Modern Middle Manager
Primarily my musings on the practical application of technology and management principles at a financial services company.
IT Cost Allocation

Sunday, July 03, 2005  

I don't believe in fate or higher powers or the will of the universe or any of that mumbo-jumbo. Sometimes it seems like Someone or Something is mocking me by trying to prove me wrong.

In my last post I mentioned that my company has two factions, led by the head of banking and wealth management, respectively. Both of these guys want to be the CEO of the company, and I believe I can describe their strategy thusly: grow their own line of business (LOB) and cash cow the other one. I currently report to the head of Banking who is also the Chief Operating Officer. I have had hints dropped my way that my department will wind up reporting to both LOB's and become a football between them in regards to IT expense allocation. The issue is that the Wealth Management (WM) LOB consists of about 75% of the company's personnel but really doesn't need the high-tech core infrastructure that we've created for Banking. Naturally, Banking does not want to pay 100% of those costs, especially if it is shared in any way with WM. Hence my dilemma -- how to charge back "fairly." I really don't have time for this crap. However, like I've said before, politics is ever with us and to believe that you can avoid it at the middle or executive management layer is folly.

So what to do? I have pondered that for the last three months as the writing started to appear on the wall. Within the last month I ran across a couple of resources that got me thinking. The first one is the Professional Services Firm Bible (PSFB), written by John Baschab and Jon Piot (disclaimer: I'm not done reading it). This book appears similar to their Executive's Guide to Information Technology, which was a comprehensive reference guide to IT organization, operations and strategy. The second resource is an article in CIO Magazine on how an electric utility structured their IT chargebacks.

What does this mean for us? I believe we can create a similar model as Southern Company while providing the level of service expected by a professional services firm. Banking's #1 concern is uptime. Wealth Management's #1 concern is lowering their cost structure. Therefore, my model for a shared-service chargeback would consist of:

1. A per-capita desktop charge. We would have a full desktop or thin client offering, depending on what the LOB wants to spend. This makes it less likely that I'll need to argue the value of thin clients over desktops yet again.

2. A per-incident help desk charge. Again, this could vary depending on the SLA required. Banking generally wants priority over WM. Great, as long as they pay for it.

3. A per-capita shared infrastructure charge. This charge would be for all of the shared services (network, server, software, Internet) used by the company. These charges should be high enough to pay for upgrades every 3-5 years.

4. Demand-based infrastructure charges. This charge would be for equipment and maintenance used specifically by an LOB. For example, firewalls used specifically for Banking would be identified and charged to them. Branch office expenses, such as firewalls, routers and data circuits opened by WM would be charged back to them. This would put choices such as T1's vs. DSL into their hands rather than have to fight with them to reduce the costs of data circuits for 4-person offices.

5. Demand-based project charges. This is my favorite and where the PSFB comes in. I want to provide a cost-plus structure in order to make our services very attractive to both groups, including selling them on what we can do. I have no problem being competitive with outside vendors and believe I can provide what the LOB's need at a much lower cost structure.

Items #1-4 are to fund the infrastructure and include maintenance agreements, upgrades, capacity expansion and the IT Operations personnel necessary to keep everything running. Item #5 is the one I'm really keen about. Not only would it give my department more visibility and accountability, it would give us an opportunity to run as a profit center. I know that is not an easy task, but nothing focuses a department as much as responsibility for its own bottom line.

A major benefit of running a department with profit and loss responsibility is the opportunity to reward the people within it based on their results. Compensation is a subject I'll review more in-depth, but on a simplistic level I believe the IT Projects personnel should be rewarded if they "bill" certain levels back to the departments and those departments are happy with the deliverables. The IT Operations personnel should be rewarded based on uptime and "customer service" factors.

In theory, this would provide the Wealth Management LOB IT overhead expenses of the fixed (infrastructure) and variable (help desk, desktop and specific infrastructure/project) variety. If they believe that their cost structure is unappealing, it will be within their power to lower it. For Banking, their cost structure is less important -- they are willing to invest in IT for a return which would be far more measurable than today. They also desire a higher priority and greater uptime than Wealth Management, both of which should carry a premium. However, they should not be penalized for the per-capita expenses.

Unless I've lost my mind, this looks like a win-win situation for us all.

posted by Henry Jenkins | 7/03/2005 10:17:00 PM

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