Understand the Costs of Your Services

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Cost of service provisioning impacts the bottom-line. The types of service a business offers as a revenue stream or as customer support bear a cost that needs to be monitored closely.

Without a sound understanding of the costs associated with these services, it is difficult for the business to assess the return on investment. Should the business spend more? Would additional spend make a difference?

It is important to have a good handle on cost of service. Follow these steps.

  1. Identify who is involved

People in different workgroups who have a role in delivering the service are costs for delivering the service. Pay attention to the number of people involved in each area.

Where people are dedicated to a service, their costs can be allocated directly. For people who support multiple services, it is necessary to capture the corresponding time allocation.

  1. Capture the key activities performed

The essence of this step is to identify what is done. This helps to understand the workflow and the interdependencies of activities.

As part of this step, track the volume of work for each activity. This is a ‘must’ in order to evaluate cost. It makes a big difference whether a task is done daily, with high volume, or occasionally.

  1. Segregate expenses

Costs that relate directly to a service are easy to account for. For costs that need to be distributed among services, it could be tricky.

This is why work volume associated with a task is needed. Apply the Pareto principle in gathering the data. Practicality trumps perfection. Splitting hair might only make a small difference at the unit cost level.

  1. Estimate the unit cost

This step computes the cost per unit of service based on the data captured.

The estimated unit cost offers a reference point to evaluate margin, cost of customer support, and adequacy of investment.

  1. Understand the offsetting benefits

When the service provided has a revenue stream, determine whether the margin is adequate.

When the service provided is a support service without a revenue stream, assess whether the cost is justified. Is there a way to optimize it? Would the business need to invest more based on customer feedback?

The approach used to estimate the unit cost of service is not perfect, but it offers a gauge to determine whether the business could afford to maintain status quo or adapt. Without doing so, it would be challenging to make sound decisions.

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