IT budgets - How to slice the pig.

(From Financial Director)

Byline: Malcolm Wheatley.

Paul Brock, MD of IT at New York-based investment bank Bear Stearns, implemented a new system in the bank last year. Nothing novel about that, you might say. But the system, acquired from Ejasent of Mountain View, California, wasn't meant to help the bank carry out its business. In fact, it had nothing to do with banking, finance or even administration. The system, explains Brock, was intended to ensure that the bank's individual departments were charged for the amount of computer storage their activities consumed.

In the world of IT, it's called chargeback - charging back the cost of IT to the users who drive those costs. Bear Stearns developed the chargeback model in order to manage what its IT expenditure actually delivers. In the process, it has put Brock - and other IT executives like him - on the frontline of a tense tussle between user departments and IT functions over who pays for what.

Basically, chargeback is a form of absorption costing. As such, it's prey to the chief failing of any absorption scheme - deciding the basis of the driver that determines the extent of the absorption, cost by cost.

"The simplest way of doing it is by headcount, where the total cost is divided by the number of users and then split by the number of users in each function," says Brock. The problem, he adds, is that this assumes users make even use of IT resources, which is not the case.

Function heads whose users consume vast amounts of IT resource don't complain, of course. But department heads whose users consume significantly less IT resource than average soon object to the hit to their budget.