LINQ’s Cost Allocation solution will allow LINQ customers to measure the operational cost of producing any Information Output – the information asset that delivers a business outcome, which in turn delivers business value.
This builds on the core Information Flow Model which is LINQ’s foundation. The Information Flow Model depicts the Information Supply Chains that connect sources of data to the Business Outcomes being served. LINQ cascades business value and operational costs along the Information Supply Chain to create a foundation for Cost Allocation.
Measuring Cost without Allocation
Cost Allocation is a non-trivial calculation since it must factor in the reuse of all data sources involved in the Information Supply Chain for the Information Output. If we were to merely sum all operational costs in the Information Supply Chain, the measured costs would be too high.
In this example, all three Action costs of $100 are being assigned to the single Information Output – the cost of that Information Output appears to be $300:
Most organisations strive to reuse information to avoid duplication of effort. LINQ’s Information Flow Model can therefore show the specific benefit of this reuse. In the simplest case, the allocation is purely based on the connectivity ratio:
This concept of valuing re-use lies at the heart of LINQ’s value cascade model. If more than one Output is utilising a source, then that source needs to be valued in a way that recognises its increased importance. LINQ values reuse: the more a Source is reused across multiple Information Outputs, the higher the reuse value.
It’s that connectivity value that’s in operation in the example above: the 1:1 ratios are showing a split between two outputs.
For some organisations, this connectivity-based valuation will be sufficient. If that is the case then you should use the reuse-weighted cost allocation model (See this article for details).
Differentiating the importance of different Information Outputs
For most organisations, there is a need to recognise that some Information Outputs are more important than others. A revenue-generating Information Output is clearly more important than a low-level management report.
LINQ uses a Business Value Index (BVI) as a way of differentiating between Information Outputs of differing business importance. Business Value Indices cascade against the Information Flow, aggregating where reuse occurs:
The relative importance of the Information Outputs will be a factor in determining the service level required of a shared Action or Information Asset. Therefore, Cost Allocation recognises this by using the ratio of BVI to allocate costs in a more equitable way:
We recommend that you use this Value-weighted Cost Allocation approach because differentiated values will be important to most organisations. Value-weighted Cost Allocation is the default setting. See this article for details.
The tension between Service Level and Allocated Cost
The Value-Weighted Cost Allocation approach creates a tension for the Information Output owner who wants to ensure that their Information Output is seen as important in terms of Service Level; but wants to minimise allocation costs. The former demands a high Business Value Index; the latter a low Business Value Index.
Output owners will soon understand that the supporting Process and Information Asset owners will prioritise service based on cost allocation – low value outputs are allocated less cost and will therefore get lower service.