Value of an IT Chargeback System - part two

Journal of Bank Cost & Management Accounting, The, 2003 by Quinlan, Terence

This is part three of a three part article on the Value of an IT Chargeback System. Parts one and two were published in Volume 15, Number 3 and cover the IT Survey scope, project overview and purpose, and a detailed explanation of the responses. Part three focuses on summarizing the results in an attempt to create benchmarks.

IT Chargeback Survey Background

During my thirty years in financial management, I do not recall a single article questioning the value of general ledger and transfer pricing systems. They have always been viewed as necessary financial systems for conducting business in order to report organizational expenses and profitability. They are considered requirements for implementing "responsibility accounting", a financial discipline as sacrosanct as net present value analysis of investments. However, when discussions in the literature or office turn to responsibility accounting and transfer pricing for Information Systems (IS), there is occasionally some question about the value of such a system. This system is commonly referred to as the "chargeback" system. The value of chargeback has been questioned in terms of "Is it worth the money?" "Is it an effective (cost control) tool?" "Do we devote too much time and effort towards it?" Chargeback has been criticized for costing too much and not being understandable (and therefore ineffective).

Nowhere in the literature have I ever read what it is specifically that is not understandable, other than the infamous term "EXCP". Nowhere has an author expressed in quantitative terms how much the chargeback process costs and what criterion is used to show that it is "too much". No article has ever given the slightest indication that the author understands the breadth and depth of information that companies acquire from their chargeback systems. Most authors, like many individuals in the IS client community, believe that the only use or value of chargeback is to allocate cost for responsibility accounting or cost control purposes.

To satisfy this void in our industry, I conducted a survey of 213 financial institutions companies in order to shed some light on why there is a different attitude about chargeback systems. Is it valid? Should we do something about it? What can be done? Specifically, the survey attempts to:

* Define "value"

* Understand what value, if any, does chargeback provide

* Recognize the various perceptions of chargeback value within a single company

* Identify quantitative and qualitative evidence that supports or refutes the literature written to date about the value of chargeback

* Provide field research on the value of chargeback for future discussions and more extensive surveys

Who participated in the survey?

The survey results are from a 26-question survey that was mailed to 213 companies. Sixty-seven (67) companies participated in the survey. This was a 31% response rate. Seventy-four percent (74%) of the participants were from four economic sectors-financial institutions (37%), utilities (15%), government (12%), and manufacturing (10%). Participants were mostly from large and medium size IS installations. Thirty-seven percent (37%) of the companies had annual IS budgets exceeding $80 million and 45% had IS budgets of $20-80 million.

Benchmarks for Chargeback Systems

What percentage of IS expenses are intentionally allocated or charged back to customers?

90% of the companies follow a full cost absorption pricing policy in that they attempt to recover 100% of their IS expenses through chargeback. One company charged back less than 65% of their cost and one company charged back more than 100% of their cost.

Which of the following IS functional areas are included in the total IS expenses used for chargeback purposes: centralized operations, distributed processing, data network, voice network, and application programming?

Over 75% of the companies had all five functional areas reflected in their IS expenses.

What is the ratio of your IS expenses as a percentage of corporate revenue or sales?

82% of the companies have IS budgets (expenses) that are less than 5% of corporate revenues. Because IS often comprises a small proportion of total corporate expenses, the need for a complex or detailed chargeback system may be less warranted for cost control purposes and more justified for other purposes, e.g., activity based cost management, benchmarking, decision making, etc.

The ratio of IS expenses to corporate revenue or sales was computed for both cost allocation companies and usage billing companies. (See explanation of each group of companies in part one of this article.) IS expenses may or may not include the expenses for all five of the IS functional areas mentioned in the above question. So the average and median (middle) values of this ratio were computed for all companies and for only companies with all five IS functional areas (5-function companies) reflected in their IS expenses in order to make an apples-to-apples comparison. The results were not significantly different for the two groups (see Tables 1. and 2. below). Also, to avoid distortion caused by companies with abnormally high ratios, the figures were restated to exclude companies with ratios over 10%.