IT Success!: Towards a New Model for Information Technology

7.4. Allocations vs cross-charging

Once you've decided which cost categories are to be borne by the client, you then have to put in place a mechanism for transferring these costs from IT to the business. This can be done through allocations or cross-charging.

7.4.1. Allocations

Allocations take the costs of shared physical resources (usually hardware and infrastructure) and spread them over departments or BUs based on one or more criteria, like head-count, revenue or actual usage. While actual usage is the most objective criteria, it can be taken to extremes and become horrendously expensive and complex in practice, so needs to be entered into with caution. Allocations are usually rolled into BU overhead at the start of the financial year, with a year-end adjustment to take into account actuals.

Besides the challenges of finding transparent and objective criteria – as opposed to a voodoo formula – allocations have the main disadvantage of being relatively invisible to those whose behaviour they are supposed to influence. Because they are buried in annual overhead, they are usually not adequately communicated to the actual application users who make requests for IT products and services – indeed, they might not even be aware that their department is paying for IT. That is why it makes better sense to do cost allocations at as granular a level as possible (ideally down to the departmental and application level), so that the resulting costs have a chance of influencing user behaviour. ...