Figuring out how much to charge business units for IT operating expenses may seem like one of the CIO's most mundane administrative tasks. But with some big changes, it could become a highly strategic function that transforms the way IT and the business work together, according to the CIO Executive Board, a unit of The Corporate Executive Board Co. in Arlington, Va.
Today, IT operating expenses are recouped from the business in one of three ways: usage-based chargeback, which requires detailed cost accounting for hundreds of line items; lump-sum payments based on the business unit's revenue or head count; or a mix of the two.
The problem is that chargeback is too granular and burdensome, while lump-sum payments fail to provide accurate signals to the business about its consumption of IT services, according to Andrew Horne, senior research director at the CIO Executive Board.
Horne said that companies need to reinvent the IT funding model by categorizing IT operations into 12 to 24 "business services" and assigning costs to each one. For example, the IT department would provide -- and charge for -- a menu of business services such as "mergers and acquisitions integration," "desktop support" and "producing market share reports." The services should be described in business terms, such as videoconferencing, rather than IT terms, like network bandwidth.
Why 12 to 24? The number of services must be limited to ensure a manageable level of granularity, Horne said.
Behind the scenes, this model requires something revolutionary: integrating the work of the IT shop's separate applications and infrastructure groups into combined business services. "It's a fundamental change in the IT department," said Shvetank Shah, executive director of The Corporate Executive Board's IT consulting practice.