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The Price of Precision

The Price of Precision

Charging back exact costs to internal customers within an organisation may seem a best budgeting practice for IS, but a "rough justice" estimate may be a better way to count beansIf IS is ever to get the respect it deserves, it must first be understood.

Internal customers who demand superb service with no knowledge of what top-grade service costs must be educated. Assuming that paying for internal IS is the better deal, an IS department can alert its internal customers to the tremendous value they are receiving by presenting them with a detailed bill for services rendered.

Such chargeback systems help control an enterprise's costs by having customers who initiate IS expenses pay for them out of their own budgets. But a rigorous chargeback methodology - one that will earn respect - requires IS management to develop, administer and maintain what can become a Byzantine method of data collection. Worse, a rigorous cost accounting system is often prohibitively expensive. Worst of all, the data needed to make such a system work, particularly in the client/server environment, is almost impossible to gather because of the degree of detail needed to make a cost accounting system accurate.

Traditional cost accounting requires strict rules and controls around each expense category. The alternative, rough justice, uses estimating and ratio development, an accounting practice that divides the total number of dollars spent by the total number of service usages. Such a metric is simple but clearly inexact; only rough justice is possible with so gross a yardstick.

Then and Now

In an effort to supply the IT community with the information necessary to make intelligent choices about accounting procedures, IDC first addressed the issue in a 1994 survey. Four years ago, the embryonic client/server architecture was exempt from chargeback practice in most companies. Those companies that did charge back their services used flat rates tied to network connectivity, server access and other features. Typically, in 1994, IS departments had varying fee structures for different services.

During the fourth quarter of 1997, IDC again surveyed top information executives from 75 large financial sector corporations on this subject. We asked them two questions:Is a rigorous cost accounting system that transfers IS expenses back to internal customers warranted, or does the rough justice method accomplish the same thing at less cost?How does your company address expenses associated with the new client/server, network-centric computer architectures?We learned that not much had changed in the methods of client/server chargeback. Not surprisingly, the help desk and business function software packages now on so many distributed systems are new categories of services for chargeback.

What IS Shops Are Doing

When it came to choosing an accounting methodology, 40 of the respondents follow a rigorous cost accounting approach; 35 pursue a rough justice approach.

Those who use cost accounting most often said they do so to make certain that chargeback rates are accurate and equitable. Accounting motivations, such as allocating costs to the ultimate end user and influencing customer behaviour by raising customer awareness so that they can take greater responsibility, were the second most frequently mentioned motives for choosing rigorous cost accounting.

Those IS shops following the rough justice approach offered three reasons for their choice. Most often, they were unwilling to dedicate the necessary resources and money needed for a full cost accounting system. This group also noted the lack of measurement tools leading to a dearth of information needed to create a sound cost accounting system. The difficulty of accomplishing a rigorous chargeback system compared with the ease of a rough justice system was also frequently cited.

IDC found that many executives such as treasurers, chief purchasing agents and vice presidents report they are too busy to learn the arcane technology terms required for comprehensive IS cost accounting. In fact, only 74.2 per cent of the cost accounting group reported understanding the categories of service on their chargeback systems, while 65.6 per cent of the rough justice group said they understand them. There's a big price tag attached to that less than 10 per cent difference in understanding. And when executives who did rigorous cost accounting were asked about the effect of unintended consequences on their system's results, 31 per cent reported that unintended consequences skewed their results. A typical unintended cost might be to have an internal customer who felt disadvantaged by other departments opting out of a shared application, thus leaving colleagues a heavier burden of fixed costs. If nearly one-third of respondents believe unintended consequences skew their cost accounting system, it's hard not to ask: is such a complex system a good investment?Data Centres and Client/ServerIDC is seeing some changes in both the data centre and distributed computing environment chargebacks. Client/server chargeback is no longer a skunkworks operation with expenses folded into mainframe expenses nor buried within data centre chargeback costs. Data centre charges, once couched in techie terms such as "CPU seconds" and "start I/Os", are being changed to more meaningful terms such as "cost per transaction". Despite the new terminology, IS still has a way to go in refining the system to meet the business needs of the organisation at a level of detail that will satisfy every customer.

Finally, for such chargeback categories as CPU, data storage and communications, our survey found that these and many other IT services often are not, in fact, receiving strict cost accounting treatment. The inescapable conclusion is that companies without a direct charge for these services do not have strict cost accounting systems but merely believe they do. They pay a high overhead for a system whose completeness is an illusion.

Best Practices

Companies that think they have a strict cost accounting system should realise that a change may be in order. IS executives should take a long, hard look at the methods of collecting data that establish charges, the cost of administering their data collection systems, and the perceived and actual benefits to customers. IDC is betting that rough justice-presenting internal customers with fair billing for far less money and with less anguish - will win hands down as a more useful and less expensive methodology.

The value of an IS group's services can best be conveyed through a chargeback system that relates its activities with the company's business functions in a meaningful and cost-effective way. The challenge for the CIO is to address these issues with the company's financial department and IS customers and to convince them that not every bean in the pile was meant to be counted.

Sometimes it's enough to give an estimate of the pile's size.

Thomas Oleson, research director at International Data Corp in Framingham, Massachusetts, can be reached at toleson@idcresearch.comChargeback CandidatesFees for IS services are calculated on various schedulesServices Fee ScheduleE-mail Cost per mailboxWAN Connectivity Cost per month per workstationLAN Connection Cost per connection to Ethernet, token ring LANLAN Servers Cost per sign-on access to serverPC Usage Cost per month or year, based on class of processorOffice Products Cost per corporate standard packages or cost per year per PCSOURCE: IDC

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