Revenue | Solaris System Management (New Riders Professional Library)

Revenue!

The IT department can also earn revenue by charging individual departments for the services being provided. For example, if a large network is supporting the sales department and the marketing department, then the cost of providing the service can be shared between the two areas. The amount charged to each of the departments would be calculated based on the issues described in the preceding sections, which describe running costs.

Charging for a service is fine until the quality of the service is challenged. Service level agreements challenge the service provider to prove that the consumer is getting value for money. Service level management is discussed in the next chapter, but it is worth mentioning here that, normally, penalties for failing to meet the agreed targets are not financial when dealing internally within a company. This may not be true if an external service provider is charging for the service ”in this case, there may well be a financial penalty for providing a substandard level of service.

Recharge Accounts

A recharge account is like a large bucket where charges are deposited. The charges are the costs for the members of staff working in the department that "owns" the budget. The idea is that these costs are debited from the recharge account, but the department also charges for the services that it provides to other departments. The revenue gained from providing the services reduces the deficit in the recharge account. The objective at the end of the financial year is for the recharge account to be at zero. It will never truly be at zero, but for a $5 million budget, a deficit of up to, say, $500,000 would be possible because the manager should not schedule his staff to be more than 80% utilized. This is to take scheduled and unscheduled absences into account ”after all, no one works every single day of the year. Staff members take leave, get sick, attend training courses, and so on, but they are still paid, and that money comes out of the system manager's budget.

It often doesn't work like that in practice: Many members of staff find that they are more than 100% utilized and must work longer hours. A significant proportion of the manager's time may also be booked to the recharge account if it is not being attributed to project work. This is the management overhead mentioned at the beginning of this chapter.

Chargeback Systems

Some companies operate chargeback systems: Departments within the business charge other departments for the provision of services. Normally, within commercial organizations, a department pays IT a support fee for each system that is to be supported. The system manager must ensure that the total amount charged for the services is sufficient to be able to run the operation ”that is, it should cover his own costs. The system manager will need to set aside additional funding to allow for upgrades and hardware failures. An initial figure for this could be derived using the previous years ' figures as a baseline.

Another method used, particularly in government, is to assign a chargeback rate to a grade ”for example, a system engineer might attract a rate of, say, $400 per day. When the engineer carries out work on a specific project or system, the relevant number of hours are booked to that project code or cost center (see the section "Project Budgets," later in this chapter). Under these circumstances, managers are under greater pressure to ensure that the people working in the department are fully utilized so that the maximum amount can be charged to other departments or projects. If the recharge rate is higher than the actual salary being paid to the employee, the manager can appear to make a profit in the recharge account ”known as over-recovery. A significant over-recovery at the end of the financial year might appear to be very good because it shows the department as highly profitable. This is not necessarily the case, though, because it could mean that the recharge rates are merely unrealistic or that the department is under-resourced and that the staff is being required to work too many hours.

The opposite can occur as well. If an employee is not fully utilized with "bookable" work, then where does he or she book the remaining hours to? The answer is that they get booked to the recharge account. A good example of time being booked to the recharge account is if there is a team meeting. When the cost is not met by charging a department or project, this is known as under-recovery ”that is, the cost of employing the person for that period of time was not recovered. The system manager usually forecasts the under-recovery figure based on the predicted program of work for the coming year. It must be stressed that this figure can be only an estimate because new requirements could be raised, or a predicted project could be cancelled or postponed.

Recharge Forecasts

Several legitimate reasons might explain why the forecast could become less valid as the year progresses. For these reasons, the budget forecast is compared against actual expenditure on a monthly basis, and the forecast should be adjusted up or down based on current performance. The advantage of doing this is that significant overspending (or underspending) can be identified as early as possible so that remedial action can be taken before the end of the financial year. You may have noticed how many companies suddenly start spending on new computers or furniture just before the end of the financial year. It is because underspending has been identified in the budget ”and, as all budget-holders know, if the money isn't spent, even less will be available next year!

Figure 2.4 shows a typical cumulative summary that a system manager might see for a cost center that is under his control. The current date would be sometime in January, and the summary has assumed that actual spending will be the same as the previous month, giving a predicted balance at the end of the year.

Figure 2.4. The Project Is in Trouble if the Actual Spending Continues to Increase.

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Project Budgets

When a chargeback system is in operation, there are associated cost centers and charge codes to which time is booked. This is how the IT department receives payment for the services being provided. Booking time to a code can be thought of as an invoice, billing the customer for the time taken to carry out a function. A budget-holder is normally assigned a cost center code by the finance department. If the manager is responsible for several projects, the budget may be broken down into a number of charge codes, one for each project. Each of the codes is then assigned a proportion of the budget, according to the forecast. The people actually carrying out the work must be careful when completing the timesheets for the week so that the correct number of hours are booked to the correct project cost code. One of the most frequent problems with systems of this kind is that the manager finds hours booked to the code that shouldn't be there. The system manager must manage his budget code(s) accordingly and, on a regular basis, question any dubious entries that he finds.

Another problem that affects this kind of system is that when a job is costed, only the physical action of doing the task is costed; the management overhead, for example, is frequently omitted. As an example, consider the IT section providing an application testing service to the business. Several hundred applications might need to be tested , all of which are to be paid for by the department that uses the application. The IT department bills the relevant project code for each application on a time and materials basis only. The management overhead cost has not been built into the price, nor has the planning effort that has gone into scheduling the applications through the process. This can cause a significant amount of work when deliveries are late, cancelled, or rescheduled. In addition, none of the associated administration has been accounted for, such as the production of a test certificate, troubleshooting, and so on. The system manager is in charge of the section; he manages the resources and yet appears to be working for free.

The objective is to ensure that all relevant costs, not just the obvious ones, are borne in mind when providing a service that is chargeable.

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