When It Comes to Allocating IT Costs

TECHNOLOGY
,
s
t
s
o
C
T
I
g
in
t
a
c
o
l
l
A
o
t
omes
When It C
by Tom Babington
D
oes your city’s finance director refer to the annual
budget preparation process as “March Madness”?
There are plenty of reasons for him or her to feel that
way. One of them just might be the information technology
(IT) cost-allocation program.
After a few bleak months at the beginning of each year,
those of us who are not finance directors begin looking
forward to Florida’s popular springtime events – such as
Bike Week, arts festivals, spring training baseball and the
first visit to the beach.
Finance directors miss all of that.
Many years ago, I asked, “So what’s the big deal?” We
do budgets every year. Each department figures out what
it wants to spend, enters it into a Wilson-Jones columnar
pad, photocopies it and walks it down the hall to Finance.
Easy as pie.
As I eventually learned, there is a lot more going on than
that. It’s not actually about the expenditures – it’s about the
revenue. And at the current and projected levels of revenue
for local governments, we just might have to reach for that
columnar pad again. (And yes, they are still available.)
The IT Value Proposition
One of the issues that arises during budget preparation is
the allocation of IT costs – the practice of determining the
IT costs attributable to individual departments and those
that are shared by all departments and then assigning the
costs to departmental budgets as a line item in the annual
budget. To charge or not to charge: That is the question.
A survey of public-sector organizations that included state
and federal agencies found that at any one time, 50 percent
of organizations allocated IT costs and sought reimbursement or chargeback, while 50 percent did not. The survey
also noted that 15 percent of each group was either thinking of instituting allocation and chargeback or thinking of
ending it.
The information and experience to be gained through a
cost-allocation program can lead to a new, more informed
approach to the governance of strategic IT expenditures and
investments. Implementing cost allocation can drive the IT
department to measure service delivery in the context of
unit cost performance, rather than by total budget dollars,
thus creating benchmarking opportunities for continuous
Continued on page 34.
PHOTO©ISTOCKPHOTO.COM
Quality Cities — March/April 2010 29
Continued from page 29.
improvement efforts. Cities that choose to allocate IT costs
tend to have a more precise understanding of the cost of
technology and a greater appreciation for its value in enabling and supporting the business needs of the city.
It has long been recognized that “when the cost is zero,
the demand is infinite.” However, IT support is never, ever
free. Cost allocation drives organizational behaviors in
terms of the volume, frequency, urgency and absolute need
for certain services or capabilities. Finally, cost allocation
allows a city to collect the appropriate level of contributions
from enterprise-funded departments more definitively and
accurately, thereby creating the potential opportunity to
reduce the level of appropriation from the general fund.
IT as a Business
At the local level, cost allocation is rare, not because of the
expenditures, but because of the
revenue. To grow and sustain IT
support, cities and counties depend
heavily on the general fund.
However, when additions and alternatives to the general
fund are present,
the allocation of IT
costs becomes attractive. Beyond the general
fund, cities may have access
to contributions from their
utility (if they have one); publicsafety Municipal Services Taxing
Units (MSTUs); telecommunications services taxes (where applicable);
various grants; lease payments for shared
use of antenna towers, data centers or radio
transmission sites; the licensing of city-developed software;
and reimbursement for IT services or fiber-based network
access fees from other municipalities.
For someone who wants to run local-government IT like a
business, this is how the game is supposed to be played. The
management of a cost-allocation program requires a proactive commitment to the strategy. The management function
requires an understanding of the simultaneous nuances of
not only internal supply and demand but also of forecasting
the demand on which future budgets will be based.
The same applies to the potential revenue from the
sources identified above. To know that such revenue is there
today is one thing, but the ability to predict that it will be
there at the required levels two years from now borders on
alchemy. Forecasting multiyear revenue streams requires
an understanding of the ebb and flow of the economics
affecting the markets occupied by each potential customer.
The implementation of cost-allocation practices is not
merely a transactional task. It is a transformational program,
34 Florida League of Cities
and it requires a well-defined strategy. Business drivers for
such a strategy include the financial objectives of the costallocation program, the behavioral expectations relative
to the internal consumers (departments), the simplicity of
methods and tools for collecting the cost data and, most
importantly, the ongoing account management practices
required to support and sustain the business of the program.
Account Management
The account management
practices are formidable. They include
t h e d e v e l o pment of a reasonable, repeatable and
transparent
formula for
calculating
the charges
and setting and
managing credible service rates;
the use of depreciation, amortization and annual
credit adjustments;
the need for a cash
balance brought
forward each fiscal
year; the advantages
and disadvantages of
bundling or unbundling
E
service
charges; and the net
OHD
R
A
AND
/AM
impact
on
the total disburse.COM
O
T
O
KPH
TOC
ment
of
shared
service
charges should
O©IS
T
O
PH
contributors choose to opt out of a shared charge
by ceasing to use the service, by significantly decreasing the
volume of service they consume, or by acquiring the service
from an alternate source.
In addition, the account management function monitors
product and service life cycle value, customer satisfaction,
internal forces that influence rate stability, and the diverse
levels of maturity demonstrated by consumers as they adapt
to the IT services market within the “IT economy” of the
city. (Who knew there was such a thing?)
Cost-allocation programs always start as a monopoly.
The economic ground rules must be known and their dynamics anticipated from the beginning – anticipated like
the return of spring training, the first visit to the beach,
and the seasonal streaks across the forehead of your city’s
finance director.
Tom Babington is a consultant specializing in local-government IT management strategies. He serves as a consultant
in residence for the Florida League of Cities. Babington can
be reached at [email protected].