Reasserting budgets and the business value of IT 2

Sean Worthington also recalls mixed experiences with chargebacks from his days as head of the IT departments at Silicon Graphics Inc. and other large organizations.

“When I have employed chargebacks, the organization desired to have control over IT spending. However, the chargebacks allowed me to more precisely allocate the IT costs back to the customers of those IT services,” says Worthington, who is now CIO in residence at Planview Inc., an IT portfolio management company in Austin.

In fact, chargebacks can be highly effective, especially in situations involving easily measured expenses.

“Chargeback is best for commodity service and cost recovery when consumption is fairly predictable and demands drivers are clearly understood and manageable,” says Scott Holland, senior director and IT program manager at The Hackett Group, a strategic advisory firm in Atlanta.

“This is often the case for maintenance projects — for example, when IT dedicates a certain level of full-time equivalents to another department’s maintenance needs and recovers through a chargeback instead of a budget transfer. This helps IT keep management control over those FTEs, where they may have lost management control if a budget transfer was arranged.”

In some cases, chargeback arrangements are morphing into IT usage allocations. Specifically, business units are charged for their consumption of resources, such as storage or network traffic volumes.

“For instance, a particular business unit in a financial services company might be processing a million trades per day,” says Howard Rubin, an analyst at Gartner Inc. “IT can figure out how much this takes in terms of storage, networking resources, etc. Consumption becomes visible, and charges are assessed based on system volume and unit cost.”

Allocation of IT resources based on usage often holds practical appeal for business unit leaders.

“When both IT and business units know the level of support they are dealing with and the costs involved, the mutual satisfaction level is increased,” says Brian Schwartzentruber, principal consultant at GlassHouse Technologies Inc. in Framingham, Mass. “Unit costs are per gigabyte, per server, per port or anything else that affects the delivery of service.”

By moving toward usage allocations, corporate IT departments might be able to use the budgeting process to begin functioning more as internal service providers to business unit customers. In his book, Baschab recommends this approach and suggests the use of inter-enterprise contracts to clarify expectations.

“Actual hours for supporting the business unit are tracked in a time reporting system, and actual hours are billed. Service levels are defined, and the IT department is responsible for achieving service levels guaranteed,” he writes.

As a rule, IT leaders should no longer view annual budgeting pow-wows as the corporate equivalent of a root canal. Instead, CIOs should turn these exercises into opportunities for change.

“To the extent that the budgeting process remains a blunt instrument to force IT spending to a certain limit and keep it there, it will continue to draw criticism that IT is expensive, unresponsive and ineffective,” says Holland.

Indeed, the CIO grown tired of regular budget bludgeoning should consider a more proactive stance and demand not only a seat, but a voice at the budgeting table.

Enter the IT CFO

Floating around the corporate IT community now is the notion that in certain instances, the IT budgeting process could use a dedicated expert – an IT chief financial officer.

“Along with being a financial/business adviser, this position would include all the budgeting and actual reporting and oversight of project and service portfolios – along with costing figures – to ensure that the information being used was of sufficient quality,” says Sean Worthington, CIO in residence at PlanView. “This person would also help keep the IT leadership team honest when it comes to the financial impact of our decisions.”

Worthington says he sees some IT shops gravitating toward an IT CFO model.

“I see this as an emerging trend, because of the interest I have seen from my peers and the increasing pressure toward greater financial transparency in IT spending from executive levels,” he says.

Practically speaking, hiring an individual dedicated expressly to these functions doesn’t yet make sense.
“I’m not sure that a company of our size could justify an IT CFO,” says Robert Golden, director of strategic business services at Insurance House. “However, we do employ many functions of that role to keep a tighter handle on spending, payment processes, payment methods, etc.”

Other IT shops are not ready to make that bold leap. “IT CFOs scare the pants off me,” says David Oles, IT director of research and development at Rent-A-Center. But, he adds, “I realize the importance of managing to a budget — not that CIOs aren’t budget-conscious, because they are. However, a CFO responsible for the organization’s IT accounting and financial structure may be even more mindful of the dollars spent.”

Budgeting buzzwords

Summary-level budgeting: The prescription of IT budgets using minimum criteria, such as funding levels from the previous year.

“This method lacks the clarity necessary to truly understand what everything costs and how IT costs align with the value to the business,” says Sean Worthington, CIO in residence at PlanView. Chargebacks: A budget method that charges business units for their use of internal IT resources.

“This method is often considered when the business units would like more direct accountability from IT,” says John Baschab, co-author of The Executive’s Guide to Information Technology.

Benchmarking: The use of industry data and research – such as analyst reports and vendor pricing figures – to make sure annual budgeting figures are on track.

“Using these techniques, companies can check the competitiveness of their IT cost structures by using the external benchmarks their competitors use, along with information from vendors to assess competitiveness,” explains Gartner analyst Howard Rubin.

Portfolio management: A comprehensive view of all IT projects across an organization that includes budgeting and costing data.

“This improves project/investment focus and tightens control over spend by forcing explicit statement of project benefits and better tracking of the delivery of benefits,” says Scott Holland, senior director and IT program manager at The Hackett Group.

Driver-based planning: Harnessing the knowledge base of a particular business unit to better project IT costs for that division.

“This is the best way to make sure that the business unit and IT plans and strategies are aligned with each other, so that everyone is rowing together,” suggests Robert Hull, chief financial officer at Adaptive Planning Inc., a budgeting forecasting application company in Mountain View, Calif.

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