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IT - Interdepartmental Charges

By razz2 ·
I have been asked what appeared to be a cut and dry question
by a local governmental official. After some thought I decided to
give it a try here:

The IT department of this municipal agency is considering
charging the other departments for services with the intent of
recouping all costs. So, a computer that the department knows
to cost price "A" will be charged at Ax2 (twice the cost) to cover
configuration etc. These other departments always pay out of
their budget for the new hardware, and IT has always paid out of
their budget to provide IT services. There is also some talk of
charging for server time etc. My first thought was "where is the
IT budget going and oh what a nice car they must have." After
some thought I am wondering if this is a trend I am unaware of.
Perhaps this is considered normal now, but it seems odd to me
for IT to charge back the cost for every service. Part of being an
IT manager is providing the information needed to appropriate
the correct departmental budget, right?

razz

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Unit Charge Costs

by BFilmFan In reply to IT - Interdepartmental Ch ...

That is a pretty normal business accounting method. You just treat everyone as an outside firm and everyone pays for IT time. Usually in the government and large companies, it is a way to hide expernditures you don't want anyone to see, like those $400 claw hammers and $1000 toilet seats.

Come to think of it, maybe someone needs a toilet seat and a claw hammer?

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IT Budget

by razz2 In reply to Unit Charge Costs

I Knew BFilmFan would come to help. And thanks to both of you
so far. I can't believe I did not know of this.

So what is the IT budget being used for if virtually all IT services
and costs are being charged back back to the departments? I
understand it from a paper point of view and tracking what costs
are in the real world, but if Dept A pays $8000 for a $4000
workstation because of the setup and labor and etc, then where
did the IT budget go?

razz

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Simple really.

by JamesRL In reply to IT Budget

First of all, Dept A shouldn't be charged a x2 multiple, because that makes it impossible to compare with outside services, and that is one possible reason for doing it in the first place.

For Labour, we used to calculate an average for an IT job grade and then add in costs for benefits (usually 1.3 x salary) as well as the cost of providing them with workspace, computers, etc. Add it all up and you get what an accountant would call a "loaded" labour rate. When in doubt err on the high side.

When you use a chargeback system part or all of the IT budget goes not to IT but to those paying for the services. I haven't seen a system where the IT budget is totally eliminated - if you did that you would have to determine the cost of management overhead and apply it to the labour rate as well.

Some people refer to this system as funny money or wooden nickles. But it does help the customers make decisions on whats important.

James

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Funny Money and other things

by razz2 In reply to Simple really.

This is an interesting idea, and I like it from a paper/study point
of view to get real costing numbers. But the reason I asked is
that your comment here makes sense. "To compare with outside
services."

Rolling costs into the hardware is weird to me. Charge-back the
real costs as IT services at real world prices. Or use the prices to
simply increase the IT budget. Those all make sense. The odd
thing here is the IT mgr charging over $10,000 for a $5k
Windows XP system with OEM software saying that all licenses
etc are included. OK, Setup and 3rd party licenses can be a bit,
but it would be linear. Meaning that a $1k system would have
the same license needs and setup. So, $6k out of Dept A for the
1k system. They also want to charge $3k per year per system for
maint. Now, with all license renewals for CAL's etc on patch
mgmnt software, anti-virus, Terminal Svcs, etc. that can be a lot
but these are odd numbers.

Anyway, thanks to all for the insight here. I understand it well
now, from a conceptual point of view. It would be a great way in
IT only to do job cost tracking and find out what a system really
costs over it's life. But I am not totally sold on the charge-back
way.

razz

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Cost Center vs. Profit Center

by gregg@NetworkEngineeringS In reply to Unit Charge Costs

Prior to being on the Vendor side of the IT scene, I ran both Cost and Profit IT centers. As a Cost Center, it really hurt when Upper Management came down and required us to cut our budget by xx%. Unfortunately, when you have an already tight expense budget, the only place you can cut is personnel. You can?t shut down a server and tell Management that was the budget cut. It can be very nerve racking in a Cost Center structure at budget crunch time.

In a Profit Center structure, I ran it pretty much like I do my commercial business. I had a price catalog for all equipment so the user department knew exactly what to budget when adding a user as far as hardware was concerned. This cost also included an itemized breakdown of maintenance plus facility and support overhead.

Next, I pro-rated the cost of telecommunications to those departments using their portion of the telco and WAN services. After that, I pro-rated the personnel and facilities overhead according to the portion used by the end-user department.

Each year, at budget planning time, I would give each department manager the budget forecast for their estimated next year services plus any upgrade plans. Estimated maintenance budgets were based on a historical average of prior year costs. Typically, for new systems you have the warranty to rely on then for following years, you budget a 3 year cost recovery for the hardware. The downside here is the end user departments have no cost cutting room at Budget-cut time for their IT budgets. Its all of none unless they cut usage and services within their departments.

Yes, it all becomes funny money since all of their budget money becomes the IT departments operating budget. One nice part of being a Profit Center is that you can also provide those same services to third party clients to off-set in-house costs. I always had several UNIX e-mail servers where I provided POP3 mail services to outside users on a per-mailbox basis and several stand-alone servers to provide IT services to small business that couldn?t afford the investment themselves but could afford a month-to-month service fee. Of course, if you?re in a high security business, third party business is not an option.

Setting up a Profit Center pricing is tough the first time around however, once you have your cost models in very detailed spreadsheets you just have to plug in the actual vs. forecast and let the spreadsheets do the work for you. So far, I haven?t seen any commercial programs that can really do a good job at Profit Center cost modeling.

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Activity Based Costing

by JamesRL In reply to IT - Interdepartmental Ch ...

I have worked at companies where we did activity based costing (ABC) which sought to understand better how the money os spent and what the impact of some decisions is on the company's bottom line.

We calculated what the "average" support call cost the company. We caluculated what it costs to provide email. That way when we looked at hiring hundreds of new employees, we had some basis for understanding how our costs would change. We also used it to justify projects - understanding the labour costs involved makes it more difficult to make a business case, so we weeded out a few of the less intelligent requests.

I had to come up with a number so we could charge an outside company who had employees on our site, using our IT services. It was an interesting exercise. You will find if you use real numbers, that it may enlighten non-IT types about the real costs of things.

James

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ABC and 123

by Sheeva In reply to Activity Based Costing

Yes, we've done various ABCs as well which provides us with better insight into costs for operational budget, capital projects and so forth. But we've also employed various methods that James has outlined in order to effectively detail and justify just what it costs to have an in-house IT shop.

In the past, Senior Managers from other business groups often felt it's no sweat and reasonable to okay their own staffs requests for IT goods and services. They did this without knowing the true costs and impact on the tax rates, reserves, or what have you. They would often have various vendors sell them on a solution and then submit a request to IT for that solution without any proper justification, etc. just before budget submission giving IT little or no time to qualify succinctly the requests.

Then when we in IT are responsible to present these unjustified requests as budgetary requirements to the various committees (council, finance, IT Advisory, etc.). Often requests were approved based on the fact that many of the affected staff are on those same budget committees. Or they were disapproved because it did not fall within a specific budget percentage less tax rate impact. This last item often done without discussion or understanding of the impact on the organization if an IT item was or was not approved.

At the end of the day, IT's budget for capital and minor capital projects have increased or decreased significantly without expanding operational budget and relating it to the organization's bottom line. Often, it was not realized that the operational budget would then carry subsequent years of budget increases due to support and maintenance contracts, training, etc.of any approved IT request.

Currently, utilizing our process of what we call "actualization", each Senior Manager on down knows in advance what it will cost to add a new staff member to their complement, what it costs to introduce new IT projects and what it costs to the organization if they do or don't follow through with justification of the request. This is accomplished by combining various financial budgetary modelling such as ABC (activity based costing) analysis, Cost and Profit Centre budgeting as well as employing SLAs (service level agreements). In fact, the SLAs help the management staff understand exactly what they will be getting for the core services such as a desktop PC with O/S, network connection and a phone, as well as extended services such as Oracle Client (ODBC), business solution applications, etc.

Charge backs is a dirty word to most in government circles. In reality, it's the cost of doing business regardless if you are public sector or private. Just think how far your organization can go in today's reality if you did not provide the IT tools to your staff. In public sector, IT does not seek to create revenue but to provide cost sharing opportunities, whether from within or other public/private sectors. IT does not look for profit but contributes to it in more ways than one.

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IT - Interdepartmental Charges

by stuart In reply to IT - Interdepartmental Ch ...

Fairly standard and perfectly reasonable practice. In fact, some outfits go further and raise internal charges for all 'core' activities. So, Finance, Personnel etc all calculate unit charges, which are charged back to departments on a 'per head' basis.

That way, everyone knows the actual cost of operating activities, including the hidden costs, which can often be higher than people think.

Individual departments also put bids in as part of their budgeting process for any new hardware, software etc they want, which isn't included in central organisation upgrades, and get charged accordingly.

Shouldn't be any other way.

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Modified approach

by GSG In reply to IT - Interdepartmental Ch ...

We do some chargebacks based on what the request is. We are also in charge of telecommunications. If a department is moving to a new location, there is no charge out of their budget for wiring, phone moves, etc..., but we were having abuses where departments were re-locating people within their department every couple of weeks and insisting that they keep their same phone numbers. That was taking hundreds of $$ per week out of our budget for wiring and telecommunications, not to mention the man-hours that were used up. When we instituted charge backs, a lot of the unnecessary wiring and phone reprogramming stopped, which is saving our organization a lot of money, plus now our techical support isn't wasting time moving equipment.

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Chargebacks

by cpr In reply to Modified approach

1) If you can't measure it, you can't manage it.

2) If you know the cost, you can then make a more intelligent selection among alternatives.

MM

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