Draft Deliverable : IT Cost Recovery Process Implementation Playbook

- DRAFT ONLY -

IT Costing and Chargeback

Process and Workflow Document

Process Owner: XXXX

Author: Steven M Morgen, IBM GBS Consulting

Version and Date: DRAFT ONLY - Version 0.1 18/01/2007

Table of Changes

Version #

Owner Approver Change Date

Date Approved

Changes Made

0.1 Steven M. Morgen ,IBM GBS

Costing and Chargeback and Analysis of 26

Table of content

TABLE OF CHANGES....................................................................................................................................... 2

1 INTRODUCTION.............................................................................................................................................. 4

1.1 OVERVIEW.................................................................................................................................................... 41.2 TERMINOLOGY.............................................................................................................................................. 61.3 ROLES AND RESPONSIBILITIES....................................................................................................................... 6

2 PROCESS STEPS........................................................................................................................................... 8

STEP 1: COMMIT TO DEVELOPING AND ESTABLISHING A COST MODEL................................................................8Step 1.1: Develop the Goals of the ADM Cost Model......................................................................................8Step 1.2: Assign Responsibility for Developing and Implementing the ADM Cost Model...............................10

STEP 2: ESTABLISH A COST STRUCTURE...........................................................................................................12Step 2.1: Define the Cost Elements.............................................................................................................. 12Step 2.2: Define the Cost Categories........................................................................................................... 12Step 2.3: Assign the Cost Elements to Cost Categories................................................................................12Step 2.4: Choose the Cost Pools.................................................................................................................. 13Step 2.5: Determine which IT resource usage is too difficult to “meter” and therefore, may require alternative recovery...................................................................................................................................... 13

STEP 3: ESTABLISH A PRICING STRATEGY......................................................................................................... 14Step 3.1: For every Cost Pool select the Billable Units................................................................................14Step 3.2: For every Cost Pool calculate the Unit Cost and set a Rate Structure...........................................14Step 3.3: Assign the costs to the ADM/Service Provided..............................................................................15Step 3.4: Set the Rate Structures for Service................................................................................................15Step 3.5: Document the Cost Model............................................................................................................. 16

STEP 4: CHOOSE THE COLLECTION, REPORTING, AND BILLING STRATEGY..........................................................16Step 4.1: Determine how the cost of services will be communicated to the business.....................................16

STEP 5: SET-UP THE COLLECTION, REPORTING AND BILLING INFRASTRUCTURE.................................................18Step 5.1: Design and Create a collection database for Costing and Chargeback.........................................18Step 5.2: Set Up Collection Mechanism.......................................................................................................18Step 5.3: Set Up Communication Channels..................................................................................................19

STEP 6: FINALIZE AND BEGIN........................................................................................................................... 19Step 6.1: Consider A Pilot Activity.............................................................................................................. 19Step 6.2: Train Those Responsible For Collecting and Reporting................................................................20Step 6.3: Begin the Costing and Chargeback Program................................................................................20

STEP 7: APPLY CONTINUOUS IMPROVEMENT TECHNIQUES TO THE COSTING AND CHARGEBACK PROGRAM..........20Step 7.1: Collect, Analyze, Report, And Evaluate Metrics (Monthly)...........................................................20Step 7.2: Review the Costing and Chargeback (Quarterly)..........................................................................21Step 7.3: Apply continuous improvement to the Costing and Chargeback program......................................22

3 TEMPLATES................................................................................................................................................. 22

4 CHECKLISTS................................................................................................................................................ 22

APPENDIX A: LABOR COST POOL DECISION CRITERIA.....................................................................23

APPENDIX B: INFRASTRUCTURE COST POOL DECISION CRITERIA...............................................24

Appendix C: Normalization guideline............................................................................................................. 25

Costing and Chargeback of 26

1 Introduction

1.1 Overview

Resource or “Usage-based” Costing and Chargeback is a “Leading Practice” that focuses on developing a standard unit cost for each major resource type or category that best represents the use of that resource. The basic idea is that the costing unit represents some measure of the resource consumed that can be traced back to the user of that resourceThe concept and practice of I.T. Costing and Chargeback is the ability of the organization’s Technology Area to define all costs associated with its Resources, and, price these services to the organization on the basis of Usage and Resource consumption in a manner and format allowing Users the ability to manage their resource consumption resulting in continuously improving, organization-wide, efficient and cost effective utilization of I.T. assets .

This method requires that all Resource elements of the Application Development and Maintenance (ADM)Data Center infrastructure and associated software specific to the applicationTransaction Activity and its Business User(s) / Owner(s), can be identified and are directly charged to the end user on a per-user basis. The cost per unit (whatever unit is chosen) needs to cover all ADMData Centers’ relegated costs. There may be parts of the “enabling infrastructure” that are chosen to be recovered through other methods such as allocation, flat fee or a per user charge.

This approach is not always effective in the complex PC-based and distributed computing environments where the mechanics and time involved in tracking usage may cost more than the IT organization recovers. It is imperative, that the resource-based chargeback scheme is straight forward in order to obtain consensus from the business ownersIn all cases, the three Critical to Success Factors are always; 1). The Resource must represent a signifcant expense (the threshold for which is pre-defined); 2). The Usage, and its associated Expense are controllable to the Business, otherwise behaviorial change cannot occur thus making the entire chargeback effort pointless; , and 3). The cost created by the I.T. Resource occurs as a direct result of its enablement and support of the associated Usage, in other words, “Causality”..

This process describes steps and sub-steps (Activities), with each sub-step having a number ofand associated tasks. The sSteps and sub-stepsActivities are as follows:

Step 1: Commit to Developing and establishing a Cost ModelStep 1.1 - Develop the Goals of the ADMData Center Cost ModelStep 1.2 - Assign Responsibility For Developing and Implementing the ADMData Center Cost ModelStep 1.3 - Understand and identify significant elements of I.T. Data Center Operations environmentStep 1.4 – Understand and identify significant elements of organization accounting, financial management, and reporting environment

Step 2. Data Capture Design Step 2.1 – Identify the Resource Usage and Transaction Data to be captured based on I.T. Management and Business User requirements and cost / charge assignability Step 2.2 – Identify the Units of Measure on which Business User pricing will be based Step 2.3 – Confirm data availability or means by which data will be obtained Step 2.4 – Determine required levels of data detail and capture frequency Step 2.5 – Use same sources of data to ensure comparability and reconciliation to other Management reports Step 2.6 – Define criteria that differentiate Controllable versus Non-Controllable data Step 2.7 – Differentiate and quantify Actual, Excess, Reserve, and Unusable capacity


Step 2.8 - Determine which IT resource usage is too difficult to “meter”, and therefore may require alternative recovery

Step 2 3: Design Repeatable Process to Establish a Cost Structure Corresponding to an I.T. Resource Data

Step 23.1 - DefineIdentify theControllable Cost Elements, differentiate Fixed and Variable , Step 3.2 Locate Data Sources; Collect Appropriate Expense Detail Step 23.23 - Define the Cost Categories , differentiate Fixed and VariableStep 23.34 - Assign the Cost Elements to the Cost Categories by Cost TypeStep 23.45 -– ChooseBuild the the Cost Pools(s)Step 2.5 - Determine which IT resource usage is too difficult to “meter”, and therefore may require alternative recoveryStep 3.6 Determine suitable allocation methods for all material non-direct , immaterial direct, and non-controllable costs

Step 3 4: EstablishCreate I.T. Costing PricingModel Strategy Step 34.1 - For every Cost Pool select theAlign Billable Units and Cost Pool(s) Step 3.2 - For every Cost Pool calculate Unit Cost and set a Rate Structure Step 3.3 - Assign the costs to the ADM/Service Provided Step 34.42 - SetCalculate the Unit Rate Structures for Service Step 4.3 – Apply Unit Rate to Business User(s)’ Usage volumeStep 4.4 – Apply resultant Usage cost to User(s) Unit(s) of Measure to derive price per Unit of MeasureStep 3.5 - Document The Cost Model

Step 4 5: Choose the Collection, Billing and Reporting, Strategy Design and Planning and Billing Strategy

Step 45.1 - Determine how the cost of services will be communicated to the businessIdentify the correct accountable authority in each Business Area responsible for each respective Usage’s cost management Step 5: Set Up the Collection, Reporting and Billing InfrastructureStep 55.12 - Design And Create A Costing and Chargeback DatabaseStep 55.23 - Set Up Collection MechanismIdentify Statement and Report Design Requirements satisfying I.T. Management and Business User(s) needsStep 55.34 -– Ensure that Reports have traceability and reconciliation to Accounting System and existing Management Financial and Expense Reports Step 5.5 – Obtain all Stakeholders’ approvals on Report and Statement design and flow in advance of placement into production

Step 6: Training Step 6.1 – Define training requirements consistent with I.T. Management and Business User’s needs Step 6.2 – Document Initial and Continuous Training Strategy, Approach, Objectives, and Success Metrics Step 6.3 – Produce Training Plan and supporting Learning Materials Step 6.4 – Obtain names of I.T.C.C. Tool Users from I.T and Business User Managements Step 6.5 - Conduct Training Set Up Communication Channels

Step 67: ImplementationFinalize And BeginStep 67.1 - Consider ADefine the requirements, objectives procedures, and success measurements for a Pilot Activity; simultaneously, prepare “Go Live” Production Implementation Plan


Step 67.2 - Train those persons responsible for Collecting and ReportingPlan for Production Data Availability Step 67.3 - Begin the Costing and Chargeback ProgramInitiate Pilot Activity according to PlanStep 7.4 – Evaluate and Assess Results; Determine Go / No Go with I.T and Business User StakeholdersStep 7.5 – Refine I.T.C.C. tool and / or process if necessary, re-test changes (if necessary) and evaluate with Stakeholders. Repeat until Stakeholder approval for full production is obtainedStep 7.6 – Finalize all documentationStep 7.7 - Upon Stakeholder Approval, proceed to Implementation and deploy Implementation plan

Step 7 8: Apply continuous improvement techniques to the Costing and Chargeback Program Step 8.1 Establish permanent Stakeholder Review Committee

Step 78.12 - Collect, Analyze, Report, And Evaluate Metrics (Monthlyper billing frequency)Step 78.23 - Review Of Costing and Chargeback Trending and Variances to current year or Standard Costs(Quarterly)Step 8.4 – Internal and External BenchmarkingStep 78.35 - Apply continuous improvement to the Process and Cost Model Step 8.6 – Implement Ongoing Training


1.2 Terminology

Charge-back Allocation of charges to clients, usually done at the end of an accounting period.Costing Establishing the cost of IT delivery by process or service and productsPricing Setting of prices to charge for services. If costs are known and the level of profit

agreed; prices are then set.Charging The process of "billing" for usage once the price of the service has been set.Cost Driver The reason costs are incurred; e.g. transaction entry, mounting tapes, security

management.Cost Centers Organizational entities those are responsible for the costs within their areas of

responsibility.Cost Pools Major groups of resources to which costs are assigned and from which charges are

distributed.Cost Category A grouping of cost items or elements into a higher level. For example the items

‘Salary & Wage’, ‘Other Compensation’, Fringe Benefits’, ‘contract & temp’ are grouped into the category ‘Personnel Service Cost’.

Cost Item or Element

A set of costs at the lowest level Cost Category for planning, tracking and identification Examples:

Salary & Wage Other Compensation Fringe Benefits Contract & Temp

Billable Units Billable units are chosen for each cost pool to achieve the allocation approach to be taken. All relevant costs within a cost pool should be recovered based on the units to be charged. The units by which IT costs are calculated and charged, i.e. CPU time, DASD storage, voice call minutes, etc.

Usage Based Charging

A method of charging departments for their use of IT resource.

Standard Costing

Pricing of usage based on a unit of work at a rate that is fixed for some period of time, usually a year or quarter.

Resource unit Costing

This method of charge-back computes charges based on resource usage that can be directly identified with a user. (Resource unit costing is the same as usage-based costing; it can be based on either standard or variable rates.)

Proportional allocation

Allocation of costs to organizational entities based on each organization’s proportional usage or participation based on a metric, i.e. sales, membership, number of FTEs.

Direct allocation The method of charging based on direct usage or direct benefit, usually for a resource that is not shared.

Activity Based Costing

A method of tracing the costs incurred by various I/T activities and associating them with services provided and/or to I/T customers. (-> Refer to relevant Technique Paper)

Units of Measure

The specific Business User Activity to which Cost of Usage will be applied to determine cost / unit of measure

1.3 Roles and ResponsibilitiesThe Costing and Chargeback Program team consists of a core team that runs the IT Accounting program on a daily basis. This team is responsible for: Gathering, storing, analyzing, retrieving, validating, and reporting on IT system data that supports

the IT Accounting program. Maintaining the IT Accounting program data base Maintaining and establishing the rate tables Validating and updating unit costs


Producing IT chargeback invoices/reports Understanding and explaining variances in actual v.s. planned as well as exceptions in individual

bills/reports Forecasting billable units for each cost pool Ensuring the accuracy of the cost pool allocations Producing IT Accounting reports on a periodic basis Costing new services and supporting differential pricing/rate Educating business units and users on IT Accounting

Implementation Team RolesThe implementation team is comprised of staff performing a variety of different roles: IT Accounting specialist Data Collection specialist Data Administrator IT Subject Matter Experts IT Finance specialist Internal Audit specialist ADM Project Manager LoB Executive ADM Executive

In addition to the team members, key linkages need to be established with each business unit and each IT department. The following table describes these roles, their responsibilities, and who performs them.

Role ResponsibilitiesIT Accounting specialist Customize the IT Accounting program

o Identify cost elementso Select cost categorieso Assign cost elements to cost categorieso Create cost poolso Establish cost structureo Select billable unito Calculate unit costo Set the rate structureo Assign the cost to ADM services providedo Set the rate structure for the serviceo Document the cost modelo Create allocation routineso Select reportso Choose the selection, reporting, billing strategyo Select or create invoice templateso Set-up communication channel

Data Collection specialist Validate the data feed Set the collection/reporting/billing infrastructure Design/create costing and chargeback database Set-up the collection mechanism Install data collection software Establish/run the data collection procedures

Data administrator Manage the data to support IT Accounting program metrics Ensure proper procedures in place for timely IT Accounting

program access to data in correct format.


IT subject matter experts IT SME contributed to the whole program/process on the IT related technical topics, such as Identifying/developing data collection techniques Validating metrics Validating data collection procedures…

IT Finance specialist Analyze cost recovery Analyze variance reports Ensure General Ledger feeds are accurate Feed the cost data from GL

Internal Audit specialist Audit the IT Accounting process and its interface to FinanceLine of Business Executive The organization for which a work effort is undertakenADM Executive The highest executive position in the ADM organizationADM Project Manager Input the project related data to the cost model


2 PROCESS STEPS

Step 1: Commit To Developing and Establishing a Cost Model

Step 1.1: Develop the Goals of the ADM Cost ModelTasks What How Who’s Responsible1 Assign a Cost

Model coordinator

Assign a temporary Cost Model coordinator to launch the costing and chargeback program; the coordinator will be responsible for performing all the tasks in this step

ADM Executive or delegate

2 Document IT Cost Model goals

Collect and document the goals of the IT organization to which the ADM organization reports. Identify desirable end-user behaviors and develop prices that will encourage users to adopt such behaviors.

GuidelineIT costing that is distributed back to the client needs to be adapted to what the Business has consumed and creates. It must be a reasonable framework for working, for both IT and Business

IT Accounting Specialist


GuidelineChargeback identifies, allocates and recovers the costs of IT services, but it can lead to political tensions, investment setbacks and distorted use of IT services

GuidelineItems that are beyond the business unit’s control (i.e. inaction ability) should not attempt to use “usage chargeback” because it will not change their behavior

GuidelineHigh Administrative Costs – i.e. producing and distributing traditional chargeback reports can result in costly administrative items, compounded by time spent explaining and discussing allocation schemes.

GuidelineConsider elasticity of demand – prices do not necessarily reflect all actual costs. Set prices at levels that users will perceive as reasonable

GuidelineThere are four key attributes of effective Charegack Schemes:

1) Reporting of Controllable Costs Only

Chargeback reports itemize only services truly driven by line consumption behavior, excluding complicated and over-technical IT “overhead” costs. By providing easy-to-understand profiles of line utilization patterns, IT business unit managers are able to focus conversations with customers on those services most apt to improve cost efficiency and satisfaction.

2) Pricing for Customer Choice

To segment diverse internal business unit customers, many IT innovators have restructured chargebacks to control IT costs without sacrificing end-user functionality needs. Many organizations are introducing customized SLAs with tiered pricing schemes allowing business units to select among discrete levels of IT service offerings; alternatively, it is possible to restrict chargebacks to exceptional “surcharges’ when line customers deviate from non-standard services or tools.

3) Incensing Optimal Utilization

To smooth demand patterns (thereby reducing IT costs and increasing customer satisfaction), it is possible to introduce time-based price differentiation chargeback schemes, billing users higher rates during “peak” periods to steer non-urgent service requests towards “off-peak” periods.

4) Generating Line Buy-in for Strategic IT projects


Chargebacks can be used as a corporate “tax”, charging back costs of corporate projects to raise funds for strategic initiatives, (e.g. Research and Development) that no individual business unit would initiate alone. “Tax credits” (discounts off of chargebacks) are given to business units that volunteer as beta sites for testing corporate initiatives.

Deliverables Assigned Costing and Chargeback Coordinator Documented IT Cost Model Goals

Step 1.2: Assign Responsibility for Developing and Implementing the ADM Cost ModelTasks What How Who’s Responsible1 Name the

sponsorIdentify the Costing and Chargeback sponsor (one person) who will oversee the Costing and Chargeback program implementation and ongoing results; this person will be responsible for championing Costing and Chargeback in the organization, providing direction, providing management attention and focus, assuring usefulness and benefits from the program for all levels of management involved, providing resources, and for removing obstacles to program implementation; or optionally choose a group of stakeholders (steering committee) who jointly will act as the Costing and Chargeback sponsor and who jointly will assume the sponsor responsibilities; the sponsor should be one or more members of senior management; (throughout this process, the term sponsor will be used regardless of whether one person or a group holds these responsibilities)

ADM Executive

2 Name the project manager

Identify a Costing and Chargeback project manager (PM) who will be responsible for implementing the Costing and Chargeback program, and who will report to the Costing and Chargeback sponsor; identify Costing and Chargeback team members, as appropriate

ADM Executive

3 Gain approval of Cost Model goals

Review and revise, as appropriate, the prioritized Costing and Chargeback goals (as documented in the previous step), and obtain approval of them from the Costing and Chargeback sponsor

Costing and Chargeback Program Manager

Deliverables Assigned Costing and Chargeback Sponsor Assigned Costing and Chargeback Project Manager Documented and approved IT Cost Model Goals


Step 2: Establish a Cost Structure

Step 2.1: Define the Cost Elements Tasks What How Who’s Responsible 1 Establish Cost

Elements 确定成本单元

A set of costs at the lowest level Cost Category for planning, tracking and identification Examples:

Salary & Wage Other Compensation Fringe Benefits

Note: Refer to the Cost Discovery Guide


Deliverables Defined Cost Elements

Step 2.2: Define the Cost Categories Tasks What How Who’s Responsible 1 Define the Cost

Categories Develop the Cost Categories based upon anticipated ”Interest Areas” – i.e. areas of the IT expenses that management and business units would potentialy want to understand and control.

Note: A Cost Category, is a grouping of cost items or elements into a higher level. For example the items ‘Salary & Wage’, ‘Other Compensation’, Fringe Benefits’, ‘Contract & Temp’ could be grouped into the category ‘Personnel Service Cost’.

Cost Categories are used to determine where the percentage of costs are spent

GuidelineIT Cost categories may be used for the design of forecast estimates and perform the cost analysis.


Deliverables Defined Cost Categories

Step 2.3: Assign the Cost Elements to Cost Categories Tasks What How Who’s Responsible 1 Assign the Cost

Elements to the Cost Categories

Group the cost items or elements into the chosen cost categories. Sample cost categories could include Personnel Services and Cost, Equipment, Other. GuidelineCost categories can be rolled-up to the:



Technology resource Personnel Level Project Level Application Level Project stages (Preliminary, AD,

Maintenance) Project Costs by life-cycle phases

Deliverables Cost Elements mapped to Cost Categories

Step 2.4: Choose the Cost PoolsTasks What How Who’s Responsible1 Document the

pre-existing costing pools (as appropriate)

If it has not already been done, document all of the contractual obligations and formal requirements of the ADM organization that involve ADM Costing and Chargeback that are being collected. Document how they are used.


2 Perform an inventory of monitoring tools that already exist within the organization

Inventory the existing organization for monitoring and analysis tools that already exist and are being used within the organization

Guideline Are there automated tools/spreadsheets established to make adjustments in current procedures for documenting IT costs to better support the new Chargeback model?


3 Evaluate existing tools for potential use within the Costing and Chargeback initiative

Evaluate the tools that were identified in order to determine if they can be applied to the Costing Model


Deliverables Defined Cost Pools

Step 2.5: Determine which IT resource usage is too difficult to “meter” and therefore, may require alternative recovery

Categories

Tasks What How Who’s Responsible 1 Document all

proposed costs Inventory all anticipated costs. Data Collection specialist

2 Evaluate tools Determine if there is an existing tool to acquire the data. If there is not, determine if it would

Data Collection specialist


be appropriate to build/acquire a tool to automatically retrieve the information

3 Recommend what charges to pursue for reporting and potential pricing

Summarize the findings. Data Collection specialist

Deliverables Identified costs that need an alternative recovery

Step 3: Establish a Pricing Strategy

Step 3.1: For every Cost Pool select the Billable Units Tasks What How Who’s Responsible1 Identify Billable

UnitsSelect Billable Units for each cost pool in order to support the allocation approach to be taken

GuidelineBillable units represent how the consumption of resources within each cost pool gets charged to the user

GuidelineAll relevant costs within a cost pool should be recovered based on the units to be charged

GuidelineThe units by which IT costs are calculated and charged (i.e. CPU time, DASD storage, function points, labour hours etc.) should be quantitative


Deliverables Defined Billable Units for each Cost Pools

Step 3.2: For every Cost Pool calculate the Unit Cost and set a Rate Structure Tasks What How Who’s Responsible1 Calculate Unit

CostUsing the forecast data (i.e. labour – headcount and utilization rate) determine the Unit Cost


2 Set a Rate Structure

If appropriate, add a buffer to the unit cost to determine the Rate Structure


Deliverables


Unit Cost and Rate Structure for every Cost Pool identified

Step 3.3: Assign the costs to the ADM/Service Provided Tasks What How Who’s Responsible1 Assign the cost to

the ADM/Service provided

Using the Cost Pool Rate Structure, map the cost to the appropriate ADM/Service

GuidelineADM can be easily divided by Project and Maintenance Services


Deliverables Summary statement of allocated expenses to ADM/Service (e.g. Maintenance)

Step 3.4: Set the Rate Structures for ServiceTasks What How Who’s Responsible1 Determine the

Service Rate Structure

The development of billing rates is based on the following criteria:

Usage reflects a consumable scarce resource

The cost of supplying the resource is significant

The information provided is both financial and technically useful

The user (customer) understands and can control their cost based upon their usage

The resource can be assigned to cost pool

The usage of the resource can be measured or accounted for

The calculation of a billing rate is based on cost for each IT resource units is a simple division of IT resource unit Costing and Chargeback volumes into cost pool dollars.

Guideline The resource usage could be based on a 12-month usage forecast using a linear regression on the previous 15 month actual measurements.

Guideline Usage rates are set on an annual basis leading to situation where they do not reflect prices in the external market.

GuidelineConsider elasticity of demand: The goal of good chargeback schemes is seldom full-cost



recovery. Prices do not necessarily have to reflect all actual costs. Prices should be set at levels that the users will perceive as reasonable.

GuidelineUse tiered pricing by providing end-users with choices to accommodate varying needs for service quality – peak/off peak, regular vs. expedited delivery, etc.

GuidelineService level agreements tailored to individual Bus provide It cost transparency, choice and lead to high user satisfaction.

Guideline Sucharges for non-standard services promote cost-justified IT selection

GuidelineTime-based price differentiation optimizes data center usage by dispersing load.

GuidelineVarying chargeback prices to maximize use of existing capacity are designed to encourage a shift toward non-peak hours and ensure full utilization of the ADM resource.

Deliverables Defined Rate Structure

Step 3.5: Document the Cost ModelTasks What How Who’s Responsible1 Complete the

Cost Model Update the Cost Model to include all of the essential elements as defined and implemented up to this point


Deliverables Documented Cost Model

Step 4: Choose the Collection, Reporting, and Billing Strategy

Step 4.1: Determine how the cost of services will be communicated to the business Tasks What How Who’s Responsible1 Work with the

Business Units to develop a clear

Using clearly developed cost information, work with the Business Units to explain the charges and gain consensus on their acceptance



understanding of charges that will be applied

Try to foster commitment from the Business Units with respect to projects that encompass multiple modules and benefits the entire organization but exceeds the funding ability of any individual Business Unit

2 Determine if a Cost Report should be generated

Cost reports are an appropriate vehicle for communicating charges to the business. They can provide the Business Units with appropriate insight to costs that they can subsequently influence

Ensure that the reports are easy to read and understand by the business units

GuidelineAvoid chargeback reports that are expressed in ways easier for IT to prepare than for end-users to understand, with complicated allocation formulas, highly technical line items, and reader unfriendly formats may not be accepted by the Business Units


3 Determine if a pro-forma invoice should be used

Standardized formats are an appropriate vehicle for communicating information since the charges are very similar from one Business Unit to the next


4 Determine the frequency that information should be generated and that chargeback should be applied

The frequency of the billing cycle should be established. Once per month is the recommend frequency, however this should be a decision point of the IT organization.


6 Develop data collection procedures and templates

Develop and document procedures on how to collect each required piece of data; if it already exists, just state where it is; if it does not exist state how to generate it; provide enough detail that an average staff member would be able to perform the procedure; keep the procedures as concise as possible; develop whatever templates are needed to capture and report the chosen chargeback information, and prepare a prototype representation (table, spreadsheet, chart, graph, etc.) to show exactly how the data will be reported and presented at each stage of the collection and reporting.



Deliverables An agreed to Collection, Reporting and Billing Strategy

Step 5: Set-up the Collection, Reporting and Billing Infrastructure

Step 5.1: Design and Create a collection database for Costing and Chargeback Tasks What How Who’s Responsible1 Design the

Costing and Chargeback database and alternate tools (as appropriate)

Now that Costing and Chargeback have been defined, a storage and retrieval system may need to be defined and designed to store the collected data, and allow the retrieval and use of it over a long period of time. Consider the following: make it easy to use, make it flexible (easy to modify), have it interface with graphical charting tools to automate the generation of graphs and charts (if possible), allow for querying to generate ad hoc reports, make it large to hold significant historical data, and make it secure (consider who can see what data)

Additional tools may also be deployed as appropriate

Data Administrator

2 Obtain tools Using the decisions made concerning the level of automation required for the Costing and Chargeback program, obtain the necessary tools (buy, develop, or use current ones); install and implement the tools


3 Create the Costing and Chargeback infrastructure

Using the design of the previous task, create the Costing and Chargeback infrastructure


Deliverables An implemented Costing and Chargeback infrastructure (i.e. database, tools, etc.)

that satisfies all of the needed requirements

Step 5.2: Set Up Collection MechanismTasks What How Who’s Responsible1 Assign collection

responsibilitiesAssign or have the appropriate management chain assign Costing and Chargeback collection responsibilities to specific individuals to collect all the required measurements, document them, calculate metrics, perform the necessary analysis, generate the necessary charts/graphs, and store them in the Costing and Chargeback database



Deliverables Assigned individuals who will have responsibility for collecting, analyzing, reporting,

and storing the Costing and Chargeback information

Step 5.3: Set Up Communication ChannelsTasks What How Who’s Responsible1 Assign

responsibility for communicating results to management

Assign or have the appropriate management chain assign responsibility to one or more specific individuals to report the Costing and Chargeback results to the various levels of management, stakeholders, and appropriate staff on a monthly basis

IT Accounting Specialist / LoB Executive /ADE Executive

2 Assign responsibility for communicating results to the entire staff (as appropriate)

Assign or have the appropriate management chain assign responsibility to one or more specific individuals to report the Costing and Chargeback results to the development staff to keep them informed on results and progress being made on a monthly or quarterly basis

IT Accounting Specialist / LoB Executive /ADE Executive

Deliverables Assigned individuals to communicate Costing and Chargeback results

Step 6: Finalize and Begin

Step 6.1: Consider A Pilot ActivityTasks What How Who’s Responsible1 Decide on a pilot

activityEvaluate the need for a pilot activity to test the feasibility of the Cost Model and associated infrastructure (procedures, collection, templates, common understanding, tools, reporting.


2 Perform a pilot activity

Plan the pilot activity by considering where in the organization the pilot should take place, the extent and length of the pilot, and all of the people that would have to be involved; schedule the pilot activity, provide necessary training, and perform the pilot activity; evaluate the results of the pilot activity; make the appropriate changes to the defined costing and chargeback program based on the results of the pilot activity.

Implementation Team

Deliverables Documented results of the costing and chargeback pilot


Step 6.2: Train Those Responsible For Collecting and ReportingTasks What How Who’s Responsible1 Develop training

materialsDevelop the appropriate training materials for all the persons that will have a role in collecting, reporting, and using the Chargeback Model


2 Provide training Schedule the training sessions, then perform the training sessions for all those that need it to perform their responsibilities


Deliverables Trained staff and management on how to carry out their responsibilities in the costing

and chargeback program (collecting, reporting, communicating, and using the costing and chargeback information)

Step 6.3: Begin the Costing and Chargeback ProgramTasks What How Who’s Responsible1 Start the program Decide on a start date when the costing and

chargeback Costing and Chargeback data collection needs to begin

Deploy to projects to start estimating and tracking actual costs at the project level


2 Deploy to Finance Deploy to Finance to begin estimating and tracking actual costs at the organization Analyze cost recovery Analyze variance reports Ensure General Ledger feeds are

accurate Feed the cost data from GL

IT Finance Specialist

3 Control and monitor the Program

Audit the IT Accounting process and its interface to Finance

Internal Audit

Deliverables A chosen start date for executing the costing and chargeback program

Step 7: Apply continuous improvement techniques to the Costing and Chargeback Program

Step 7.1: Collect, Analyze, Report, And Evaluate Metrics (Monthly)Tasks What How Who’s Responsible1 Collect the

measurementsExecute the Costing and Chargeback procedures to collect the Costing and Chargeback data according to the specified schedule



2 Analyze and prepare results

Analyze the data, prepare the defined charts, graphs, trends, etc. to prepare for reporting the results according to the specified schedule


3 Report results Report the Costing and Chargeback metric results through the defined communication channels by the defined schedules using the defined media


Deliverables Collected, analyzed, and communicated monthly measurements

Step 7.2: Review the Costing and Chargeback (Quarterly)Note – This step should be performed on a monthly basis for the first few months of the Costing and Chargeback program

Tasks What How Who’s Responsible1 Survey usage

and benefits of the Costing and Chargeback program

During each quarter, note the reactions to the Costing and Chargeback program, the suggestions for improvement, the implementation problems, and any other significant information relating to the program; seek out information if it is not readily available (use surveys, questionnaires, roundtable discussions, etc.) to elicit pertinent information; at the end of each quarter, organize the information collected into some form of presentation to be given to the Costing and Chargeback Sponsor


2 Evaluate Costing and Chargeback program with sponsor

Present the information obtained in the above task to the Costing and Chargeback Sponsor and discuss the results; make sure that the following topics are considered for discussion and evaluation -- the right people are getting the right information; there is a process for receiving and considering improvement recommendations, and improvements to the Costing and Chargeback program are implemented; the consequences of the program on behavior, activities, morale (make the right thing to do the easy thing to do); the Costing and Chargeback program goals; are the Costing and Chargeback being reported still the right ones?; should there be more?; should there be fewer?; the cost of the Costing and Chargeback program is still appropriate; the benefits received because of the Costing and Chargeback program are documented; trends of the Costing and Chargeback reported are positive or there are action plans to change the trends; and most important, management uses the Costing and



Chargeback results to make better decisions and make ADM more effective; from the results of this evaluation, develop and execute appropriate action plans

Deliverables Documented evaluation of the Costing and Chargeback program Appropriate action plans

Step 7.3: Apply continuous improvement to the Costing and Chargeback program

Tasks What How Who’s Responsible1 Evaluate the IT

Planning Process

Determine how IT and the Business would use this information to improve the IT Planning process


2 Evaluate the investment process

Determine how IT and the Business would use this information to improve the investment process


3 Evaluate the Prioritization Process

Determine how IT and the Business would use this information to improve the Project Prioritization Process


4 Evaluate the Portfolio Management Process

Determine how the IT and the Business would use this information to improve Application Portfolio Management


Deliverables Documented evaluation of the Costing and Chargeback program (after applying

continuous improvement) Appropriate action plans (after applying continuous improvement) Results of the continuous improvement initiative and focus

3 TEMPLATES

None

4 CHECKLISTS

List of Sample Work Product - Costing and Chargeback

Sample Work Product Documented IT Cost Model Goals

Documented and approved Costing and Chargeback IT Cost Model Goals

Defined Cost Elements

Defined Cost Categories


Sample Work ProductCost Elements mapped to Cost Categories

Defined Cost Pools

Identified costs that need an alternative recovery

Defined Billable Units for each Cost Pools

Unit Cost and Rate Structure for every Cost Pool identified

Summary statement of allocated expenses to ADM/Service (e.g. Maintenance)

Defined Rate Structure

Documented Cost Model

An agreed to Collection, Reporting and Billing Strategy

An implemented Costing and Chargeback infrastructure (i.e. database, tools, etc.) that satisfies all of the needed requirements

Documented results of the costing and chargeback pilot

A chosen start date for executing the costing and chargeback program

Collected, analyzed, and communicated monthly measurements

Documented evaluation of the Costing and Chargeback program

Appropriate action plans

Documented evaluation of the Costing and Chargeback programAppropriate action plans (after applying continuous improvement)

Results of the continuous improvement initiative and focus (after applying continuous improvement)

Appendix A: Labor cost pool decision criteria

Proposed Method 1. Set the band levels in line with the organization’s labor structure2. Divide persons in each banding into two categories: Service and Overhead 3. Utilization rate should be used to determine weather or not a person belongs to service people or

overhead. (i.e. 40% could be set as the “break” point. If greater than 40% utilization then the individual is providing a “service”. If less than 40% then the individual is categorized as “overhead”) a) Utilization rate is determined by => service hours (e.g. Project hours, Maintenance hours) /

available hours (i.e. all available working hours excluding public holidays, etc.)


4. Overhead labor cost will use the same method as overhead cost categories to allocate back to the band levels. Allocation will be performed by using the service headcount ratio for each banding. (Service headcount ratio is the number of service headcount for each band level divided by total banding service headcount. Reference 3 above.)

Type Band 1 Band 2 Band 3 Band 4 Band 5 Band 6 Band 7 Band 8Service HeadcountOverhead HeadcountService Headcount Ratio = service headcount for each band level divided by total banding service headcount

Appendix B: Infrastructure Cost Pool decision criteria

Mainframe cost pool (includes MA, mainframe SW&HW, mainframe storage ) Proposed Method1. Forecast the service machine hours at the beginning of the year, work out the unit

cost per service machine hours. Measure and allocate the mainframe cost to ADM service by the actual usage. a) Forecast service machine hours based upon historical data b) Unit Cost / hour = Total machine cost / service machine hours

2. Use the forecast service labor hours to calculate the mainframe unit cost at the beginning of the year, and then allocate the mainframe cost to ADM service (e.g. projects, maintenance) by actual service labor hours

High-End UNIX server (includes MA, HW) cost pool Proposed method1. Calculate the unit cost based on the forecast [Normalized # of CPU*Days], and then

allocate the cost to the ADM service by actual usage.

Middle and Low-End server cost poolProposed method


1. Calculate the unit cost based on the dedicated # of server days, and then allocate the cost to the ADM service by actual usage.

Other equipment ( Network Device, Printers, Fax Machine, Scanner ) Proposed method1. Allocate this part of cost to the banding pools by service HC #

Type Mainframe High-end UNIX server

Middle and Low-End server

Billable unit Machine hours Normalized # of CPU*Days

Dedicated # of server days

Appendix C: Normalization guideline

Computers within an organization have different processing speeds. This speed difference might cause users to request that their work be run on the faster machine to reduce costs. This situation could lead to heavy workloads on the faster computers while the slower units stand idle. To avoid this problem, you can normalize the processing speeds to more evenly charge for CPU utilization. That is, you can assign a percentage of the original CPU time used by a system rather than the actual time to be used during the billing process.

For example, your organization has two z/OS systems, AL90 and AL95. System AL95 is 20 percent faster than AL90. If you use AL95 as the base system, use a factor of .80 to normalize AL90 to reflect the speed of AL95.

For production only: Due to the disparity between the way different operating systems capture performance statistics, it is not desirable to normalize the processor times between platforms (e.g., z/OS to UNIX or UNIX to Windows).


Draft Deliverable : IT Cost Recovery Process Implementation Playbook

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