Posted by Stijn Van Vreckem on Jul 08, 2011

A brief excerpt from the executive summary of my Vlerick EMC BPM thesis.

Using ABC to design a successful business model

Managing the business becomes easier, less stressful and more profitable.

In a startup company, it is very important to know what comes in and what goes out. Fluctuations in revenue create great pressure on running a tight ship.

We need to be able to manage our costs and apply this information to our strategy and business models. XAOP is still looking for a solid and sustainable business model. Traditional accounting mechanisms do not give us the necessary insight into the real cost of our activities. I have tested Activity Based Costing (ABC) in process and operational management (short term) and also on Business Models for strategy (long term).

In this project we investigated the impact of ABC on a set of different business models that we are experimenting with. XAOP has at least three business models today. The first business model is the software development service, the second (Cloudring) and third (Timetag.it) are product oriented software as a service business models. There is of course an overlap between the different models. Our investment in research can be controlled via ABC and assigned to the correct projects (using a service model or product models).

I learned during the project that ABC is not only valuable for large organizations but that also small software companies like XAOP can benefit from its modern approach to track activity performance with a financial metric.

This work defines the direction that we will take in developing and selling our products and services from a financial perspective for the next two years. This was missing before in our business model and I will highlight the benefits of doing this. But there is also a downside: creating and keeping an ABC model up to date demands a lot of work.

ABC is dependent on gathering data and capturing information on processes and activities in order to give an accurate view. The XAOP ABC application is being run on a dataset of approximately one year’s worth of detailed information. This project has been a catalyst for capturing activities (with Timetag.it) in a more structured way than before.

Excerpt Chapter 2 - Section 2.5.1

Cloud computing services

Most companies are moving towards using a new kind of technology with regards to their servers. They make use of virtualization to run multiple servers on one physical machine. This may seem a bit like magic, but it brings flexibility and cost efficiency by making better use of the capacity of the hardware. Not only does the cost of the hardware/machines go down, but the cost of the energy to power these machines is also reduced.

The question is, does it become more difficult with virtualization to measure server usage between the different projects?

What we have done at XAOP is create specific virtual machines for each project. This allows us to create a modular and separated infrastructure. The administration of these machines is simplified and automated because they all use one standardized base. It is like copying or cloning an existing machine. The new hype around Cloud computing is fueled by virtualization technology. At XAOP we can start in two minutes 100 servers to compute a very big problem in the cloud. We use cloud providers such as Amazon and Heroku (part of Salesforce.com) to accomplish this.

There is a lot of literature about applying ABC in the manufacturing industry. I could not find an equivalent example of the true cost of calculating an IT service. But I do think it is interesting to apply ABC to the IT software as a service business (SAAS) model. We looked into costs such as :

At XAOP we have had the following experience :

These are all indirect costs that have to be taken into account. The cost to power a machine even when you do not need it remains a fixed cost.

A typical project at XAOP needs three separate environments which have to be bought and maintained: a development environment, an acceptance & staging environment and a production environment.

With the introduction of virtualization we can now offer our customers the possibility to carry out development and acceptance & staging with a virtualized cloud solution. We learned that Amazon and Heroku are ideally suited for applications that are for transient use (e.g. an application that is only used approximately 9 months a year).

We can do the same calculation by project for other cloud services such as Github for source control management (with the cost driver being the number of commits/transactions per project).

Pivotal tracker is a project management tool that we use and the cost of this tool can be divided by usage i.e. the number of stories to measure the size of the project.

For Cloudring or Timetag this analysis is valuable if we want to define and convert how much we need to charge in a freemium model (assuming 5% of the users are premium and 95% of users are free).

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