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During a recent meeting, a CIO described a possible challenge he encountered in his chargeback process. The “unit prices” he was invoicing to the business units were sometimes higher that the ones proposed by external service providers. This was primarily due to the manner in which the IT expenses were allocated. There were sound reasons for this, and he considered explaining them to the BU leaders. But he experimented with another approach: With the agreement of his CEO (and CFO), he split the amount of the chargeback into two “buckets” and allocated a part of the costs to the corporate level rather than to the BUs.
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A few years ago, when a CIO client developed an IT chargeback system, he was confident that the implemented rules were fair to the business units (BUs). But salespeople from external service providers (ESPs) suggested that BU leaders should bypass the IT organization (ITO) and work directly with them because they would be able to offer better deals.

And indeed, the prices proposed by the ESPs were often cheaper than the unit costs displayed in the internal IT services catalog. BU leaders then began hassling the ITO and corporate executives, arguing that it would be more cost-effective to work directly with ESPs. Fortunately, the CIO was able to explain and to rationalize the “discrepancies” with a little help from his finance and accounting partners.

There are numerous reasons for this situation, and they are instructive to other CIOs attempting to establish chargebacks. The ITO allocated the costs related to the IT strategy, architecture, IT consistency, master data management (MDM), overall security, PMO, audit and a variety of other IT services. These activities and their costs were not included in ESP proposals, since most would continue to be incurred by the ITO after any outsourcing occurred (and thus should be considered and charged back separately).

The CIO decided that these “IT overhead costs” should not be bundled into unit costs, but instead broken out and allocated separately, almost like the G&A (general and administrative) line item in a company’s income statement. Moreover, the CIO explained that ESPs often underestimate some components of their services, such as organizational change management in application development projects. There was also a risk that the ESPs would drive price cuts on a first deal to secure the deal and then increase prices sharply on additional contracts, once they secured a strong commercial position with the company, as some ESPs do.

“I’ve tried to explain why it was not always relevant to compare such prices,” recalls the CIO. “The CEO and the CFO understood perfectly, but it turned out to be tougher with BU leaders.” As John E. Van Decker, Jim Duggan and Jack Heine wrote in a Gartner research note (please see below), “All chargeback mechanisms have detractors.”

So a new chargeback system was designed with the support of the CEO and the CFO. Only the costs strictly related to the delivered service were used to price the chargeback rates; all the other costs were allocated to the corporate level and included in the business expenses.

A communication, based on examples, was aimed at BU leaders to warn them against the “dumping” price strategy of some ESPs. They were informed that such contracts could eventually lead to higher costs.

CIO CALL TO ACTION
To improve the acceptance of the chargeback system and lower the risk of BUs dealing directly with ESPs, CIOs should take the following actions:
• Evaluate the allocation of IT costs and whether they should be incurred directly by BUs or be a shared corporate-level service (that may be allocated differently). This enables better comparisons with ESPs’ unit prices.
• Prepare a communication/PR kit to promote the approach with key stakeholders.
• Work with the CEO and/or the CFO to gain their support on the financial model.
• Communicate to the BUs about the pros and the cons of using ESPs directly, without the help of the ITO.

BOTTOM LINE
Carefully allocating IT costs between corporate and BU budgets, and enabling direct comparisons to ESP pricing, can improve BU chargeback acceptance and fair competition with ESPs trying to sell directly to BUs.

Business Impact:
A transparent IT chargeback system improves both the accuracy of cost computations and the commitment of BU leaders in IT cost control, and ultimately saves time and money.

Additional Insights:
• “IT Chargeback: Simple Models Often Better Reflect End-to-End Business Value,”
Jack Heine, Kurt Potter, 7 May 2009 (Research)
• “Business Application Chargeback 101″
John E. Van Decker, Jim Duggan, Jack Heine, 21 November 2008 (Research)
• Chargeback – How Far Should You Go?” Gartner EXP research team led by Marcus Blosch, Roger Woolfe and Jeremy Grigg, May 2003 (Research)

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During a recent CIO Community event in the Southwest U.S., CIOs gathered to discuss how their organizations use social networking tools. While some organizations had squelched or discouraged use, others embraced these tools for specific or broad uses and were focused on managing the information flow.
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Nine CIOs met in Dallas-Ft. Worth, Texas, to share social networking (SN) trends and learnings. Each CIO described their SN environment, briefly analyzed their initiative’s progress (or lack thereof) and future, and shared ideas and the major influences affecting their choices. The discussion ultimately expanded to include management, security and record-retention/retrieval concerns.

The general Gartner position on SN is that most companies should carefully embrace and support these tools (since trying to stop their use completely is futile) but definitely manage them – establishing rules for appropriate network use (while on company time), content sharing, security/privacy, etc.

Postures Against Social Networking
Numerous commercial and public sector CIOs complained about SN’s negative impact on their internal and external networks, especially where video sharing was prevalent. One CIO of a global aircraft manufacturer said, “The Internet is our international backbone. We shut down all Facebook and MySpace–type applications and freed up 42% of our bandwidth. When we published this, our board asked what was happening before.” An insurance services CIO added, “Our resources are being wasted; 34% of our network is consumed by video and audio, primarily utilized by our people using social networks.” This consumption tainted the organizations’ perceptions of SN’s value.

Some CIOs Straddle the Fence
So while some CIOs are avoiding social networking altogether, others are being selective in their use of the tools. One healthcare CIO said, “We’ve locked down chat due to HIPAA and security concerns. Our best knowledge workers are more effective when allowed to use these tools, but for others it was a waste of time and a risk. I saw improved productivity when we cut them off.” Another CIO of a regional healthcare delivery organization said, “We block 80% of usage. However, management has access. We’re piloting Twitter.”

For Some, It’s a Judgment Call
A CIO from a chemical manufacturing company added, “We labeled closing down social networking as ‘job-saving cost cuts’; by freeing up network bandwidth, we saved significant money.” He added, “Of course, we allow legitimate sites like LinkedIn.” Most CIOs had been asked to opine to peer executives on the legitimacy of some social networking sites, like Facebook, LinkedIn or Twitter.

CIOs Deploy Social Networking Tools for Many Uses
The CIOs in this roundtable are using SN in a number of ways, from improving internal networking and forums to training. Some are even reaching outside their organizations to post upcoming conferences and other activities that will bring visibility to their organizations.

“We are asking all employees to set up profiles in SharePoint,” said a CIO at another aircraft manufacturer. “This is secure and private, and it allows each employee to network within the organization.”

“We put product how-to demos on YouTube. We receive direct customer feedback through this forum, too,” added a chemical manufacturing CIO.

“We’ve created forums within SharePoint, including wikis, so that employees can help each other. One business wiki that really took off was ‘How do I report each type of claim?’” added another CIO. “Even our e-mail environment turned into a sort of internal Facebook through Outlook, with pictures and facts each employee maintains and shares.”

“We’ve deployed internal wikis to allow users to search prior help desk fixes and even improve answers to common problems,” added another commercial CIO.

“We awarded an iTouch to the employee who got the most hits on their business wiki,” remarked another CIO.

“We use Yammer to consolidate e-mail and achieved almost a 10% increase in productivity using e-mail less,” added a public sector CIO. “I haven’t used e-mail in at least a week. We have official channels for HR on LinkedIn. HR first said, ‘What are you doing? We don’t want to do that.’ Now they market to new employees and conduct free background checks through LinkedIn, MySpace, Facebook, YouTube, etc.”

Another CIO said, “As a speaker at conventions, I am asked to update my LinkedIn bio before engagements. They want me to ‘advertise’ to my network that I am speaking at their event.”

CIO CALL TO ACTION
CIOs should do the following:
• Define targeted projects for social networking and tie these efforts to business objectives.
• To work best with public channels, establish rules and manage content, and involve marketing, legal and other business executives.
• Consider alternatives in case some of these “free” tools suddenly become expensive or unavailable.
• Use these SN tools to better understand employees, the functional organizational structure and previously undiscovered bases of power and communication.
• Develop a company policy on social media that addresses appropriate use, record retention and security best practices. In other words, cautiously embrace/support and manage SN sites.

Bottom Line:
Social networking tools offer new approaches and mechanisms for attracting and maintaining relationships with constituent bases (employees, partners, vendors, customers), but they also bring risk and additional expense. Consider successes and failures, as well as cost (e.g., networks) and productivity issues, then target social networking initiatives to fit the organization’s culture and business requirements. Keep an eye on security.

Business Impact:
Social networking services are now being used by many organizations’ employees, customers, vendors and other constituents as a way to keep in touch. Managed and exploited properly (e.g., mined for relevant information), these tools can increase productivity, expand communication, help identify evolving power bases, touch and track customers and otherwise support new growth initiatives.

Additional Insights:

“Mapping Social Networks and Their Impact on the Enterprise’s Business Objectives” (Research)

“Social Software Vendors Jostle for Enterprise Attention” (Research)

“Lessons from Facebook: Five Tips to Help Control Your Content” (Research)

“Recognize the Security Risks of Twitter, Other ‘Consumer’ Tools” (Research)

“Findings: Social Network Analysis Prevents a Critical Loss During a Layoff” (Research)

“The Business Impact of Social Computing on Data Exposure in the Workplace” (Research)

“Establishing Policies for Social Application Participation” (Research)

“Case Study: Social Networking Tool Becomes Essential Workplace Infrastructure at Deloitte” (Case Study)