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The Price of Success

The Price of Success

Billing IT costs back to the business can instil a sense of user accountability and a desire to consume IT resources more efficiently. It can also inspire very creative and misguided cost-cutting schemes among users

CASE STUDY 2:

How Southern Company started billing the business for IT expenditures, creating enterprise-wide accountability and inspiring more rational investment approaches.

Billing IT costs back to the business can instil a sense of user accountability and a desire to consume IT resources more efficiently. It can also inspire very creative and misguided cost-cutting schemes among users. When Southern Company, one of the US's largest electrical utilities, started charging its business units for IT telecom costs based on available capacity, a business manager got the bright idea to reduce the charges by constricting the capacity of his telecom pipe. In another incident, Southern allocated data network charges based on the number of PCs in a department, inspiring managers to unplug desktops from the network. While Southern headed off these schemes before they could do harm to worker productivity, these schemes showed Southern that it needed to get smarter about how it did IT chargeback.

Some CIOs wince at the mention of chargeback, the practice of billing some or all IT expenditures back to the business units that consume IT services. They envision resentful users and the tedium of the accounting. But many swear by its power to spread IT cost accountability and responsible consumption throughout the organization. "It puts responsibility for IT spending on everyone's shoulders," says Becky Blalock, senior vice president and CIO of Southern. "It's easy to order desktops for your employees when the cost is billed to some other group. But if you have to pay for and manage that cost yourself, it forces accountability."

Southern has had more than seven years to learn how to do chargeback right. It was in the mid-1990s when IT services were reclassified as individual products and billed by demand to the businesses. The move was part of a major IT restructuring initiated by Tom Fanning, Southern's current CFO, who at the time was serving a stint as CIO. The results, he says, have been transformative. "Today, IT is not just viewed as a cost centre where money goes in and nothing comes out," says Fanning. "You know what you're paying, and you know what you're getting for it." That knowledge has improved overall perception of IT's value and fostered more disciplined IT investment throughout Southern's nine subsidiaries. Without chargeback and the centralized, standards-based governance model Fanning also initiated, Southern's IT costs would be at least one-third higher, he estimates.

And without the financial transparency that chargeback creates, there might not be an internal IT department at all. When Fanning initiated the program, no one could prove that IT was competitive with outside service providers. Today, based on benchmark data and live RFPs, Southern knows that internal IT delivers products and services for $US36 million less than what outsourcers would charge to provide the same service levels. "I compete with vendors every day that, if I don't meet with them, will go to the business units and say: 'We can save you money'," says Blalock. "If the business doesn't know what IT's costing and what value they're getting, then it's easy to believe what the vendor is selling and decide to outsource this whole thing."

"If nothing else," says Blalock, "transparency is job security for me."

The $US39.50-a-Month PC

Southern divides its $US245 million IT budget into four chargeback buckets - products, services, applications and corporate-billed services - each allocated in different ways to different customers.

In the products bucket are PCs, laptops, printers, PC-based software and field operations labour. PCs, for example, are billed at $US39.50 per month, which includes the hardware, operating system, labour for setup and eventual replacement, and financing charges. These bills are sent to specific user groups, and costs are tied directly to the number of PCs deployed in those groups.

The services bucket holds charges for services performed solely for the benefit of one user group in a business unit or function, such as a service that requires an IT field support person to work on information technology within a specific power plant. These charges are directly billed to that exclusive business consumer.

The applications bucket includes costs to build and maintain applications that serve functions such as marketing, power transmission or distribution. These are billed to function heads, such as the chief marketing officer, and are based on time and materials used.

The final bucket is called corporate-billed services. It represents about half of all IT costs and covers services such as the mainframe, help desk and the network. These are all enterprise-level services for which adjustments to month-to-month consumption would have little effect on the actual associated fixed costs. For example, if marketing uses the help desk less in April, the bill won't go down, because the overhead associated with maintaining a help desk is still there. (Southern made a big mistake in this area initially - more on that later.) Bills for these services go directly to the CEOs of Southern's businesses.

The bills to an operating company can be hundreds of pages long and are delivered monthly in electronic form. Charges are linked to specific work orders from the users. And money does change hands, moving from business budgets to the IT group. This isn't a mere numbers exercise.

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