Project Practitioners > Getting Control of Charge-Backs

Getting Control of Charge-Backs

By Niel Nickolaisen

I recently participated in a study that assessed how many of us are using some type of IT charge-back program and, if we do have such a thing in place, the specifics on how the program works. The survey results show that while many of us have some type of cost allocation process in place, the specifics vary widely. I was not surprised.

I have long been a charge-back skeptic. I once inherited a very complex charge-back process that turned major portions of my IT staff into billing agents. In addition, I found that having an IT charge-back system created an environment that encouraged my internal customers to spend some of their time shopping for IT bargains by signing their own technology contracts and creating shadow IT functions. From their perspective, they wanted to only pay for the IT they directly consumed and my invoice included the costs of the shared services like data center management, network management, security management, et cetera.

So, as soon as I could, I abolished our charge-back plan and kept all IT operating costs part of a centralized IT organization. My internal customers and I still jointly budgeted and petitioned for new projects and initiatives but once the project went into production, I absorbed the support costs into my central IT budget. This seemed to work really well for me and for my customers. If the CFO or CEO ever pushed me to allocate the IT costs directly to the consumers of IT, I recounted the horror stories of my previous brush with charge-backs.

Then, about a year ago, my CEO came to me and asked, once again, for me to find a reasonable way to allocate IT costs to our business units. He wanted not just IT but all central support services such as Human Resources and Legal to align their costs with whose consuming our services. My CEO’s rationale was one of fairness. Some of our business units were high consumers of centralized services and he wanted their financial statements to show their consumption.

Recalling my previous problems with complex charge-back schemes that required us to track nearly all of our interactions with internal customers and for them to shop for services, I asked my team to brainstorm a simple way to allocate costs. We agreed that whatever we used did not have to be precise. But, it did have to provide a reasonable idea of who we spent most of our time and money supporting. With those as our boundary conditions, we came up with something that is simple, not profound, and certainly not perfect. We divided our user community into two broad categories. First, what we called standard users. These users consume network, email, service desk, data center, database, and security services. Second, what we called business users. These users use our ERP, CRM, and business intelligence systems. By default, all business users are also standard users. With these two categories defined, we then estimated (and I mean estimated) the total costs to support our combined standard and business users. This turned out to be fairly simple. For a business user, what were our annual maintenance ERP, CRM, and BI costs? What were the costs of our tier 2 and 3 support? For a standard user, what did it cost to manage and maintain our network and email system and man the service desk?

With these total costs estimated, we divided these numbers by our total number of standard and business users to get a per user cost. We then allocated our costs to our business units by multiplying the number of users by these per user costs. We did this in collaboration with the accounting staffs of our business units and so they understood our logic – or lack thereof. So far, it has not caused too many problems. There have been layoffs in some of our business units and they have asked that their allocation drop accordingly. I reminded them that while they could slice off part of their workforce, I would not slice off 5% of a DBA or service desk technician and so their allocation would stand. I did commit to them that as we reduce our costs – for example, we have reduced some license counts and have negotiated lower network pricing – I would pass the savings on to them. True to my word, we have passed on the savings we have achieved.

All in all, it has been a reasonably well-received. The CEO and CFO are both happy to better trace costs to consumption and I have not had to build an activity tracking system so that I know how many minutes of service desk technician time each business unit uses in a month.





Comments
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You are quite fortunate to work with enlightened management that understands that this kind of cost allocation is just as meaningful as tracking hours to projects and departments (maybe more accurate - everyone b-s's those numbers every week anyway).
Has the reception by middle management been good or has there been pushback?


I love this, Niel. It's a fantastic example of providing what's needed, rather than what's requested. It sounds like you do a lot of communication management to support it. How do you get around the human tendency to take numbers as gospel rather than estimates even when we *know* they are only estimates?


There was some initial pushback – particularly from those that really, really liked to make the case that they should find and fund their own IT initiatives. I asked the CEO to deal with that one and simply tell people that they could not “cherry-pick” specific IT services without factoring in the infrastructure and shared services to support those services. But, people really turned around their attitudes once they saw how simple it was to administer. No more detailed cost accounting and tracking. When it came time to decide whether to “re-up”, everyone was in favor of continuing our allocation scheme.


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