Paying the IT Piper

Paying the IT Piper

When I arrived in Sydney in 1981 there was only one tollway -- the Harbour Bridge and the fee was 20 cents. Now there's the M2, the M4, and the M5 as well as the Harbour Bridge and the Harbour tunnel. Tolls are averaging around $2 per trip and there are plans for more tollways. It seems that the motorists of Sydney have accepted the argument that the only way to fund new infrastructure projects is through a user pays principle.

It's an argument close to the hearts and minds of IS executives; they too wrestle with the conundrum of how to finance IT infrastructure investments. The challenge is highlighted in IDC's recent "Forecast for Management" survey.

Survey findings not only revealed that spending on IT -- as a per cent of turnover -- is at its highest level ever but also disclosed that spending patterns are changing.

In 1993 about 46 per cent of the IT budget was spent on hardware and software.

Today that figure is around 28 per cent. On the other hand spending on the network and associated line costs has increased from just over 14 per cent to 22 per cent in the same time period. It is clear that Australian CIOs are experiencing what Computer Economics has termed the era of "network-centric" computing -- the IT environment that is made up of LANs, WANs, intranets, extranets and the Internet.

The difficulty is that this environment requires a significant investment in infrastructure to tie the equipment together. Yet, for many users this framework is largely invisible. (Just as motorists only appreciate the need for new roads when they are stuck in a traffic jam, IT users only understand the need for better communication facilities when their existing network continually lets them down.)Furthermore, IS executives often find themselves faced with the problem of explaining how some totally new infrastructure component is a better way of doing business. The Internet is a good example. Research from the BBN Corporation in North America estimated that a typical internally-managed Web site cost over $200,000 a year in hardware, software, employee and communication costs alone. All this before a single business benefit was realised. Similarly, how can the IS department justify the move to some of the newer networking services such as frame relay or LAN/WAN switches?Many CIOs are turning to chargeback as a mechanism for recouping the costs of investments. But unlike the centralised mainframe environment, there are complexities with chargeback in a distributed environment, including the question of how to distribute costs in a way that the end user finds palatable while the IT department recoups infrastructure expenses.

Computer Economics in a recent newsletter identified four ways the IT department could implement chargeback. The first was described as usage based -- where the end user is charged for the consumption of IT resources such as CPU cycles or tape mounts. A second alternative is a flat fee approach -- where the annual IS budget is divided among various business departments based on the number of users and their IT activities. A third approach is to link IT cost recovery against specific deliverables such as invoices generated or claims processed. The final option is to take a leaf out of the outsourcing book and to negotiate a service fee for a defined scope of work.

Computer Economics believes that the flat fee or usage based approaches do not provide a mechanism for infrastructure investments since they result in first-off-the-rank users subsidising those coming on board later. Instead Computer Economics sees that transaction-based pricing offers an opportunity to build in profits to fund infrastructure investments. The challenge is to automate this data collection. Computer Economics believes products to do this are starting to appear. As such, it seems that IT users like Sydney motorists are going to be finding quite a few tollways on their future journeys.

Peter Hind is the manager of User Programs, which includes InTEP, at IDC Australia

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