Ready to blaze a trail out of the cost allocation jungle?

The best way out of that jungle is to stop guessing and capture real costs and build cost allocation and chargeback models based on actual usage.

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Under the pressure of increasing financial and regulatory demands, IT must justify and recover expenses by distributing them across the organizations that use its services. To the dissatisfaction of all involved, cost allocation and charge back are usually based on a lot of guesswork and compromise. The way out of this dilemma is to capture real costs and build cost allocation and charge back models based on actual usage.

You don't need a Harvard MBA to understand the conflict. The executives running line of business (LOB) units live and die by their profit & loss (P&L) statements. They're motivated to maximize the ratio of P to L. This is good, because increased "P" pays for raises and bonuses. However, because IT lives on the expense side of the equation, many times LOB executives equate IT to the "L" part of the formula making IT a target for some razor-sharp budget pencils.

Best Processes
with Greg Lenox

Budget time, and the natives are restless about IT

From one perspective, an IT manager's fiscal equation is nice and clean. Budget dollars in, project and overhead dollars out; and they always zero out. However, it gets messy quickly when those LOB executives challenge IT's chargebacks. Out of the hundreds of examples that are running through your mind, I'll give you one that I've heard before. "My mobile sales people all use cell phones. How can you justify charging us the same per employee percentage for long distance access as the customer support center, when we don't use long distance?" You can't, can you?

The compass is busted and the GPS batteries are dead

The truth is, we paint our cost allocations schemes in broad strokes. We roll up soft costs into overhead and allocate them across organizations according to some policy haggled out in a conference room. In the long distance example above, I bet we're looking at a standard formula tied to headcount. You may be able to justify yourself to a five-year-old child by saying "Just because!" But that won't cut it when the fur is flying about the details.

Don't lose your fortune to the false glitter of El Dorado

You can't blame a LOB executive for trying. Suppose she takes the following hypothetical case to the CFO: "I get dinged for my portion of the IT expense for $500K. I'm positive we only use about $250K. Let me take over our IT function, and I can boost my P&L from 8% to 18%." The next thing you know, decentralization and fragmentation sets in, and you're losing control of your assets and systems. The solution is to allocate and charge back the right amount in the first place and justify the allocation to everyone's satisfaction.

Base your allocation and charge back on reality, not legends

It's obvious, isn't it? If you know how much things cost and how much of them are used by whom, you can allocate costs and justify charge backs. It's a lot of work, and many IT organizations haven't been motivated before. But over the last few years, slow growth and heightened regulatory scrutiny such as Sarbanes-Oxley accountability are now pushing IT in that direction. Why not get ahead of the curve?

Replace leaps of faith with step-by-step progress

The secret to cost allocation and chargeback is to bite off what you can chew. Do a trial with a division or smaller organization. Enlist the LOB manager as a partner, with the promise of rationalized costs and better service. Capture the activities and the real costs that go into the services involved. With this data, you can start managing IT in ways you couldn't before.

Draw a map, and you'll get there quicker

Basically, you'll build a model of how you deliver IT services. At this point, the more detailed you can be about the components, the better. You'll probably find out that only 80% are worth tracking, but you'll know which 20% to roll up under overhead. Then you can apply this cost allocation learning to more pieces of the enterprise, adjusting the chargeback proportions according to each organization's usage. It's hard work, but it's worth it in the end. You'll look like a hero and make that all important "P" bigger.


Greg Lenox, an expert in the processes, methods and practices of IT operations for customer support, help desk, asset management, inventory management, telecommunications management and change management, is president and CEO of Entuition Inc., a maker of operations management solutions in the infrastructure logistics marketplace. At Entuition and in previous positions, he led several major re-engineering projects. His clients included SunTrust Banks, Citibank, Target, GlaxoSmithKline, Baxter Healthcare, Nations Bank, Wachovia Bank, First Union Bank, BB&T, CCNB, CNA Insurance and others.

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