COST CONTROL

As stated previously, budgeting includes both planning and control. The effectiveness of good budget planning diminishes significantly if planning is not followed by a good program of cost management throughout the year.

Organizational Involvement

Cost control, like safety, security, and quality, is the concern of the entire organization and not just top management. If all employees are not committed to cost control, top management will find it extremely difficult to institute effective cost-control mechanisms. There are many ways to delegate responsi-bility for control, ranging from Management by Objectives (MBO), a method that involves assigning total responsibility for cost control to lower levels of management, to implementing organizational policies and procedures for cost control. By instituting a fonnal MBO system, senior management defines various business objectives and delegates responsibility for achieving them to lower-level managers. Key cost-control parameters can be included in these objectives. The performance of the managers is then evaluated continuously against these objectives.

Presentation of Data

Any budget/finance analyst will agree that it is desirable to break down expenses as far as possible. Presenting this breakdown in a readable, able form is also important in assisting cost control at all levels of manage-ment. Comparing historical with current data also helps management to per-ceive cost trends and patterns of spending.

Cost Control for Personnel-Related Costs

In many data centers, personnel costs are greater than all other costs (excluding hardware) combined. Controlling personnel costs involves the following major areas:

• Determining manpower needs

• Recruitment

• Wage and salary administration

• Training

• Job evaluation and planning

• Union negotiations

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The most effective tools for controlling personnel costs are timely, accu-rate reporting of such costs and an ongoing dialogue with all levels of supervi-sion. Consistently competent supervision-direct observation and individual contacts with personnel-is essential for such control. In some instances, comparing standard and actual labor costs may be helpful.

Cost Control for Nonpersonnel Costs

Cost control methods vary greatly, depending on the management style and business practices of the corporation. The following paragraphs discuss some of these methods and their value in budget management. Although used primarily in controlling nonpersonnel costs, these methods are also applicable in controlling some personnel costs.

Authorized Approval Procedure. This is the most widely practiced method of cost control. The data center establishes a procedure requiring each of the expenses and/or commitments for expenditure to be approved by one or more levels of management. Which levels of management are authorized to approve various expenditures is usually determined by the size of the expendi-ture. Various thresholds are generally established to classify expenditures. In some organizations, certain expenses must be approved by a certain level of management, regardless of their value. For example, in order to control foreign travel, some corporations require that all such trips, regardless of distance or duration, be approved by the highest level of management. An-other example is seen in corporations in which a single control is established for all telecommunications expenses, regardless of their origin.

A well-thought-out and strictly enforced procedure for expense authoriza-tion will facilitate cost control by creating an atmosphere where expenses are closely scrutinized and budget-versus-expense data is effectively managed. If the procedure is not firmly adhered to, the effectiveness of this fonn of cost control can be greatly reduced.

Documenting Costs. If costs and cost sources are well documented, fu-ture budgeting and cost control will be simplified. Standard fonns are often used by corporate data centers to identify and record costs associated with hardware and software. This information is then used to identify and budget hardware rental or maintenance costs and to verify vendodnvoices. This type of recordkeeping also assists in asset protection, development of cost recovery (or chargeback) fonnulas, and resource planning.

Comparison of Standards. To evaluate cost-effectiveness, managers must compare the actual cost with the cost defined as satisfactory or standard.

For certain costs (e.g., maintenance costs), standard cost is the cost of the work done by a standard employee with standard resources under standard conditions; for other costs (e.g., travel per diem), standard costs are simply estimates of what is satisfactory. If such standards are used as a cost control method for data center operations, the standard costs must be well thought out

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and continuously reviewed for applicability. Efforts to measure work per-formance using standard costs must, of practical necessity, be tempered with common sense; a purely quantitative analysis is insufficient.

Review of Assets and Cost Sources. A thorough, periodic review of assets will assist management in controlling future costs. For example, the development and regular review of a contingency plan will help in controlling the costs of a backup facility. Reviewing the data center security plan can help lower insurance premiums and curb costs associated with theft, fire, and other threats.

ASSET/CAPITAL PURCHASE PLANNING AND CONTROL

Most corporations have a well-defined methodology for planning and con-trolling the procurement of all assets or capital purchases. Capital budgeting involves generating procurement proposals for such assets as CPUs, peripher-als, or the data center building; estimating cash flows; calculating the payback period or return on investment (ROI); approving the procurement; and finally, continuously evaluating the procured asset in the light of the original invest-ment and continuing costs. A procureinvest-ment proposal is usually evaluated to determine whether it provides a return equal to or greater than the margin required by the organization. In some instances, there may be other factors (e.g., OSHA, EPA, or other legislative requirements) that override consider-ation of rate return.

Capital Purchase Planning

The following steps are generally followed in capital purchase planning:

• Identification of the capital asset and related procurement costs.

• Determination of the depreciation methodology for the asset. Yearly depreciation figures are utilized in the cash flow analysis.

• Identification of anticipated savings to be realized from the ment of the asset. Since this is the value that will justify the procure-ment, care must be taken to identify and cost out all tangible and intangible benefits. For example, when an older computer is being replaced with a newer computer, power and heating savings should also be quantified.

• Preparation of cash flow analysis. The following factors are included in this analysis:

-Acquisition cost -Depreciation schedule

-Investment tax credit (ITC) where applicable -Tax realization from depreciation and ITC -Savings generated and resultant tax realization

• Calculation of return on investment and present value of the cash flow.

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