Adventures with Charge Back And the Value of a Useful Consistent Lie Good afternoon. Welcome to the CMG South West. This is a conversation where, using a real-world example, we will explore our adventures with an information technology charge back system, and the value of a useful consistent lie. === Ben Davies This is a summary of our adventures with chargeback, and the value of "useful consistent lies". Let's start with stating that change back is easy. Trivial even. It is simple math. What is your recovery target divided by the number of items expected to be 'sold'. There you have it. That is it. You are done. So what is a useful consistent lie, and what is its value?? Well it is everything around you and how you understand it. When your understanding is sufficient for the conversation, you use that understanding, that useful consistent lie, within the conversation, and the value of the useful consistent lie is that the conversation can now be conducted with a reasonable degree of mutual understanding. Like this. What time is it, right now? Whatever your answer, it is not the most correct to the exclusion of all others, answer. It IS a useful consistent lie. The time may be 12:18 in the afternoon by my digital watch but you may have said it is quarter after noon, lunchtime, mid day, or any other of a host of answers. If you wish the most correct answer you should ask a physicists and set aside a weekend for the nuance of the 'right answer'. So how do these ideas fit together? In a 30 minute session we attempt to explain that. At the end we expect that you realize charge back is easy, except for the people. But you should try it anyway. 2019/04/07 – Coppell (TX) Ben Davies – ben.davies@moviri.com

AGENDA Movìri at a Glance What is IT Accounting and Chargeback? Confusion comes from a Misunderstanding Useful Consistent Lie Conclusions In the next few minutes we will introduce Movìri Discuss what is IT accounting and Chargeback Try to dispel a Yuge misunderstanding Introduce the idea of a Useful Consistent Lie Present a conclusion or two and open up for questions.

Movìri at a Glance

© 2018 Moviri – CONFIDENTIAL – All Rights Reserved Movìri at a glance Data Mining and Performance Optimization Services and Software Company Founded in 2000 as “Neptuny”, a Politecnico di Milano spin-off Caplan line of business (now TrueSight Capacity Optimization) sold to BMC Software in 2010 and simultaneously rebranded Moviri Incorporated privately held company with Headquarters in Italy Full ownership of Moviri Inc. in the US and Moviri Limited in the UK Two additional lines of business: ContentWise (fully owned) and participation in Cleafy Milan Headquarters Movìri was founded as “Neptuny” with the capacity planning product “Caplan” Which is now TrueSight Capacity Optimization. In 2010 BMC bought the software and some of the people but those that remained became Movìri as the ‘Preferred Consultant’. Movìri is now a global technology company with several lines of business, including ContentWise.tv (User experience and personalization solution for broadcast, cable, satellite, OOT an streaming television. AKA, the interface on your TV channel selection), .Cleafy (a real-time, continuous application monitoring and risk assessment solution), and AKAMAS.io (AI driven full-stack solution for continuous performance optimization). === www.moviri.com www.ContentWise.tv www.Cleafy.com www.AKAMAS.io $ 15 m revenues in 2014 150+ engineers in 2015 H1 60+ customers in Fortune 500 20+ countries covered Boston © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

© 2018 Moviri – CONFIDENTIAL – All Rights Reserved Customers 200+ enterprises have chosen Movìri They are worldwide leading companies in Finance, Media, Telecom, Retail, Manufacturing and Government. More Performance, in more places. Our consultants and engineers are global citizens. Just like your business. Moviri is focused on IT Performance and a growing global customer base is testament to the company’s expertise and capabilities. Enterprise customers choose Moviri because its consultants are world-class experts in making IT faster, more reliable and safer. Movìri – More Performance, in more places More than 200 enterprises have chosen Movìri. They are worldwide leading companies in Finance, Media, Telecom, Retail, Manufacturing, and Government. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

IT Accounting and Chargeback

IT Accounting and Chargeback Cost Identification Cost Identification focuses on achieving cost transparency inside the IT units. Cost Allocation Cost Allocation distributes the costs to the business units. Cost Recovery Cost Recovery actually charges the accounts of the Business Units for their usage of IT services. Accounting IT accounting and chargeback has three relatively simple ‘steps’. First is the accounting bits… >>COST IDENTIFICATION<< focuses on achieving cost transparency inside the IT units. The objective is to identify actual costs for the different IT services, and thus control the efficiency of their provision. The process is mandatory, whether or not the costs are further allocated to the business units >>COST ALLOCATION<< Cost Allocation distributes the costs to the business units. The objective is to enable business and IT managers to control what the money is spent on (e.g. cost share per Business Unit). These steps are being done normally, to one degree or another, and are iterative. At some point they seem mature enough, or there is senior management requirement to make a charge back system of some sort. Show back, shame back, charge back, or whatever it is called. Then the Chargeback bit. >>COST RECOVERY<< actually charges the accounts of the Business Units for their usage of IT services. It is natural to think that the charge back conversation is a continuation of the previous steps, but it is a separate, distinct, unrelated, process. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

The Mission of Chargeback Charge back has nothing to do with finance and everything to do with driving behavior Manipulate Price Drive Behavior Chargeback System Charge back has nothing to do with finance and everything to do with driving behavior. In order to drive this behavior, you make options available at a price. You manipulate the price to influence behavior. Consumers, faced with choices between server types, memory and storage amounts, at a price, are able to select appropriate technology that is adequate for a purpose, and at a known (and hopefully minimized) expense. Manipulating prices can drive behavior. Driving behavior is the purpose of a charge back system. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

How to create a Chargeback Model? The goal of a chargeback system is to determine a recovery target and derive prices of the items for ‘sale’ to achieve the recovery goal. Recovery Target Line Items Line Item Price Recovery Target=∑ (#Items * Items Price) Lets start with information technology charge back is easy. At its most basic, you pick a recovery target pick items that will be used to recover pick a price based on the number of items expected to be sold As a formula you get something like this. Recovery target = ∑ (Line Item * Line Item Price) The goal of any charge back system is to determine a recovery target then determine prices of the items for ‘sale’ to achieve the recovery goal. The hard part is the people. Which we will get to in a minute. ==== http://www.businessdictionary.com/definition/target-return-pricing.html © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

Example of a Chargeback Model Recovery Target IT budget Line Items Employees Line Item Price ? In our example, the goal is to recover $1,000,000 IT budget. After some conversations of which are appropriate proxies for a chargeback, the consensus is to charge by number of employees for each department. The company has 125 employee. Recovery Target =∑(#Items * Items Price) “IT Budget” =∑(# Employees * ?) Here is an example… The charge back mission is to recover one million dollars spent on information technology, and for data I have the counts of: employees, phones, cell phones, desks, offices, desktop computers, etc. to choose from. After some conversation of which are appropriate proxies for a charge back, the consensus is to charge by Employee then each group pays for their number of employees.   If there are 125 employees, $1,000,000/125 = $8,000 per employee. This solution is consistent, transparent, and understandable. There is no expectation that each employee actually costs that amount, but it is understood that it is a ‘good enough’ answer. There are consistent perspectives on the useful consistent lie that each person costs $8,000, and with this, the recovery amount will be collected. Mission accomplished. Until… Some VP decided that he is paying too much, and insists the model change… $1,000,000 = ∑(125 * $8,000) Consistent, Transparent, and Understandable! © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

(More Complex) Example of Chargeback Model Recovery Target IT budget Line Items Multiple Items Line Item Price ? Line Items Inventory Count Target % Line Item Price/yr Extended Cost Desk 143 20% $1,399 $200,000 Phone 15% $1,049 $150,000 Laptop 107 25% $2,336 $250,000 Employees 125 40% $3,200 $400,000 Total. $1,000,000 And comes up with this slightly more complex model. Note the recovery target remains at one million dollars. And each person now only costs $3,200. However, now there are other things that get charged for. Our VP is happy that his people only cost $5,648 instead of $8,000, as none have a laptop. To the extend that this is consistent, transparent, and understandable, the prices for each line item is the useful consistent lie. There is a lot of information to unpack here. === This example can be used to illustrate that now that desks and phones are being counted, the VP that has empty desks with phones ‘is paying too much’ and may wish the model be changed to lower the bill, or remove the empty resources from their responsibilities. If they are removed the cost per each that is able to be sold will go up, all other things on the model being equal. Just a few line items shows that behavior changes vs. just charging for one line item. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

Same Math, Just Completely Different Recovery Target IT budget Line Items Multiple Items Line Item Price ? Line Items Inventory Count Target % Line Item Price/yr Extended Cost Desk 143 20% $139,900 $20,000,000 Phone 15% $104,900 $15,000,000 Laptop 107 25% $233,600 $25,000,000 Employees 125 40% $320,000 $40,000,000 Total. $100,000,000 The math is the same even if the recovery target is 100 times bigger. Here the recovery target is now a hundred million. Now each person is charged $320,000 a year. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

Confusion comes from a Misunderstanding

Confusion from a Misunderstanding “So you are telling me that any employee costs $320,000? No way!” The short answer is – “YES, that is the charge for each employee” The question is one of cost. The answer addresses the amount charged. Confusion comes from a Yuge misunderstanding… “So you are telling me that any employee costs $320,000? No Way!” The short answer is “Yes, that is the charge for each employee.” The longer answer may be… Yes, in the charge back model in place now to recover $100,000,000, using only the counts of desks, phones, laptop computers, and people. The people line is a proxy to recover $320,000 for each employee. The question is ‘employee costs x’ ; The answer addresses the charge for each employee, which is a proxy used to recover a target. The misunderstanding is one of COST vs CHARGE This is where the problems come in for a charge back system. People mis understand the difference between cost and price, people become defensive with their money (even if is just a budget line item). Charge back changes the way decisions are made, changes behavior, changes motivations, power structures, changes politics, changes everything actually. We know how an organization abhors change. The politics of charge back is difficult. The mechanics of charge back is simple. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

© 2018 Moviri – CONFIDENTIAL – All Rights Reserved Cost of Goods Sold COGS is the direct cost attributable to the production of the goods sold in a company Cost of goods sold (COGS) refers to the direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. COST means the cost of goods sold. This is an important internal conversation to identify the constituent costs such that each one can be reviewed to lower overall cost. And therefore the cost of goods sold. Assuming that the costs can be lowered and the price charged can maintained then a higher profit is generated. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

© 2018 Moviri – CONFIDENTIAL – All Rights Reserved Price of Goods Sold PRICE is the amount charged. Price is the amount charged and is completely independent of what the cost of goods and services sold are. In our case we have a recovery target, which may or may not represent the IT budget. We have an inventory of items and services that can be sold. The prices is driven from simple math, and is completely independent of the cost. Prices are manipulated to encourage and discourage choices (behavior), as long as the recovery target is met. Price is the amount charged. And price is completely independent of what the cost of the goods and services sold are. Price is driven from simple math. We have our recovery target, and an inventory of items and service that can be sold. Then we do the math. We can fiddle with the prices to encourage or discourage behavior, which is to say influence choices, as long as the recovery target is met. But more on that later. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

Mitigate the Misunderstanding Cost of Goods and Services Sold Price of Goods and Services Sold The Cost of Goods and Services Sold is the cost attributable to the production of the goods sold in a company. The Price is what is charged to meet a recovery target. When creating a Chargeback Model, you should consider the Recovery Target as your goal. Cost of Good Sold provides virtually zero help with a Chargeback Model To mitigate the misunderstanding First we point out the difference between the “Cost of Goods and Services Sold” conversation, and the “Price of Goods and Services Sold” conversation. Cost of goods and services sold is the costs attributable to the production of the good or service. This is a useful conversation internally to determine where the investments the company has made gets into the product. Raw material, parts, paint, direct labor, etc. In a charge back model, PRICE is what you charge to get to recovery target. If you have 100 things and wish to recover $1000 dollars, the price is $10 each. It matters not one bit that the thing costs 3 cents in plastic, 8 cents in electricity, 18 cents in marketing and 17 cents in shipping. The PRICE is $10 each. To reiterate… Costs of goods and services sold is a separate, unrelated, conversation, and has no place in a charge back model conversation. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

a.k.a. the basis of EVERY conversation, EVER had. EVER. Useful Consistent Lie a.k.a. the basis of EVERY conversation, EVER had. EVER. The Useful Consistent Lie Also known as – the basis of EVERY conversation, EVER had. EVER.

The Value of a Useful Consistent Lie An Useful Consistent Lie is everything around you and how you understand it. When your understanding is sufficient for a conversation, you use that understanding. The value of the useful consistent lie is that the conversation can now be conducted with a reasonable degree of mutual understanding. Try to answer: what time is it, right now? What is a useful consistent lie, and what is its value?? Well it is everything around you and how you understand it. When your understanding is sufficient for a conversation, you use that understanding, that is the useful consistent lie, and the value of the useful consistent lie is that the conversation can now be conducted with a reasonable degree of mutual understanding.   For example, what time is it, right now? Whatever your answer, it is not the most correct answer. It IS a useful consistent lie. The time may be 12:18 in the afternoon by my digital watch, but you may have said it is quarter after noon, lunchtime, mid-day, or any other of a host of answers. To the extent that your understanding moves the conversation along, it is a useful consistent lie. If you wish the most correct answer, you should ask a physicist and set aside a weekend for the nuance of the ‘truth’. And STILL that understanding will ‘only’ be a useful consistent lie. The value of the useful consistent lie is that the conversation can happen with this ‘good enough’, mutual understanding. The closer you look, the more you realize the ‘truth’ is an expensive illusion. Useful consistent lies are all around you. When the mutual understanding breaks down, then a new, “more correct”, useful consistent lie is needed. These are never the EXACT correct answer. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

The Useful Consistent Lie in a Chargeback Model Recovery Target IT budget Line Items Multiple Items Line Item Price ? Line Items Inventory Count Target % Line Item Price/yr Extended Cost Server 12,000 64.8% $27,000 $324,000,000 Storage 150000 25% $833 $125,000,000 Memory 15,000,000 10.2% $3 $51,000,000 SUM 100% $500,000,000 The following example of charge back of information technology goods and services is set up the same way. Instead of desks, phones, laptop computers, and people, as the line items we use servers, storage, and memory.   In this example, we have a recovery goal was 500 million and we have some twelve thousand devices. In this case our cost for a server was 27 thousand dollars. While the numbers are bigger, the method is still the same. The price column IS the useful consistent lie for this model In our Chargeback Model, the Line Item Price is the Useful Consistent Lie © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

Conclusions

© 2018 Moviri – CONFIDENTIAL – All Rights Reserved 4 Key Takeaways Chargeback is EASY, except for the people Cost of Goods Sold vs. Price to Achieve a Chargeback Recovery Target Charge back is all about changing behavior. The model should be consistent, transparent and well understood The Value of Useful Consistent Lies They help the conversation along with a reasonable degree of mutual understanding So! What do you take away from this?? Charge back is EASY – except for the people Cost of goods sold is a completely different conversation than Price to achieve a charge back recovery target The value of a useful consistent lie. They help the conversation along. In the case of the charge back price no one is suggesting that the price represents the cost of the goods or services, just that it is a proxy, a useful consistent lie, to achieve a chargeback recovery target. © 2018 Moviri – CONFIDENTIAL – All Rights Reserved

Q&A

Examples of Useful Consistent Lies… How much is a server? What is your name? What time is it? What is the weather like today? What is your favorite color? How much did that cost? How many minutes in a day? Where is the gathering? How long is a day? Simple answer right? What you think is a lie. A useful consistent lie. https://www.youtube.com/watch?v=IJhgZBn-LHg There are hundreds of examples like this. What is for lunch? (hot dogs, peperoni) Who is in charge here? Useful Consistent lies are specifically used to further the conversation With a ‘correct enough’ understanding for that conversation.