Recognizing the truth in the adage “you get what you pay for”, most of us are willing to shell out for products and services that do a good job of meeting our needs. But what if we’re not sure what we’re getting or how much it’s costing us? Human nature being what it is, we’re naturally suspicious, untrusting and sometimes even ornery.
Things aren’t much different when it comes to corporate finance. We jealously guard our budgets, and try to keep a keen eye on where the money is going. So it’s not surprising that internal clients of the IT department often suffer a great deal of frustration when it comes to ponying up their share of IT costs. Too often they’re not sure what they’re paying for, and perhaps even worse, they lack the ability to properly manage their IT costs.
That was the situation at The Manufacturers Life Insurance Company when it converted its allocation-based charge-back system to a “best-in-class” demand-planning and charge-back process for cost recovery of IT services. The following is a detailed account of how this was accomplished.
ORIGINS OF THE PROJECT
The project’s roots date back to January 1998, when Manulife’s Board of Directors asked management to prepare a plan for the conversion from a mutual life insurance company to a shareholder-owned publicly traded company. This was to be done through a process known as demutualization, which would provide the organization with the strategic flexibility and capital necessary to take advantage of emerging opportunities.
In preparation for its Initial Public Offering in September 1999, a number of internal operating changes needed to occur to support the company’s new financial reporting requirements. Naturally, the Information Services organization and its internal clients would be affected by these changes.
When Dave Codack, Vice President, Business Services, Information Services, joined the company two months after that Board of Directors meeting, his mandate was crystal clear: make the company’s core IT operation function as a business.
This was a tall order because of the incredibly short time available and the size and scope of the operation. Information Services within Manulife is composed of about 1,700 people, nearly half of whom are employed at head office in Toronto, with the remainder supporting the company’s business operations in Waterloo, Ontario. Codack’s area, Business Services (which encompasses cost recovery, internal systems and reporting, controls, internal services and metrics), is one of five Information Services “pillars”, the others being Production Services, Development Services, Client Services and Consulting Services.
At the time, Information Services had a centralized infrastructure budget. As is the case in many large organizations, fixed costs for general corporate-wide programs were allocated generally on a percentage basis, without regard for a business unit’s actual usage or adjustments. Although business-unit-specific system costs flowed back appropriately, there was no forecasting framework in place to predict or plan usage.
There was no doubt about it, the company’s former charge-back system was inflexible, difficult to manage and not as accurate as it could be. Internal clients had little understanding of the charges they were receiving and no ongoing control of their expenditures. Hence, the need for a more dynamic method of managing them.
A “QUICK AND DIRTY” SOLUTION
Explains Codack, “We wanted to drive a usage-based system that would provide information at a very granular level to enable product line managers to truly understand and manage their information technology costs proactively. Because of our tight deadline, we were forced to develop a ‘quick and dirty’ solution and hammer it in, always with the intention of modifying it later.”
One of the major attractions of implementing a usage-based system right away was that Business Services would begin capturing 1998 actuals rather than another year of hypothetical usage levels. These actuals would provide a baseline for comparisons and give everyone involved an understanding of their true bottom line more quickly than would otherwise be possible.
The new public company’s financial reporting standards required that cost recoveries be reported to the General Ledger. This meant that all charge-backs needed to be accurately and appropriately assigned to their respective business units. It also implied that if Codack and his team met their mandate, Information Services would be playing a zero-sum game by the end of the fiscal year.
In May 1998, Mark Thompson joined Manulife as AVP of the Pricing and Recovery Implementation team. Fortunately, he had several years of experience on the financial side of Information Services within a world-class manufacturing organization and was up to the challenge.
“I was hired to help define and implement a best-in-class demand-planning and charge-back process for cost-recovery of IT services provided by corporate information service providers to their respective business-user clients,” Mark explains. “We had to effect a huge change in a compressed time frame, and although we didn’t have time for proper change management or education for IS or the rest of the company, we made the best of the situation.”
DEFINING A PRICING MODEL
“The first important hurdle was to define a behaviour-based pricing model that internal clients would embrace,” Codack stresses. “Buy-in was an important component of the entire process. In the past, internal clients were sometimes asked to pay for services they may or may not have used. We needed their ongoing input and acceptance of the process.” To that end, he facilitated the creation of an Information Technology user council composed of the CEO, EVP and President of each of the company’s business units to act as a focus group for all information technology issues.
A taskforce of AVPs from Operations Services & Programs (OS&P) defined the infrastructure component of the Information Services rate as a composite of four category costs: utility (pooled services), variable services, service agreements and new solutions (applications development). Each work area developed a “steady state” budget based on six high-level categories: people, building, hardware, software, communications, and “other”. Each budget was then allocated on a percentage basis to the various rate cost pools. Overheads, growth, investments and economic factors were also modelled and taken into consideration. The task force also determined a system for volume measurement. Ultimately, the formula Rate = Cost/Volume was established.
The Pricing & Recovery core team helped define the development and support labour component of the Information Services rate, which would be applied where staff was required beyond typical infrastructure needs. Labour was categorized into five levels, based on employment bands. Staff compensation is classified by level, geography and average. Other staff-related costs were also determined and applied (utility, training, supplies, real estate and travel). Additional factors to be determined included economic influences on compensation and real estate, monthly planning rates and hourly billing rates based on utilization assumptions.
Concurrently, the team focused on how to classify charge-backs and arrived at a pricing and recovery methodology comprising three independent processes: demand planning, time-tracking and project accounting.
Once the rates were determined, the Demand Planning system was designed and implemented. The process uses an Information Services planning toolkit based on a Visual Basic front-end and supported by a Manulife Access database.
Using the system, teams of Client Relationship Managers (CRMs) build a series of orders to meet client requirements. Orders and volumes are then adjusted to reflect the total spending criteria and business priorities of the business unit. The client, in effect, forecasts the infrastructure and headcount required to support his or her business initiatives and accepts responsibility for their associated costs. Typically, a series of submissions is used to manage plan to desired spending outcomes. Once demand planning is finalized, the data obtained can be used to establish budgets for both the client and the Information Services operations. It also determines the total Information Services spending envelope.
Development and Support labour revenue is subsequently aligned with the various business-unit systems organizations. Operations Services & Programs labour revenues are sorted by order type, and infrastructure revenue is mapped via rate structure to contributing work areas.
INFRASTRUCTURE USAGE MEASUREMENT
Infrastructure usage measurement is achieved using two basic methodologies, depending on the service: inventory, in which a snapshot is taken at the start of every billing month; and usage, in which the actual consumption is measured on an ongoing basis through the prior calendar month.
Production Services provides measurement data to Business Services for summarization, formatting and uploading into the utility management tools within Lawson financial software for project accounting. Assignment to clients is based on personnel, job name and other resource registration mechanisms.
With the rate structure established, a multi-functional core team of four dedicated systems and process staff and up to 10 part-time staff (including CRMs, representatives from IS, Finance and Production Services) set out to define and implement an appropriate time-tracking tool, as well as a system to collect data and process charges.
“Our goal was to develop an optimized plateau linking all data together and integrating the various systems involved in pricing and recovery,” says Thompson.
Fortunately, Manulife already had a working financial summaries data system in place based on the Lawson financial suite. Because this software could also accommodate the data collection and charge-back requirements of the recovery process, there was no need for additional development.
BUILD OR BUY
“We had to decide whether to build or buy the time-tracking tool,” explains Thompson, “and we really didn’t have the necessary internal support resources or the time to build it. We also had a limited option with regard to a standard platform across the organization. Some of our people were working in a Windows 3.1 environment. Others were using Windows 95 and still others were using Windows NT. Lotus Notes was the common interface and it’s primarily a document- or text-based tool. These were difficult conditions to meet.”
After conducting an RFI and evaluating bids from a number of software developers, the team selected the Lotus Notes version of Changepoint PSA software for its time-tracking application.
Changepoint is an integrated product designed for managing the complete business of IT service delivery. Its PSA solution includes the ability to capture skill sets of individuals and the requirements of a particular project, provide resource allocation, forecast and schedule projects, track time and expenses for customer billing, capture best practices in a central knowledge repository, generate custom proposals, and deliver executive reports.
The product is also available in native Windows and browser client versions.
By November 1998, the team was busy implementing the time-tracking tool and training users with the help of a technical specialist. Dedicated servers for Changepoint were also installed in Toronto and Waterloo.
“We had until mid-January to roll out the system,” says Thompson, “a short window to work through the issue of scaling the application. We decided to assume that all time booked was approved, and develop the time-approval component of the system for the Year 2000. The team also decided to write its own reporting application based on Cognos PowerPlay software and SQL, and also to create its own tool for project management.”
TIME-TRACKING LABOUR USAGE
Time is captured via Changepoint and a billing extract is run at the end of the billing month period based on entered, certified and approved records. An extract is then post-processed via Excel and loaded into Lawson. Key information collected includes resource type and amount, source workgroup, and the order charged.
For material items (non-labour), IS Finance reviews business unit expenses and eliminates all standard labour items. Remaining amounts must be recovered as material items linked to orders. General Ledger and other details are reviewed to align costs with orders. A list is then supplied to Pricing & Recovery for upload into Lawson for billing. The future direction is to drive billing directly via Accounts Payable systems in Lawson.
Actual usage amounts are compared to each business-unit IS work area’s forecasted requirements for that period. This “variance index” defines the area’s progress in meeting its plan. Work area costs are split between labour and material. Then, a “true-up” or forward pricing adjustment is applied to both categories each month. The labour true-up is calculated by multiplying the business unit IS area’s labour costs times its profile factor and then subtracting its labour recoveries. The non-labour true-up is reached by subtracting the IS area’s non-labour recoveries from its non-labour costs. The adjustment for each business unit IS group is allocated to the client base on a pro rata basis by its share of labour recoveries. The true-up progresses on a year-to-date basis and any shortfalls or over-recoveries addressed get reversed.
AND THE RESULTS . . .
Needless to say, one of the primary objectives of the exercise from the perspective of Business Services is to have revenue match expense annually, and the key to achieving this is the variance to the planned net expense.
So how is the new pricing and recovery system working so far and what are the chances of Information Services playing a zero-sum game by year end?
“One of the most exciting things is that Information Services used actuals for the end of the first quarter of 1999,” says Codack, “and year-to-date to the end of August, we were over-recovering slightly at two (per cent) to three per cent ahead of plan. But this is a good thing. It’s always easy to give money back.”
He recently established a governance structure or client advisory board that meets on a monthly basis to help regulate pricing, define management information systems and prioritize new initiatives.
“At the officer level, this system allows us to understand whether we’re meeting budget and to work in an environment of collaboration,” says Codack. “From an Information Services perspective, it pushes decision-making and responsibility down to the product line managers. We want them to think about decommissioning old systems and identifying value-added activities that can improve their businesses. This pricing and recovery system will make them more aware of exactly how they are spending their money.”
Now that a working version of the system exists, its operation and support become the responsibility of Don Wilush, AVP, Corporate Systems, who functions as a Customer Relationship Manager for Human Resources Systems and IS Internal Systems. Wilush and his team have already generated some pretty impressive reports and documentation to support the new system.
“We’ve already learned some very good things in 1999 about improving the system, some of which we will apply in 2000 and some of which we’ve already implemented,” he remarks. “For example, every month our managers get Performance-to-Plan documents, which are essentially income statements for each of the work areas or cost centres under they’re direction. They know what kind of money they’ve spent and they know what they’ve been charged from Information Services. But the IS charges come through four different line items and this can be difficult for them to understand. What we’ve done is taken those line items and blown them up to enable the managers to comprehend what their internal debit backs are composed of, what projects they’re associated with, the resources and time booked for each of them – even their real server consumption. It’s really going well.”
Technically, Wilush’s immediate focus is on stabilizing the system and improving its reporting function. Release 2.01 of Changepoint has been installed and results to date are excellent with replication speed having improved tremendously. Wilush and his team will also be working closely with Consulting Services on process reengineering initiatives.
“Ideally, to implement a perfect pricing and recovery system, you need to apply proper management and rigour, and make sure that projects are not date-driven,” advises Wilush. “You also need to ensure that adequate time is allowed to identify products and tools that fit the organization’s needs. The environment should also be prepared in terms of behaviours. For example, awareness of time-tracking methodology and project management should be high, and augmented with education and training. We didn’t have that luxury and it’s like the old 80-20 adage: by driving in the system we installed, we received 80 per cent of the benefit. Now we’ll improve the remaining 20 per cent.”
Pat Atkinson is a freelance writer based in Oakville, Ont.