1. NC Shared Services Funding Model Evolution North Carolina Office of Information Technology Services

2. Agenda  Background  Objectives of NC Rate Transformation  Approach  Baseline Budget  Cost Methodology  Keys to Implementation  Future Phases OFFICE OF INFORMATION TECHNOLOGY SERVICES2 3/12/15

3. Background ReferenceSummary of Legislation § 147-33.82OITS shall submit rates to Ofc of State Budget & Mgmt § 147-33.83OITS may establish shared services and charge for them § 147-33.87Ofc of State Budget & Mgmt and OITS establish method to budget and account for IT SB 744 – 7.2(c) Transparent rates, with report due Oct 1, 2014 SB 744 – 7.2 (c1) Establish rates for Criminal Justice System HB 950 - 6A.8(b) Rates: setting according to industry standards, apply overhead consistently  NC technology services are provided via shared services through the Office of Information Technology Services (OITS) and 3 rd party vendors  NC OITS rates had been frozen for three years because of untraceable methodology and numbers OFFICE OF INFORMATION TECHNOLOGY SERVICES3 3/12/15 OITS State Chief Information Officer Was funded through overhead allocation on Shared Services Shared Services Team Funded 100% by chargeback (net-zero cost recovery) Statewide Team Funded 100% by appropriation Administration and Finance Team Was funded by a combination appropriation and shared services (overhead allocation)

4. Objectives of NC Rates Transformation  Propose any recommended changes in funding methods  Create an updated rate-setting methodology that:  Is consistent and easily understandable  Creates more transparent budget and rates  Simplifies the process  Removes intra-agency cross billing  Provides clear cost allocations  Validates and updated rates  Ensures cost recovery & funding of IT priorities  Identifies operational areas for business process review and improvement OFFICE OF INFORMATION TECHNOLOGY SERVICES4 "SECTION 7.2.(c) Rate Setting. – By October 31, 2013, October 31, 2014, the State Chief Information Officer shall establish consistent, fully transparent, easily understandable rates that reflect industry standards for each service for which any agency is charged. 3/12/15

5. Third-Party Validation  GT associates helped unravel the areas of confusion:  Personnel were accounted for across multiple cost centers/services  Rates calculations were circular (Server costs depend on e-mail rates; e-mail costs depend on server rates)  NCAS is not designed for cost basis accounting  Inconsistent application/tracking of funds for IT Facilities and Equipment (ITF&E) expenses  Inconsistent application of rates to consumers  Cost centers included in their budgets “intra- agency cross charges,” which created complexity and confusion OFFICE OF INFORMATION TECHNOLOGY SERVICES5 OSBM and OITS co-sponsored for third-party validation of rates Internal cross- billing Provisioning teams split across multiple cost centers Multiple intra-fund overhead spreads Admin overhead allocations ITF&E costs Cross-budgeting 3/12/15

6. Continue to Streamlin e Service Catalog Update ITF&E plans, budgets, and rates model Separate Core IT Costs and Recovery methods Set Rates and Fees Recover Cost Organize around services, not technologi es Update ITF&E plans and budgets Update cost centers and recovery model Set Rates and Fees Recover Cost Phased Approach to Get Well OFFICE OF INFORMATION TECHNOLOGY SERVICES6 Streamlin e Service Catalog Develop True Baseline Budget Develop Cost Methodol ogy Set Rates and Fees Recover Cost  First zero-based budget in recent past  Service Catalog reductions/improvements  Created funds to track personnel previously split among many cost centers  Aligned with IT Restructuring Effort PHASE 2 (TBD)  Aligned with ERP Implementation PHASE 3 (TBD) Phase 0 PHASE 1 (for FY15/16)  Streamlined rate categories where able  Separated SCIO operations support costs and identify funding options  Re-established baseline budget, eliminate cross charges, capture costs executed, and conduct ITF&E planning  Updated Rates 3/12/15

7. Service Catalog Improvements OFFICE OF INFORMATION TECHNOLOGY SERVICES7 Continued efforts to improve service catalog Phase 1 (FY15-17) Streamlin e Service Catalog Develop True Baseline Budget Develop Cost Methodology Set Rates and Fees Recover Cost  Service catalog improvements are continual as we improve business processes, modernize equipment, and remove unused service codes  All Service Catalog changes affect billing systems for telecom and/or computing services as well as account tracking and budgeting  Moving towards customer-facing services (Phase II and III) will completely revamp the service catalog  Telephony and voice are largely pass-through and consistent year-over-year; left mostly as-is for Phase I 3/12/15

8. Variables to accuracy: Hardware & Software Maintenance Contract renegotiations Price inflation Turnover of personnel Baseline Budget  Worked with agencies to verify as-is consumer base and potential demand changes  Worked to identify “internal consumption” between services  Verified and documented as-is resources and potential changes for FY15-17  Identified the clear “cost of doing business” by removing intra- agency cross-charges and clarifying operational budgets  Captured and validated overhead costs  Provided new vision and plan for ITF&E funding OFFICE OF INFORMATION TECHNOLOGY SERVICES8 Separated budgeting and cost recovery process Phase 1 (FY15-17) Streamline Service Catalog Develop True Baseline Budget Develop Cost Methodology Set Rates and Fees Recover Cost HAZARDS! ! 3/12/15

9. Cost Methodology  Costs budgeted and communicated in five (5) distinct areas (below)  Options included Appropriation, Subscription Rate, Allocated across services via causal driver(s), rates (fee-for-service) OFFICE OF INFORMATION TECHNOLOGY SERVICES9 Shared Services Direct Support (Help Desk, etc.) – Spread across rates via causal drivers Recovering Services – developed rates for cost recovery OITS Support Functions (HR, Finance, Legal, etc.) – Agency Subscription (incl. OITS) SCIO and Direct Staff - Appropriated ITF&E Costs – created a spend plan and refurbish plan Phase 1 (FY15-17) Streamline Service Catalog Develop True Baseline Budget Develop Cost Methodology Set Rates and Fees Recover Cost 3/12/15

10. Allocation Methodology OFFICE OF INFORMATION TECHNOLOGY SERVICES10 3/12/15

11. Cost Stack Example  The cost of providing each service is now represented by a “cost stack” of all allocations and distributed costs that provide the service  Helps identify the true costs associated with a service and identify areas that require more specific analysis  All rates calculated on the cost stack vs. external demand OFFICE OF INFORMATION TECHNOLOGY SERVICES11 3/12/15

12. Keys to Implementation of Phase I and Next Steps  Reviewed legacy Memoranda of Understanding (MOUs) with agencies that paid for services outside of the current rate structure  Identified key demand drivers and defendable allocation methodologies as keys to rates setting  Secured agreement on how to deal with ITF&E purchases and funding  Will update service catalog to establish new services and cost centers for FY15-17 (Affects billing systems)  Through the process, identified areas of concern and areas that require further operational and strategic review OFFICE OF INFORMATION TECHNOLOGY SERVICES12 3/12/15

13. Future Phase II  Better define processes, tools and governance models  Refine sophisticated cost model to allocate accurate costs to services  Fully implement activity-based cost modeling capabilities to automate the administration of the cost model  Separate Core IT costs and recovery methods OFFICE OF INFORMATION TECHNOLOGY SERVICES13 Mature capability that reflects the state’s core IT costs Phase 2 (Aligned with IT Restructuring) Continue to Streamline Service Catalog Update ITF&E plans, budgets, and rates model Separate Core IT Costs and Recovery methods Set Rates and Fees Recover Cost 3/12/15

14. Future Phase III  Redefine Shared Services Division catalog centered around customer-facing services, not technologies  Moves SSD towards a service consumption model  Consumers pay for a service, not a collection of technologies  Should integrate with ERP, cost allocation, and budgeting systems OFFICE OF INFORMATION TECHNOLOGY SERVICES14 Fully mature, integrated capability that reflects offerings and bundles Phase 3 (aligned with ERP Implementation) Organize around services, not technologies Update ITF&E plans and budgets Update cost centers and recovery model Set Rates and Fees Recover Cost 3/12/15

15. Questions?? OFFICE OF INFORMATION TECHNOLOGY SERVICES15 3/12/15