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The IT Chargeback Journey

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This presentation describes how an IT organization can implement or improve their IT cost chargeback process.

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The IT Chargeback Journey

  1. 1. ITFMA Conference - Pittsburgh The IT Chargeback Journey Pete Hidalgo April 15, 2015
  2. 2. Page 1 Table of contents ► The big picture ► The ITFM and Chargeback Journey ► Chargeback definition ► Benefits ► Key concepts ► Guiding principles ► Model types and maturity ► Automation ► Q & A ► References
  3. 3. Page 2 The big picture… EY IT financial management framework – based on ITIL and leading practices ► Includes core internal FinancialManagement processes: 1. Financial planning/budgeting, analysis, and reporting 2. Asset management – HW and SW 3. Invoice management 4. Supplier/vendor and contract management 5. Purchase request and invoice management 6. Telecom expense management 7. IT service costing and benchmarking 8. IT allocation / showback/chargeback 9. Bill of IT and associated usage reporting EY IT financial management framework ► And accounts forkey externalinterdependent processes 1. Service definition and catalog management 2. Service request fulfillment and demand management 3. Service level management 4. Capacity management 5. Availability management 6. Service asset and configuration management 7. Release and deployment management 8. Service owners / Business Relationship Management 9. Project portfolio management Business strategy/ goals Output/ benefits 1. Cost transparency 2. Consumption efficiency 3. Cost reduction 4. Customer satisfaction
  4. 4. Page 3 Step 1. Step 2. Step 3 Step 4 Step 5 & 6 Continuous The EY ITFM Journey Provides a clear path to support the delivery of cost effective services to the business… Step 1 Current State Assessment Step 2 Service Definition Step 3 Unit Service Costing Step 4 Metrics & Reporting Step 5 Chargeback Model Step 6 Bill of IT  Transparency  Cost efficiency  Customer Satisfaction Today’s Focus
  5. 5. Page 4 The chargeback journey Below is a recent real world example of one company’s journey…
  6. 6. Page 5 The chargeback journey Below is a recent real world example of one company’s journey…
  7. 7. Page 6 What is chargeback? - 6 A process by which an I.T. organization can recover its costs of providing services to its customers
  8. 8. Page 7 Why implement chargeback? ► To understand the true costs of providing IT services ► To educate IT customers on the value of the IT services that are being provided ► As a tool to improve operating efficiencies and lower costs ► To enable customers to manage their own consumption of services and associated costs - 7
  9. 9. Page 8 Benefits of implementing chargeback Significantly outweighs the costs… 1. Reduce spend/costs 2. More effective IT spending 3. Key component of ITIL Financial Management 4. Improve demand & expense forecasting for the IT organization and its customers
  10. 10. Page 9 The chargeback journey Implementing chargeback is an evolutionary process vs. “big bang”… Usage reporting Showback (Usage + $) Chargeback Time Chargeback process
  11. 11. Page 10 Usage Reporting Example Customers need to first understand their consumption and costs before being charged… ► Highest benefit and maturity level is to produce monthly for each service via self-service on an automated platform Automated Example - Apptio Manual Example - Excel
  12. 12. Page 11 Automation Frequency Chargeback automation and frequency To perform more frequent chargebacks increasing levels of automation are needed…
  13. 13. Page 12 Chargeback data requirements To chargeback on a unit cost basis, unit consumption and cost data is needed… Datagranularity Level of effort
  14. 14. Page 13 Chargeback data requirements Data quality must be quantitatively assessed in order to measure improvement… Data quality will determine the maturity level of the desired model…
  15. 15. Page 14 Service definition – first year example Must first define services in order to allocate costs….below is one actual example Portfolios and services can be expanded as process maturity increases… IT services can be initially organized into five portfolios comprised of 20 individual services Site & Business Enablement • On-site support for infrastructure and applications Application Delivery & Support • ADM (Development, maintenance, support and Software of applications) • Infra - Data Center & Connectivity • Infra - Compute / Servers • Infra - Storage & Back-Up • Databases, Java, .NET, tools • Integration Staffing Enablement • Identity and End User Computing • Service desk and support • Conferencing (video, WebEx) • Email & collaboration tools • Telephones • Network connectivity • Mobility Enterprise Support Services • Security Risk Management • Strategy, Architecture, Governance, and PMO • Industry and innovation - TES • BI, Data warehouse • Business Resources, Human Resources New Initiatives • New projects requested from GIS by the business Global Infra Services PMO Security Risk Management IT App Delivery & Support Site Support Strategy, Arch., Governance Finance Human Resources
  16. 16. Page 15 Service definition – first year example Also creates a foundation for the development of a complete service catalog… # Service Name Service Owner Service Description Staffing Enablement 1 Identity and End User Computing TBD Lifecycle management of End-User devices including procurement, imaging & patching, installation of software, identity and access management services, desk-side support and printers. 2 Service desk and support TBD Resolution (incl. management) of service requests, incidents and tickets raised by end-users to the help desk. 3 Conferencing (video, webex) TBD Solutions enabling employees to organize meetings, conferences & other sessions using Telepresence, Webex, video, & enterprise audio conferencing, network based broadcast services, Video@work, and enterprise supported digital signage (facility messaging). 4 Email & collaboration tools TBD Enabling communication and collaboration across the organization through email, messaging, and enterprise collaboration tools. 5 Telephones TBD Telephony services including Call Center, voice mail, extension licensing & fees, softphone (IPC and Jabber) and associated equipment and maintenance (Excludes circuit & toll charges and equipment such as phones sets & headsets installed at sites). 6 Network connectivity TBD Data and voice networks per site that allow secure connectivity across the enterprise (Data Centre related networks costs are captured separately). 7 Mobility TBD Mobile device security and management, mobile application standards, and corporate owned cell phone management/standards. Application Delivery & Support 8 ADM (Development, maintenance, support & Software) TBD Application development, maintenance and support activities for all applications including software purchased from 3rd party vendors. 9 Infrastructure - Data Center & Connectivity TBD Management of Data Centers including equipment, labor involved and network connectivity in providing the service. 10 Infrastructure - Compute / Servers TBD Management of Servers and Operating Systems including equipment and labor involved in providing the service, directly for business applications and other GIS key services (Mainframes, Windows, Linux, Unix). 11 Infrastructure - Storage & Back- Up TBD Management of Storage & Back-Up including equipment and labor involved in providing the service, directly for business applications and other GIS key services (NAS, SAN). 12 Databases, Java, .net, tools TBD Primarily; Database platforms, licenses and the labor associated for DB maintenance (Oracle, MySQL, DB2, SQL Server). Supporting JAVA type tools for ad-hoc support and development. 13 Integration TBD Services related to developing, supporting and maintaining the integration functionality across the multitude of enterprise and local applications.
  17. 17. Page 16 Services and chargeback model progression From high level bundle in year 1 to individual services and per unit charging in year 3… Staff Enablement Service 2015 2016 2017 • Identity and End User Computing • Primarily bundled and allocated by total headcount • allocated by total headcount • Bundled and allocated to the BU’s by the #of assigned PC’s • Standardized methodology • Set-up structure to move to Service Based Costing in 2017 • By # of PC’s per BU • Service desk and support • By ticket-count per BU • Conferencing (audio, video, web) • By # of telepresence locations per BU • Email and collaboration tools • By # of Email accounts per BU • Telephones • By # of extensions per BU • Network connectivity • Direct cost per Site / BU • Mobility • By # of Mobile Devices per BU
  18. 18. Page 17 Guiding principles for model design Consistency Effort Fairness Transparency ► Are IT chargeback methods aligned with cost allocation and profitability measurement used throughout the organization? ► How much effort (e.g., data collection, transformation, calculation, reconciliation, and billing) is appropriate and is it in keeping with the value provided? ► To what degree should chargeback be based on actual consumption versus an estimated allocation? ► What costs should be included/excluded? ► What insight should customers have into how IT manages IT— including which costs are fixed and which are variable? ► What behaviors, if any, should chargeback drive (e.g. reduced consumption, investment in new products, incentives to move users from old technologies, etc.)? Influence Chargeback guiding principles and considerations Consistency Effort Fairness Transparency Influence
  19. 19. Page 18 Chargeback models Not one size fits all… HighImplementation complexity Low High Businessbenefitsandtransparency Resource- based allocations Differentiated service levels and pricing 1. Overhead allocation 2. Flat fee 6. External pricing 7. Value based pricing 4. Incentive based 3. Resource consumption based 5. Service based Service pricing Resourced-Based Allocations distributes costs through allocations or simple consumption estimates Service Pricing measures specific consumption and drives behavior through tiered services and prices (e.g. incentives for off-peak usage) Differentiated Service Levels and Pricing reflects a more market-based approach to cost recovery High
  20. 20. Page 19 Chargeback model details IT chargeback methodology Methodology description 1. Overhead allocation 2. Flat fee 4. Incentive based 5. Service based 6. External pricing 7. Value based pricing 3. Resource consumption based ► IT costs are allocated to LOBs as a corporate overhead cost based on a simple driver not directly related to resource consumption (e.g. revenue, asset balance, etc.) ► Fixed annual cost negotiated with BUs; normally based on a “crude” estimate of resource consumption ► IT charges are manipulated to drive specific behavior (e.g., lower charges to influence use of network or servers during off-peak times) ► IT service charges to BUs are based on consumption of specific activities; quality and availability of services are explicitly defined, service “choice” provided for key products ► IT service fees are based on market (external) prices; products offered are comparable to those available in the marketplace ► IT service fees are based on perceived value delivered to LOBs (e.g., business value created, customer satisfaction, timely delivery of new financial products) ► IT costs are allocated based on specific unit of resource consumed (e.g., number of dedicated servers, network ports, etc.) Cost Awareness Cost Measurement Effort Costsand Complexity Cost Management Effort 0. No chargeback ► IT costs are not charged back = Low = Medium = HighKEY:
  21. 21. Page 20 Chargeback model maturity Used to understand where you are, where you want to go, and to measure progress… High BenefitsandTransparency Low High 2 Flat Fee 3 Consumption Based 4 Incentive Based 5 Service Based 6 External Pricing 7 Value Based Pricing Implementation Complexity 1 Overhead Allocation Current State Target State
  22. 22. Page 21 Chargeback model maturity criteria # Maturity Level Maturity Description 1 Overhead Allocation • IT costs are allocated to Business Partners (BUs) as a corporate overhead cost based on a simple driver not directly related to resource consumption (e.g. revenue, asset balance, etc.) 2 Flat Fee • Fixed annual cost negotiated with BUs; normally based on a “crude” estimate of resource consumption 3 Resource Based Consumption • IT costs are allocated based on specific unit of resource consumed (e.g., number of dedicated servers, network ports, etc.) 4 Incentive Based • IT charges are manipulated to drive specific behavior (e.g., lower charges to influence use of network or servers during off-peak times) 5 Service Based • IT service charges to BUs are based on consumption of specific activities; quality and availability of services are explicitly defined, service “choice” provided for key products 6 External Pricing • IT service fees are based on market (external) prices; products offered are comparable to those available in the marketplace 7 Value Based Pricing • IT service fees are based on perceived value delivered to BUs (e.g., business value created, customer satisfaction, timely delivery of new financial products)
  23. 23. Automation
  24. 24. Page 23 Chargeback model Need to automate to drive and fully realize the benefits of chargeback… Benefits Time
  25. 25. References
  26. 26. Page 25 Recent client success stories Client industry Client need EY value delivered Media and entertainment A large global media conglomerate needed help establishing ITFM processes and creating an Enterprise Technology service catalog for its newly established IT shared services organization ► Designed a comprehensive, business facing IT service catalog that included service performance levels for each service ► Developed a monthly service usage-reporting process and reports for all IT services ► Created an IT-specific chart of accounts to align costs with services ► Built a service-cost model and calculated actual unit service costs ► Designed a service-cost allocation model covering 26 services and seven business divisions Advertising A large global advertising firm needed to assess their ITFM process maturity and develop a detailed plan for improvement ► Determined current and target ITFM maturity levels ► Developed a detailed gap analysis ► Created 16 improvement recommendations ► Designed a comprehensive ITFM data and system-end state architecture ► Provided an executable and prioritized recommendations roadmap Pharmaceutical A large global pharmaceutical company needed to improve IT cost transparency and develop an end- state ITFM data and system architecture ► Assessed the current state of ITFM processes within its Information Technology Shared Services (ITSS) organization ► Developed unit service-cost model and benchmarked to the market, identifying millions in potential annual savings ► Designed ITFM data and system-end state architecture Broadcasting An international television broadcast network needed to address its fragmented ITFM processes, lack of cost transparency, no service definition nor usage reporting, and an ineffective cost allocation process ► Performed a current state cost and operational assessment of existing IT function and ITFM processes ► Designed, developed and supported the launch of a comprehensive IT-service catalog for the newly formed IT shared services organization ► Defined and documented key ITFM processes ► Developed an IT service-cost model ► Identified significant potential reductions in annual IT operating costs
  27. 27. Page 26 Peter Hidalgo, Jr Senior Manager IT Transformation Advisory Services Ernst & Young LLP 5 Times Square New York, NY 10036-6530, United States of America Pete.Hidalgo@ey.com Mobile: 973-223-5616 Education West Point - USMA BS – Engineering Columbia University MBA Certification(s) PMP ITIL Financial Management ► Senior Manager with over 20 years of experience in I.T. Financial Management, Telecom and I.T. infrastructure, Cost Optimization, Program Management, and I.T. Shared Services Transformation. ► Deep industry experience in managing and optimizing I.T. costs. Previous responsibilities included serving as the Global I.T. Financial Manager for a Fortune 100 company, where he managed an annual operating budget of over $100 million. In that role he also developed and implemented an ITIL based service costing and chargeback process, resulting in improved client satisfaction and major, recurring cost savings. ► Currently serves as the I.T. Financial Management Service Leader within Ernst & Young’s IT Advisory practice Relevant experience ► Assisted a Fortune 50 global manufacturing client with redesigning their current IT allocation model and processes for over $1 billion in annual spend ► Advised a Fortune 50 pharmaceutical client with improving their IT financial management processes, cost transparency, data management, chargeback model redesign, service owner framework, and automation ► Advised and assisted a leading media and entertainment company to transform their IT operations into a shared services model encompassing 11 major service domains. Also assisted in the development of a data center strategy, a WAN architecture review, and a detailed IT service cost analysis, to include the development of a service catalog, and a chargeback model. ► Assisted in an IT infrastructure (voice, data, and data center) strategic assessment and financial analysis for a Fortune 500 corporation, which resulted in identifying the strategies to improve network and data center performance and availability, in addition to saving $32M - $53M over three years in IT operating expenses. ► Supported an IT Cost Optimization study for the premium spirits and wine supplier in the U.S., which addressed their telecom and infrastructure spend. Identified annual savings of 10% to 19%. ► Advised in the strategic assessment of the voice and data networks for a Fortune 500 high tech manufacturing firm, which resulted in a new technology direction (VOIP) and Identified over $9M in annual savings. ► Assisted in performing an IT Operations strategic assessment for a Fortune 100 manufacturing corporation, focusing on data center consolidation. Developed data center consolidation and disaster recovery strategies, in addition to Identifying over $5M in annual savings. ► Advised a leading medical device manufacturing company in the evaluation of their outsourced infrastructure service contracts, resulting in overall savings of $5M - $6M, or 35% - 45%. ► Assisted a Fortune 100 consumer staples company with the assessment of their wireless telecom services contracts, resulting in overall savings of $6M - $9M, or 45% - 55%.
  28. 28. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. © 2014 Ernst & Young LLP. All Rights Reserved. 1406-1272833 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

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