The Retail Method is used to allocate the annual cost of competing commodity IT products. This method is based on the Amazon Retail model, and is the standard used by most vendors offering a Bill of IT.
Since the introduction of desk top computers, the IT group has been trying to accommodate the business purchases of readily available commercial products. As the trend to more competitive platforms (i.e. Cloud Computing, SaaS, etc.) increases, so will the pressure be to move the accounting and control of these services to external vendors. While this method may be very popular now, it is likely to disappear from the IT group in the next couple of years. In the future, the external commercial vendors will be providing this service to the business.
Method
Properties
Cost Horizon
The Cost Horizon for this method is on an Annual basis and adapts easily to the annual budget constraints of the IT organization. The products associated with this method will rarely span more than one budget cycle.
Resource Type
The products associated with this method are integral in nature. That is to say, they are similar to a retail purchase in that once the product is acquired the transaction is complete. Buying a PC from the IT group is the same as buying a PC from a retail outlet.
The products in this method are also commodity based. This means the products are available from sources other than the IT group, and at competitive prices. With the advent of Cloud Computing, the IT group will face further competition from external sources that may be able to offer better prices.
Usage Type
The usage of products within this method is basically based on an ownership type of concept. The client “purchases” the commodity product and generally does with it however they desire. The transaction completed the interaction with IT.
Pricing Policy
Since this method is based on the Amazon Retail model, the pricing policy is similar in nature to that of a retail outlet. Since these are commodity products, Free Market pricing comes into play and generally results in prices that are based on Market Rates.
The Retail method is consumption funded. That is to say, the amount of funding that is needed is based on the price and volume associated with the product. Like retail outlets, the IT group needs to not only set a competitive price, but to establish a suitable volume of sales based on a realistic forecast.
Price Formation
Unlike a retail outlet, the IT group is constrained to an annual budget. While there are exceptions made, the IT group generally must operate within this constraint. This requires that the group perform a competitive analysis of competing vendors and/or products. Failure to establish a proper price for the products may result in a loss on the products, or a price that is not competitive with external sources.
Pricing Frequency
The pricing for products in the method must be fairly frequent since these are commodity products with external sources of competing vendors and products. The best procedure would be to review the pricing every three to six months depending on the nature of the product.
Attributes
The strong point of this method is that the product transactions can be readily identified, priced, and allocated to the purchasing group. This means the products should not require any reconciliation (unless the competitive analysis is off) and the actual costs are known and can be allocated to the proper group(s).
Behavioral Drivers
Overall, the behavioral drivers are mostly positive (upper quartile) for products within this method group. Since pricing is based on the unit price of the product and this price can be compared with other sources, the client will know the value of the purchase and whether it is a fair price. The pricing policy is also predictable because it is based on market forces and should allow for the client to easily control their future costs.
Bill of IT
The Bill of IT for the Retail method will usually consist of a list of itemized “purchases” that have been made by the client during the time period. This list will be similar to the receipts that are provided by any retail outlet. For each item in the list, there will usually be the following:
- Item ID
- Short Description
- Number of Items “Purchased”
- Unit Price
- Total Price
