exact skills required to support the service. 1 FTE must be a mix of required skill levels/band levels, like 70% of Level 2 and 30% of Level 3. This combination is vital to define the cost of the particular service and hence a good service architect must possess enough hands-on knowledge of the skillset. In our case, let us produce a rationale for each skillset required.
SkillsLevel 2Level 3
SQL Server70%30%
Network Switches90%10%
Large Firewalls70%30%
  1. Support Rationale

    This rationale is required to count the number of service points/Cis which are supported by each individual per shift. In our case, the most generic table would look like the following.
SkillsCount/ FTE
SQL Server70
Network Switches50
Large Firewalls20

This table requires the knowledge of industry trends, automation of processes within your organization. As you can see there are lots of levers which can control the overall rationale and a smart pre-sales executive plays on these levers to fine tune the overall proposal.

  1. FTE Rate Chart

Next thing you need to have is the rate chart of your organization, which is generally a very confidential document and only sales or pre-sales teams have access to the same. This document is issued by the finance team to authorized stakeholders from time to time, highlighting the key changes in a new rate card.

A typical rate card would look like this with other important information.

Employee BandA (Junior)BCDEF (Senior)
Offshore Cost / Month (USD)220028003200390046005500
Onsite Cost / Month (USD)6500720079008700970011300

Gross Margin: Min 18%

  1. Overall Cost Template

    Finally, you would need to create a costing template for your service. Now, while all the requested information is provided, please find the cost of the service.

    While creating the cost, please keep the following assumptions in mind.
    • There is no change in overall IT Landscape
    • The same team is supporting the client
    • Do not consider any other factor, just calculate the cost for 5 years

Please provide the final cost of services in the comments below and correct responses will be announced on all social platforms.

Happy Learning!!!