Charging for Services, a la Carte

Welcome to the end of information technology as overhead.

Your CEO wants your department to make a profit—or at least recover all its costs. Now you have to start billing other parts of your company for every service you provide.

“It’s not easy,” says Ron Bradley, executive director of the Corporate Renaissance Group, a provider of management services in Broken Arrow, Okla. “It’s tough.”

First, a technology department that has to charge for its services immediately steps into a new world: the competitive marketplace. Every service it provides has to “beat the market,” as Bradley puts it, on price and quality, or it will lose the business under its own roof.

How do you know where you stand?

First, list all the services you provide to different departments. Use nomenclature just like market players such as IBM, EDS or Accenture. Charge for “application development services,” “compute time” or “e-mail service.”

Next, figure out what each service actually costs.

The tedious part is determining how much time is put each year into an activity, such as code writing. When possible, keep track of time as you go. Then tally hours, monthly and annually.

Where you don’t have precise records, interview yourself, Bradley says. Figure out the total effort involved, and ask yourself what percentage of the overall effort goes into a function such as project management.

After that, each hour, each piece of hardware, each part of communications capacity has to be assigned to a service.

Once you’ve determined the overall cost, on an annual basis, for a given activity, the fun begins. You need to determine what the “unit” will be, on which you will charge customers.

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The chart shows how one company toted up its costs for the activities that went into developing applications for all departments in the company’s last fiscal year. That let it figure out the “unit cost” it should charge going forward, in order to recover its costs. If it wants to make a profit or allow for contingencies, it can raise the price.

There is some leeway for that. IBM, a rival source of computing services, typically wants to earn 30 cents for every $1 of services it provides. So, you have a built-in 30% head start before worrying about whether you’ll lose the business on price.

But you’d still better deliver good service, or price won’t matter. You will get 100% of nothing.