How to Allocate Information Technology Expense?

With today’s technology trends, Information Technology or IT has become much more significant to business operations. In the past, the cost of IT was a small, almost trivial, share of overhead. Now IT has become a significant part of corporate overhead. No longer trivial, businesses now want to know how to relate IT to products and services. In a sense, IT has become a big black box. No one knows what is going on inside the box; they just know it is horribly expensive.
There is no silver bullet, or quick and easy answer to the question: “How to Allocate IT?” It will take some work but is worth doing. Two suggestions will guide this analysis and prompt critical discussions about IT’s role. First, imagine IT as if it had been outsourced and is now an independent third party. Second, model IT’s resources, activities, and products in this new separate virtual business. Whether or not you adopt all of the practices of a separate business such as billing and receivables is not the question. The purpose is to have the clarity of a separate, although pseudo, business structure that has to deal with real customers. Coupled with the analysis, and more important than the analysis, are business discussions about what is really going on inside the box.
As an independent business, IT would have customers and provide these customers with products or services at competitive prices. Of course, some businesses are monopolies that can set prices at any desired level. In this case, usually the government steps in to regulate prices. As an internal service provider IT is a virtual monopoly. As long as business units are required to use internal IT, they feel like they are dealing with a monopoly. However, instead of government regulators, executive management needs to step up to the role of regulating this internal monopoly. Being responsive to the vision and strategy of the business, executive management is in a position to do a much better job than government regulators. An even better scenario would be to benchmark service pricing with others.
Now as a pseudo independent business, IT spends money doing work. Call this spending Resources and this work Activities. The outputs of these activities are products and services that are “sold” to customers. The particular challenge with IT is to be creative in defining services and customers. Don’t rely on IT’s perspective. Here’s where a customer’s perspective comes into play and the business discussions between IT and its customers become intense but are based on facts rather than innuendo, therefore clarifying and valuable. Create a model of the business. Activity-Based Cost principles will provide additional guidance.
Can the customer understand the service? No, the customer does not need to know how to replicate the service; that is IT’s job and expertise. However, the customer 21St Century Classroom Technology Equipment needs to be able to understand and visualize what they are paying for. They may not like the price. But the first step is to understand the service.
Who are the customers? Many businesses are stuck in the paradigm of their own departments or cost centers being the customers of IT. With the degree of IT integration now evident, processes may be the customers for a given service. For example, the procurement process may be the customer of a materials system. It would not make sense to charge this service to individual departments. Should a production control system be charged to individual production departments? Probably not. Bottom line: if it is difficult to charge to individual departments, perhaps you have the wrong customers and should consider the processes instead.
Can the customer affect the quantity of the service? In dealing with any vendor, what we pay is the product of Laptop Specs Meaning price multiplied by quantity. If the customer can control the quantity, then they can affect the total charge.
While you’re at it, discuss other service level parameters. Is the quality in the desired range? Does the customer need a family sedan but you’re giving them a Rolls Royce? Or, vice versa. How about delivery parameters? Do customers wait weeks or months, days or hours.
Information Technology does not have to be a big unmanageable black box. From a cost perspective IT is not just to be allocated in some arbitrary manner. While not easy but definitely valuable, imagine IT as an independent business. This business must hire people, purchase equipment, and occupies space. The people and equipment perform activities to create products, deliver services, and satisfy customers. Real, fact-based discussions with IT customers together with data from an Activity-Based model will assist management in its role of understanding, measuring, and managing this critical business function. Thereby IT can fulfill the full measure of its strategic role in the business.

READ  Technology of the Future