Tipping toward chargeback - Technology Transfer

Edna the Entrepreneur, at the request of Betty the Businesswoman, had been investigating chargeback as a means to get a handle on information systems expenditures at Acme Services Co. Edna, manager of technology research, had spoken with IS management, and now needed to talk to her two principal clients, Felicia in Finance and Mac in Marketing.

Felicia's passion for nit-picking detail had earned her the nickname "Felicia the Ferret." Her systems were heavily mainframe-based, with some downloads to PC spreadsheets. Mac, dubbed the "whiz kid," had mostly PC LAN-based applications.

"Good morning, Felicia," Edna said. "I'm here to talk to you about a new approach we might be taking in accounting for IS costs. Using chargeback, IS would calculate the total costs for services provided to you and other departments each month and bill you for them. We would handle this through intra-company transfer."

Felicia responded enthusiastically. "I've been waiting a long time for this. We account for everything else in this company. We need an accurate mechanism to identify IS costs."

"Define accurate for me," Edna countered.

"Well, I would want to know what all of my costs were, split out by cost center, and by cost category," said Felicia. "Therefore, I would want to see development costs by project and by application. I would want to know how much time was spent in analysis, programming, administration and overhead. For systems costs, I would want each of the hardware categories accounted for, including network. I ideally would want to see costs broken down by person, so I could determine who was using excessive resources and take corrective action."

"Whew," Edna said. "That would be some bill. Wouldn't that take a lot of time just to analyze?"

"That's what we're here for," Felicia said cheerfully.

Edna said, "Well, I have to tell you that we don't yet have all the measurement tools in place to give you all the detail you want. We're not even sure what algorithms we're going to use."

"Oh, don't worry," Felicia said. "I'll assign someone to work with you. They'll get you all fixed up."

Oh great, thought Edna. What will Russ, who runs the data center, do to me if I send him an accountant to bird-dog this project?

"What if we started with broad categories of costs, and refined the algorithm from there?" Edna asked. Felicia frowned. "But you might be sending out inaccurate data," she said. "Then, when you discovered mistakes, we'd have to make adjustments for each department."

Edna tried another tack. "Felicia, when you said you would take 'corrective action,' what did you mean?"

"Oh, that probably sounded a bit harsh," Felicia admitted. "Actually, I would look to see who submitted multiple reports instead of printing one and photocopying it. I would examine the costs of all junior accountants, for instance, and if one had costs significantly above the norm, I'd investigate further to see if he or she were playing games or something."

"That strikes me as somewhat punitive," Edna said.

"Computers are expensive. We need to seek out and eliminate waste. And frankly," Felicia whispered, "it's not my department I'm concerned about. Those people in marketing, for example, are very cavalier in their use of resources. That's where we'll find the waste."

Edna sighed. "How about if we approach this more from an overall management perspective? How would chargeback help?"

Felicia said, "I'd see if we could submit more jobs during off-hours to reduce overall charges. Also, if we have an application that had excessive charges, we could see if Lou [the Lifer, head of application development] could make changes to make it more efficient. If not, maybe we should get another program."

Just what Lou needs, Edna thought, more work. She rose to leave. "Felicia, thanks for your help. If we move forward, we'll look to you for assistance."

IDENTIFYING COSTS UP FRONT

The next stop was Mac. Edna explained Betty's intention to control costs and outlined the chargeback philosophy.

"How do I get charged now?" he said.

"Currently, IS is considered part of corporate overhead," Edna said. "Each department is allocated a portion of the expense annually and you have to build it into your operating expense."

"That sounds simple," said Mac. "Why do you want to change it?"

"Well," Edna answered, "there is some thought that line management is not sufficiently accountable for resource usage. That's because you're only aware of the costs at budget time."

Mac laughed. "Budget time is bad enough," he said. "Besides, I thought I did get charged for my PCs and other equipment."

"That's true in a sense," Edna agreed. "When your folks order a PC, we allocate it to your cost center. After that, you pick up the depreciation expense."

"What more do I need to know then?" he asked. "If I question the expense, I don't sign the purchase order."

I'll bet that doesn't happen too often, thought Edna. She continued, "So far we've just talked about PCs. You still have some applications on the mainframe. We have not sent reports on usage there."

"Frankly, I consider that just a part of doing business --a fixed cost," Mac said. "Oh sure, costs probably go up and down a bit, depending on what campaign we're working on. But I'll bet at the end of the year we're still pretty close to plan. And if not," he added, "that's the kind of information you people should be sending us instead of bills for usage that I can't control."

"What do you mean, you can't control it?" Edna asked.

Mac leaned back in his chair. "Look, a lot of our mainframe system expenses are reports that we prepare for the executives," he said. "If they ask for a lot of detail, I can't very well tell them 'No.' Why should I have to explain my usage when I'm simply being responsive?" He frowned. "That would just make me look bad."

Edna realized their conversation was heading in the wrong direction. "But aren't you concerned about increasing your operation's efficiency?" she asked.

"Of course I am," Mac snapped. "But worrying about computer costs isn't going to do that. My department is judged on how fast we can pull off a marketing campaign and the quality of the materials. If I have to use additional computer resources to do it, so be it. Once the revenue figures go up, no one will concern themselves with computer costs."

This is going nowhere, thought Edna. "So I take it you would not find much value in this approach," she said.

Mac could see she was getting upset. "Look, if you folks want to do chargeback, go ahead. But from my perspective, the current system works just fine. I have to fight the budget battle once a year for my piece of the pie. After that, your people give me an estimate of how much a project is going to cost or a machine will run me when I sign the request. That's when I make my decision on expenditures. After that, systems design is controlled by you and actual usage is controlled largely by the guys upstairs. I don't want to have to explain that every month." He smiled. "So help me out here, okay?"

A week later, Edna gave her presentation to Betty and Don, the director of information systems. After listening to the pros and cons, Don said, "So there's no really good reason to change."

"Our increasing costs are a good enough reason," Betty countered.

Edna intervened, "I think we have to consider what we're trying to achieve. If the issue is user accountability, then I think Mac had a good point when he said the costs should be identified up front. Maybe we should focus more on implementing a good cost/benefit approach that would require users to justify their requests."

Don nodded. "It certainly would be a lot less expensive for us to implement," he said.

Betty thought for a minute. "What you say makes sense. Let me mull it over and I'll get back to you."

COPYRIGHT 1993 Wiesner Publications, Inc.
COPYRIGHT 2004 Gale Group