Skip to content

Capturing Costs for Allocations and Utilization based charging

October 5, 2008

o how would we capture costs for cross-charging and allocations? Across our three cost categories (product development, infrastructure and operations), there are three main cost components: hardware, software and people.

* HARDWARE COSTS: Hardware costs (PCs, servers, network infrastructure…) are easy to monitor based on the initial price tag and annual depreciation. Sometimes expensive hardware like high-end servers or mainframes is used by a single application, which makes things easy. But sometimes they can be shared by multiple applications, which complicates things somewhat because allocation rules then have to be worked out, as explained above. Network infrastructure is almost always used by multiple applications, but fortunately there exist network monitoring tools which analyze network traffic by application and hardware device. The challenge is to strike the right balance between the desired result (reasonably fair and understandable allocations) and the costs and complexity of obtaining actual, ‘metered’ usage.

* SOFTWARE LICENSES: This would cover the costs of packaged application software and the associated annual maintenance. This can be relatively easy to calculate if, for example, a new application is based on 100 licenses of some specialty lead management software for direct marketing. If however, the 100 licenses represent an add-on to the marketing module of a large enterprise-wide application like SAP or Oracle which is also running your company’s order management and financial, then the price could be heavily discounted — or even given away ‘free’. In such cases, calculating the software cost to allocate would require some creativity and would necessarily be an average which took into account all functional areas using the various modules of SAP, Oracle or whatever.

* PEOPLE COSTS: People costs take the form of analysts, developers, testers, trainers, operations and support staff. This can be easily captured by simple time and expense entry against standard project and application codes, e.g. software development against project ABC, or operations and support against application XYZ. Once such time and expenses are approved, they can then be automatically invoiced at month-end or quarter-end to the required BU client.

As for the potential organizational difficulties of getting people to enter their time (‘big brother’ looking over one’s shoulder and unwelcome visibility into one’s work), this should become less of an issue when it becomes clear that the objective of time entry is to cross-charge the client. Note that if the same people were to work for an ASP, they would have no problem filling out time sheets, since they would be operating under a client-vendor business model which requires it for billing! Well, it would be the same in IT under the new business model — if properly communicated, it should be understood and accepted.

Finally, the various cost components need to be presented in an understandable format to the payer. A departmental or BU manager is not interested in the technical details of hardware usage, network traffic or the time spent by various categories of people doing analysis, coding or testing. Costs should either be rolled up into the three understandable categories of product development, infrastructure and operations, or bundled into understandable services which the payer can relate to, e.g. ‘equip a new hire with a laptop and a mobile phone’ or ‘produce custom report’.

In summary, cost allocations and cross-charging can be relatively complex — and emotionally charged — subjects for BUs and IT, and need to be entered into with caution, with an initial overemphasis on simplicity and buy-in as opposed to bean counting and the potential for rejection. What you’re ultimately looking for is not strict financial accuracy, but workable results in terms of regulating demand through adequate pricing.

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: