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 Changes Made
# Date Approved
0.1 Steven M.
Morgen ,
IBM GBS

Table of content

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

1 INTRODUCTION......................................................................................................................................................4
1.1 OVERVIEW......................................................................................................................................................4
1.2 TERMINOLOGY.................................................................................................................................................7
1.3 ROLES AND RESPONSIBILITIES.............................................................................................................................7
2 PROCESS STEPS....................................................................................................................................................10
.........................................................................................................................................................................10
STEP 1: COMMIT TO DEVELOPING AND ESTABLISHING A COST MODEL..........................................................................10
Step 1.1: Develop the Goals of the ADM Cost Model.........................................................................................10
Step 1.2: Assign Responsibility for Developing and Implementing the ADM Cost Model................................12
STEP 2: ESTABLISH A COST STRUCTURE..................................................................................................................13
Step 2.1: Define the Cost Elements ...................................................................................................................13
Step 2.2: Define the Cost Categories ................................................................................................................13
Step 2.3: Assign the Cost Elements to Cost Categories ....................................................................................13
Step 2.4: Choose the Cost Pools.........................................................................................................................14
Step 2.5: Determine which IT resource usage is too difficult to “meter” and therefore, may require
alternative recovery.............................................................................................................................................14
STEP 3: ESTABLISH A PRICING STRATEGY ..............................................................................................................15
Step 3.1: For every Cost Pool select the Billable Units ...................................................................................15
Step 3.2: For every Cost Pool calculate the Unit Cost and set a Rate Structure ............................................15
Step 3.3: Assign the costs to the ADM/Service Provided ..................................................................................16
Step 3.4: Set the Rate Structures for Service......................................................................................................16
Step 3.5: Document the Cost Model...................................................................................................................18
STEP 4: CHOOSE THE COLLECTION, REPORTING, AND BILLING STRATEGY.......................................................................18
Step 4.1: Determine how the cost of services will be communicated to the business ......................................18
STEP 5: SET-UP THE COLLECTION, REPORTING AND BILLING INFRASTRUCTURE...............................................................19
Step 5.1: Design and Create a collection database for Costing and Chargeback ...........................................19
Step 5.2: Set Up Collection Mechanism.............................................................................................................20
Step 5.3: Set Up Communication Channels........................................................................................................20
STEP 6: FINALIZE AND BEGIN................................................................................................................................20
Step 6.1: Consider A Pilot Activity.....................................................................................................................21
Step 6.2: Train Those Responsible For Collecting and Reporting....................................................................21
Step 6.3: Begin the Costing and Chargeback Program.....................................................................................21
STEP 7: APPLY CONTINUOUS IMPROVEMENT TECHNIQUES TO THE COSTING AND CHARGEBACK PROGRAM..............................22
Step 7.1: Collect, Analyze, Report, And Evaluate Metrics (Monthly)...............................................................22
Step 7.2: Review the Costing and Chargeback (Quarterly)...............................................................................22
Step 7.3: Apply continuous improvement to the Costing and Chargeback program........................................23
3 TEMPLATES..........................................................................................................................................................24

4 CHECKLISTS .......................................................................................................................................................24

APPENDIX A: LABOR COST POOL DECISION CRITERIA.........................................................................25

APPENDIX B: INFRASTRUCTURE COST POOL DECISION CRITERIA..................................................26

APPENDIX C: NORMALIZATION GUIDELINE..............................................................................................26

Costing and Chargeback Page 3 of 27

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 Model
Step 1.1 - Develop the Goals of the ADMData Center Cost Model
Step 1.2 - Assign Responsibility For Developing and Implementing the ADMData Center Cost
Model
Step 1.3 - Understand and identify significant elements of I.T. Data Center Operations
environment
Step 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 Variable
Step 3.4 - Assign the Cost Elements to the Cost Categories by Cost Type
Step 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 volume
Step 4.4 – Apply resultant Usage cost to User(s) Unit(s) of Measure to derive price per Unit
of Measure
Step 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 Infrastructure
Step 55.12 - Design And Create A Costing and Chargeback Database
Step 55.23 - Set Up Collection MechanismIdentify Statement and Report Design
Requirements satisfying I.T. Management and Business User(s) needs
Step 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 Begin
Step 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
Plan
Step 7.4 – Evaluate and Assess Results; Determine Go / No Go with I.T and Business User
Stakeholders
Step 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
obtained
Step 7.6 – Finalize all documentation
Step 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 Benchmarking
Step 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 products
Pricing 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 A set of costs at the lowest level Cost Category for planning, tracking and
Element 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 A method of charging departments for their use of IT resource.
Charging
Standard Pricing of usage based on a unit of work at a rate that is fixed for some period of
Costing time, usually a year or quarter.
Resource unit This method of charge-back computes charges based on resource usage that can
Costing 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 of costs to organizational entities based on each organization’s
allocation 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 A method of tracing the costs incurred by various I/T activities and associating them
Costing with services provided and/or to I/T customers. (-> Refer to relevant Technique
Paper)
Units of The specific Business User Activity to which Cost of Usage will be applied to
Measure determine cost / unit of measure

1.3 Roles and Responsibilities
The 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 Roles
The 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 Responsibilities
IT Accounting specialist  Customize the IT Accounting program
o Identify cost elements
o Select cost categories
o Assign cost elements to cost categories
o Create cost pools
o Establish cost structure
o Select billable unit
o Calculate unit cost
o Set the rate structure
o Assign the cost to ADM services provided
o Set the rate structure for the service
o Document the cost model
o Create allocation routines
o Select reports
o Choose the selection, reporting, billing strategy
o Select or create invoice templates
o 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 Finance
Line of Business Executive The organization for which a work effort is undertaken
ADM Executive The highest executive position in the ADM organization
ADM 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 Model
Tasks What How Who’s Responsible
1 Assign a Cost Assign a temporary Cost Model coordinator to launch the costing ADM Executive or delegate
Model and chargeback program; the coordinator will be responsible for
coordinator performing all the tasks in this step
2 Document IT Collect and document the goals of the IT organization to which the IT Accounting Specialist
Cost Model ADM organization reports. Identify desirable end-user behaviors
goals and develop prices that will encourage users to adopt such
behaviors.

Guideline
IT 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


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

Guideline
Items 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

Guideline
High 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.

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

Guideline
There 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 Model
1 Name the Identify the Costing and Chargeback sponsor (one person) who will ADM Executive
sponsor 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)
2 Name the Identify a Costing and Chargeback project manager (PM) who will be ADM Executive
project manager 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
3 Gain approval of Review and revise, as appropriate, the prioritized Costing and Costing and Chargeback P
Cost Model Chargeback goals (as documented in the previous step), and obtain
goals approval of them from the Costing and Chargeback sponsor

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
1 Establish Cost A set of costs at the lowest level Cost IT Accounting Specialist
Elements 确定 Category for planning, tracking and
成本单元 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
1 Define the Cost Develop the Cost Categories based upon IT Accounting Specialist
Categories 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

Guideline
IT 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
1 Assign the Cost Group the cost items or elements into the IT Accounting Specialist
Elements to the chosen cost categories. Sample cost
Cost Categories categories could include Personnel Services
and Cost, Equipment, Other.
Guideline
Cost 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 Pools
1 Document the If it has not already been done, document all of IT Accounting Specialist
pre-existing the contractual obligations and formal
costing pools requirements of the ADM organization that
(as appropriate) involve ADM Costing and Chargeback that are
being collected. Document how they are used.

2 Perform an Inventory the existing organization for IT Accounting Specialist
inventory of monitoring and analysis tools that already exist
monitoring tools and are being used within the organization
that already
exist 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 Evaluate the tools that were identified in order IT Accounting Specialist
existing tools for to determine if they can be applied to the
potential use Costing Model
within the
Costing and
Chargeback
initiative
Deliverables
 Defined Cost Pools

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

Categories

1 Document all Inventory all anticipated costs. Data Collection specialist
proposed costs
2 Evaluate tools Determine if there is an existing tool to acquire Data Collection specialist
the data. If there is not, determine if it would
be appropriate to build/acquire a tool to
automatically retrieve the information


3 Recommend Summarize the findings. Data Collection specialist
what charges to
pursue for
reporting and
potential pricing

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
1 Identify Billable Select Billable Units for each cost pool in IT Accounting Specialist
Units order to support the allocation approach to be
taken

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

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

Guideline
The 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
1 Calculate Unit Using the forecast data (i.e. labour – IT Accounting Specialist
Cost headcount and utilization rate) determine the
Unit Cost
2 Set a Rate If appropriate, add a buffer to the unit cost to IT Accounting Specialist
Structure 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
1 Assign the cost to Using the Cost Pool Rate Structure, map the IT Accounting Specialist
the ADM/Service cost to the appropriate ADM/Service
provided
Guideline
ADM 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 Service


1 Determine the The development of billing rates is based on IT Accounting Specialist
Service Rate the following criteria:
Structure • 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.

Guideline
Consider 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.

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

Guideline
Service 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

Guideline


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

Guideline
Varying 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 Model
1 Complete the Update the Cost Model to include all of the IT Accounting Specialist
Cost Model 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
1 Work with the Using clearly developed cost information, work IT Accounting Specialist
Business Units with the Business Units to explain the charges
to develop a and gain consensus on their acceptance
clear
understanding of Try to foster commitment from the Business
charges that will Units with respect to projects that encompass
be applied multiple modules and benefits the entire
organization but exceeds the funding ability of
any individual Business Unit

2 Determine if a Cost reports are an appropriate vehicle for IT Accounting Specialist
Cost Report communicating charges to the business.
should be They can provide the Business Units with
generated appropriate insight to costs that they can
subsequently influence

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

Guideline
Avoid 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 Standardized formats are an appropriate IT Accounting Specialist
pro-forma vehicle for communicating information since
invoice should the charges are very similar from one Business
be used Unit to the next
4 Determine the The frequency of the billing cycle should be IT Accounting Specialist
frequency that established. Once per month is the
information recommend frequency, however this should be
should be a decision point of the IT organization.
generated and
that chargeback
should be
applied
6 Develop data Develop and document procedures on how to Data Collection specialist
collection collect each required piece of data; if it already
procedures and exists, just state where it is; if it does not exist
templates 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
1 Design the Now that Costing and Chargeback have been Data Administrator
Costing and defined, a storage and retrieval system may
Chargeback need to be defined and designed to store the
database and collected data, and allow the retrieval and use
alternate tools (as of it over a long period of time. Consider the
appropriate) 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
2 Obtain tools Using the decisions made concerning the Data Collection specialist
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 Using the design of the previous task, create Data Collection specialist
and Chargeback the Costing and Chargeback infrastructure
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 Mechanism
1 Assign collection Assign or have the appropriate management Data Collection specialist
responsibilities 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 Channels
1 Assign Assign or have the appropriate management IT Accounting Specialist /
responsibility for chain assign responsibility to one or more LoB Executive /
communicating specific individuals to report the Costing and ADE Executive
results to Chargeback results to the various levels of
management management, stakeholders, and appropriate
staff on a monthly basis
2 Assign Assign or have the appropriate management IT Accounting Specialist /
responsibility for chain assign responsibility to one or more LoB Executive /
communicating specific individuals to report the Costing and ADE Executive
results to the Chargeback results to the development staff
entire staff (as to keep them informed on results and
appropriate) progress being made on a monthly or
quarterly basis

Deliverables
 Assigned individuals to communicate Costing and Chargeback results

Step 6: Finalize and Begin


Step 6.1: Consider A Pilot Activity
1 Decide on a pilot Evaluate the need for a pilot activity to test the Costing and Chargeback
activity feasibility of the Cost Model and associated Program Manager
infrastructure (procedures, collection,
templates, common understanding, tools,
reporting.
2 Perform a pilot Plan the pilot activity by considering where in Implementation Team
activity 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.

Deliverables
 Documented results of the costing and chargeback pilot

Step 6.2: Train Those Responsible For Collecting and Reporting
1 Develop training Develop the appropriate training materials for Costing and Chargeback
materials all the persons that will have a role in Program Manager
collecting, reporting, and using the
Chargeback Model
2 Provide training Schedule the training sessions, then perform Costing and Chargeback
the training sessions for all those that need it Program Manager
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 Program
1 Start the program Decide on a start date when the costing and Costing and Chargeback
chargeback Costing and Chargeback data Program Manager
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 IT Finance Specialist
tracking actual costs at the organization
 Analyze cost recovery
 Analyze variance reports
 Ensure General Ledger feeds are


accurate
 Feed the cost data from GL
3 Control and Audit the IT Accounting process and its Internal Audit
monitor the interface to Finance
Program

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)
1 Collect the Execute the Costing and Chargeback Costing and Chargeback
measurements procedures to collect the Costing and Program Manager
Chargeback data according to the specified
schedule
2 Analyze and Analyze the data, prepare the defined charts, Costing and Chargeback
prepare results graphs, trends, etc. to prepare for reporting the Program Manager
results according to the specified schedule
3 Report results Report the Costing and Chargeback metric Costing and Chargeback
results through the defined communication Program Manager
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

1 Survey usage During each quarter, note the reactions to the Costing and Chargeback
and benefits of Costing and Chargeback program, the Program Manager
the Costing and suggestions for improvement, the
Chargeback implementation problems, and any other
program 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 Present the information obtained in the above Costing and Chargeback
Costing and task to the Costing and Chargeback Sponsor Program Manager


Chargeback and discuss the results; make sure that the
program with following topics are considered for discussion
sponsor 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

1 Evaluate the IT Determine how IT and the Business would use Costing and Chargeback
Planning this information to improve the IT Planning Program Manager
Process process
2 Evaluate the Determine how IT and the Business would use Costing and Chargeback
investment this information to improve the investment Program Manager
process process
3 Evaluate the Determine how IT and the Business would use Costing and Chargeback
Prioritization this information to improve the Project Program Manager
Process Prioritization Process
4 Evaluate the Determine how the IT and the Business would Costing and Chargeback
Portfolio use this information to improve Application Program Manager
Management Portfolio Management
Process

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

Cost 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


Sample Work Product
Collected, analyzed, and communicated monthly measurements

Documented evaluation of the Costing and Chargeback program

Appropriate action plans

Documented evaluation of the Costing and Chargeback program
Appropriate 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 structure
2. 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 8
Service
Headcount
Overhead
Headcount
Service
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 Method
1. 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 method
1. 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 pool
Proposed 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 method
1. Allocate this part of cost to the banding pools by service HC #

Type Mainframe High-end UNIX Middle and Low-End server
server
Billable unit Machine hours Normalized # of Dedicated # of server days
CPU*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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