By allocating fixed costs based on actual usage, fluctuation in usage in one department can affect the fixed costs allocated to another department. When actual volume is the allocation base, user departments will not know their allocated costs until the end of the budget year.
On the other hand, when budgeted volume is the allocation base, user departments will know their allocated costs in advance. This information helps both short-run and long-run planning by user departments.
The main justification given for the use of budgeted volume to allocate fixed costs is related to long-term planning. Firms make decisions on committed costs (such as the fixed cost of a service department) using a long-run planning horizon. The use of budgeted volume to allocate these fixed costs is consistent with this long-run horizon.
If fixed costs are allocated based on long-run commitments or plans, some managers will be tempted to underestimate their planned usage. In this way, they will bear a lower fraction of the total costs. Top management can counteract these tendencies by systematically comparing actual usage with planned usage.
In some organizations, there may be clear-cut rewards in the forms of salary increases and promotions for managers who are accurate forecasters. In addition, some cost allocation methods include penalties for under predictions of budget usage. For instance, a higher variable rate may be charged after a department exceeds its budgeted usage.
Finally, for the successful adoption of SOA, the behavior of rank-and-file employees also needs to be considered. Ease of use and an intuitive interface are essential when digitizing IT governance processes. However, the software must also have “teeth”: an enforcement mechanism with such features as automatic escalation of issues and notifications to superiors when tasks aren’t completed in the allotted time, for example. This “carrot and stick” approach can drive desirable behavior by employees.
Cost Recovery and SLAs
IT is a business that sells products and services to clients throughout the corporation; its market. In this context, chargebacks are simply prices for its products and services.
Cost recovery (as indicated above, the third step in a chargeback system) actually moves money between budgets. This is bound to get the attention of business unit managers who are focused on their bottom line.
To move to cost recovery you are going to have to set up a chargeback committee within the compliance office, with business unit representation and chaired by the CFO. This committee sets up and runs the chargeback. The CIO sits on the committee, but only in an advisory role.
Service level agreements (SLAs) and performance agreements are key to effective management of IT services and good customer relationships. Good SLAs balance customer needs with the IT department’s capabilities, and customer expectations with the IT department’s commitments.
Effective collaboration between the CIO and the CFO is an important factor in determining the success or failure of the launch of SOA-based applications. The CFO needs to set a policy, one that maximizes benefits to the company as a whole, for the distribution of the costs of creating, operating and maintaining the SOA applications.
At the same time, the CIO and/or CTO must create and manage an ecosystem in which both short- and long-term costs for SOA are minimized. An important part of this assignment is picking and choosing which applications to create using SOA and then choosing the architecture for accomplishing the job. That’s where project portfolio management (PPM) comes in. (See my article on Developer.com.)
While the IT benefits of SOA adoption can often justify the program by itself, the more important metric to publicize is the benefit to the business. You must work with the business to value SOA-based projects in the same ways you always have in managing the IT portfolio.
It is especially important that any new IT governance be adaptable to a company’s culture to ease the transition from the old system. There is natural resistance to change in almost every organization, and many employees will look for excuses to avoid technologies that disrupt their comfort level.
Culture is not just one aspect of the game. It is the game. What does the culture reward and punish?
Marcia Gulesian has served as software developer, project manager, CTO, and CIO. She is author of well more than 100 feature articles on IT, its economics and its management, many of which appear on CIO Update.