How to Allocate IT Costs and Assign Cost Owners

To work out how to allocate IT costs, list every technology cost the firm pays, agree a few categories with finance and separate shared spend from spend one unit uses. Then name a person for each large line, give each shared cost one driver, test the split on one quarter and review it with each unit every month.

IT cost allocation means sharing technology cost out to the units that use it, by rules IT and finance accept. This guide is for IT and finance leaders in India and the GCC asked to show each unit its share. That includes the CIO, IT head, CFO and finance controller. For why IT spend slips out of view in the first place, read our explainer. Scoring an existing split and choosing between allocation models are outside this guide.

Each step below has an output that a later step uses:

Allocate IT Costs From a Full List of Spend

The first job is one list of everything the firm pays for technology, wherever the books record it. A split can only share out what the list holds.

Start in the general ledger and pull every account IT already owns. Those run from hardware and software to support agreements, telecom lines and outside service fees. Then look past those accounts. Company card statements and staff expense claims can hold tools bought as software as a service. Here that means software that a supplier runs and rents out by subscription. A department may have booked it under office supplies or travel. Read the supplier names on those lines, since the account names won’t tell you.

Next, open the contract file. A support renewal or a multi-year agreement goes on the list at its value for the period you are allocating. Cloud statements go on too, at account level for now, with tags left for a later step.

People are a cost as well. IT salaries and contractor fees belong on the list. Our article on what routine manual work costs looks at the hours behind repeat tasks.

For a group with companies in, for example, India and the UAE, build one list per entity. Then combine them, with each line still labeled by entity.

Give every row its source, supplier and amount for the period. Where the record shows one, add the person who approved the purchase. When you first decide how to allocate IT costs, the source column lets finance trace any figure back later.

Agree a Short Set of Spend Categories With Finance

Sort the list into a handful of categories that finance and IT can both read without a glossary. Hardware, software and subscriptions, cloud, network and telecom, support and outside services, and IT staff make a reasonable first set.

Keep it short at the start. A long tree of categories can look precise. But each extra branch is one more mapping rule that someone has to keep and defend. You can split a category later, once the first version has run and people ask for more detail.

Map each ledger account to one category, and write the mapping down as a table: account code, account name, category. Card and expense lines found by supplier name need their own rows. Otherwise, their account code alone would put them in the wrong place.

Finance should sign off this mapping before you go further. If finance would map an account differently, settle it now, because every later step inherits the category.

In a group, each entity may use its own chart of accounts. Agree one category set for the group and map each entity’s accounts into it.

Separate Shared Spend From Spend One Unit Uses

Go through the categorized list and mark each line as direct or shared. A direct line serves one business unit, and it goes straight to that unit with no rule needed. A shared line serves several units and needs a driver, which comes two steps later.

Direct lines take the least work. For example, a design tool used only by the marketing team can move across as it is. The same goes for a plant system that runs one factory, or a cloud account holding one unit’s application. Check the user list or the contract before you mark a line direct. A tool bought by one team may now serve others too.

What stays shared tends to be the plumbing, such as the network and its security, the service desk and hosting. Email and collaboration tools belong here too, with core business systems such as the finance and HR platforms. Shared cloud costs, such as support plans and commitment discounts, sit here as well.

When a firm learns how to allocate IT costs, the direct lines can settle part of the discussion with unit heads. Each head can see the unit’s own tools. The debate, however, tends to sit with the shared lines.

Record the reason for each shared mark in a short note. A shared mark with no reason is hard to defend when a unit head asks why the line isn’t theirs alone.

Name a Person Who Answers for Each Major Spend Line

Every large line on the list needs one named person who answers for it. Each unit’s share also needs a named person inside that unit. Decide what counts as large for your own firm. Either a line above a set amount or the top lines by value can work as a rule.

The person on a spend line should be someone who can act on it. That means they can renew, reduce, move or stop the cost, or can take it to whoever does. If the name carries no such authority, nobody on the list can act when the cost rises.

On the unit side, pick someone who knows how the unit uses its systems. An operations manager or the unit’s finance partner can fit. They are the one who reads the share each month and raises questions before they grow.

You also need a finance sponsor. A senior finance person who backs the method gives the split weight with unit heads who want a smaller number. Without one, a disputed share can turn into a negotiation.

Write the names into the list itself, in a column beside each line. A separate document can drift out of date when people change roles. Use the role as well as the name, such as head of infrastructure. The line then keeps an answer after a change of staff.

Before any number reaches a unit, IT, finance and the unit heads should agree the method together. Hold one meeting for this and keep a written record.

Allocate Shared IT Costs With One Driver Each

A driver is the measure that splits a shared cost between units, such as the tickets each unit raises. The TBM Council’s guidance on allocation methods asks that the logic used be understandable and defendable. A good driver reflects real use and draws on data you can get every month.

When you plan how to allocate IT costs that several units use, start from the table below. It gives one driver to test for each of six common shared costs.

Test each driver on real data first. If a result surprises unit heads and you can’t explain it in a sentence or two, try another driver.

Park Costs No Driver Fits in a Holding Line

However, some shared costs won’t fit any driver you can measure yet. Put them in one holding line, kept apart from the units’ shares and shown in every report.

Review the holding line each month, item by item. For each one, ask what data would let it move to a unit. The TBM Council notes that unallocated costs can distort financial insight and weaken trust in the model. That is a good reason to keep the line visible and small.

You might need a stopgap, such as splitting a holding item by headcount for one quarter. When you do, mark it as temporary in the list and give it an end date. The TBM Council describes fallback rules of this kind as a way to keep allocation running. They apply when a primary driver is missing, late or flawed.

Link Cloud Accounts and Tags to the Same Categories

Map every cloud account and tag value to the categories finance agreed in the second step. A cloud cost should land in the same category, and the same unit, as it would in the ledger.

Tracking and controlling cloud spend as a whole is the work of managing cloud cost. For how to set tags up, see our guide to tagging cloud spend to the teams that run it. Here, the point is the link back to the ledger categories.

Keep tagged and allocated apart. A cost tagged as shared has been labeled; it still needs a driver before any unit carries it. The FinOps Foundation’s paper on shared cloud costs treats tracking as essential to see progress on allocating shared costs. A simple monthly figure for how much shared cloud cost has reached a unit does that job.

Untagged cloud cost goes to the holding line until someone tags it or a driver covers it.

Test the Split on One Quarter Before Anyone Sees It

Run the whole split on one past quarter before any unit sees a number. However you decide to allocate IT costs, a closed quarter gives you settled figures to check against.

First, check that everything allocated to units, plus the holding line, equals the quarter’s ledger total for IT spend. If it doesn’t, something has been counted twice or missed. The amount shared out is then off by the size of the gap.

Then compare each unit’s share with what its head expects. A share that jumps well above that is worth a closer look. The cause may be a driver that doesn’t fit or a direct line marked to the wrong unit. Or the cost may really belong there.

Trace any large gap back through the list to its source row, using the source column from the first step.

Finance should agree the totals and the mapping before the first unit report goes out. We recommend that finance sees the test results first, then the unit heads, in that order. A unit head who finds an error in their first report may stop trusting the next one. The monthly reads that follow can then turn into arguments over figures.

If you can, pick a quarter without unusual events such as a merger or a one-off project. The test then reflects a normal run.

Walk Each Unit Through Its Share Every Month

Once the test quarter holds, send each unit its share every month. Then go through it with the unit head and the named person in a short meeting. The meeting agrees actions on the spend, with the split itself already settled.

Each time, show the unit’s direct lines and its share of each shared cost, with the driver beside it. Also add any change from last month. A unit head can then tell whether a rise came from their own use or a cost that rose for everyone.

Note each action with a name and a date, such as a subscription to cut or a figure to check. Then open the next meeting with last month’s actions.

Firms that are still learning how to allocate IT costs can start with the share as information only. Showback means showing units their share without charging them, and chargeback means charging the share to their budgets. Choosing between these two uses of the result is a separate decision.

Keep the monthly pack to one page per unit, with the detail available on request.

Change the Split Mid-Year Only on a Set Trigger

Changing drivers every month can make shares hard to compare month on month. Agree in advance what will justify a change before the year ends, and write it into the method.

Triggers can include a reorganization that moves teams between units, or a new system that several units start using. A holding line that keeps growing month after month can be one too. A disputed share is a reason to check the driver data, though the dispute alone isn’t a trigger.

Outside those triggers, leave the drivers alone during the year. We recommend a full review of drivers and categories once a year, before the next budget round. Finance and the unit heads should both be in the room.

Mistakes to Avoid When You First Allocate IT Costs

Six set-up mistakes are worth checking for before units see their first share.

For an outside look at your split, start with an IT spend review from our team. Signisys provides technology cost governance work within our consulting and managed cloud services. That gives us a commercial interest in the topic. No charge, with a fixed scope.

FAQ on How to Allocate IT Costs