1. CNJohnson & Associates, Inc. 2010 An Overview of Chargeback Best Practices

2. CNJohnson & Associates, Inc. 2010 2 Chargeback – Why do we do it? Organizational profitability Product profitability Cost allocations Just because – we have always done it! ??

3. CNJohnson & Associates, Inc. 2010 3 Why do we do it? Control cost Zero-base Equitable Competitive Manage demand Benchmark Product costing – pricing Customer satisfaction

4. CNJohnson & Associates, Inc. 2010 4 How do we define successful chargeback? No one complains Everyone complains There is measurable cost savings There is measurable cost avoidance

5. CNJohnson & Associates, Inc. 2010 5 How do we define successful chargeback? Defensible Passes audit Recoup costs Accounts for growth Understandable Flexible Competitive Simple

6. CNJohnson & Associates, Inc. 2010 6 Chargeback – What has not worked? Allocations were too simple Allocations were too complex Allocations were too high in the organization It was allocations, and not controllable by those charged Financial entries with no information about charges Invoices or reports were too technical

7. CNJohnson & Associates, Inc. 2010 7 Chargeback – What has worked? Charges based upon resources used Charges based on technical resources Charges based on business oriented metrics Charges to those who could make changes

8. CNJohnson & Associates, Inc. 2010 8 Chargeback Best Practices – Myth or Possibility? Is chargeback a quest for the impossible? Can chargeback change organizational behavior to really make a difference?

9. CNJohnson & Associates, Inc. 2010 9 Let’s Build a Best Practices Chargeback System What do we need first? What’s second, third, etc?

10. CNJohnson & Associates, Inc. 2010 10 High level management support –Technical – CIO –Financial – CFO

11. CNJohnson & Associates, Inc. 2010 11 Chargeback Philosophy – Why? What is the vision of chargeback? What is the mission of chargeback? What are the measurable objectives?

12. CNJohnson & Associates, Inc. 2010 12 Chargeback Best Practices Characteristics Equitable. Repeatable and Accurate. Understandable. Controllable or Predictable. Economical

13. CNJohnson & Associates, Inc. 2010 13 Equitable Fair to all customers. One customer is not subsidizing the cost of another customer. The customer pays for the services they consume or the capacity they request. Use activity-based costing methodology.

14. CNJohnson & Associates, Inc. 2010 14 Repeatable and Accurate It should not matter when (time of day or day of the month) the job or activity is performed. The same volume of work should cost the same each month. Assuming the same input, it should consume the same resources each time.

15. CNJohnson & Associates, Inc. 2010 15 Understandable The customer must understand the chargeback process and methodology. IT must understand the chargeback process and methodology. They both must know what is being charged. What is included in the charges.

16. CNJohnson & Associates, Inc. 2010 16 Controllable or Predictable The customer must have the ability to control or predict the cost of performing a particular activity. If the customer processes more transactions, the cost should increase. If the customer reduces activities, the cost should decrease.

17. CNJohnson & Associates, Inc. 2010 17 Economical The system itself must be relatively inexpensive to run, including: –Collecting data. –Processing. –Reporting on the information. –Resources required Hardware Software Staff

18. CNJohnson & Associates, Inc. 2010 18 What are the benefits? Short-term Long-term financial goals – break-even or profit?

19. CNJohnson & Associates, Inc. 2010 19 Overall cost of IT Understanding what IT really costs Managing the cost of IT

20. CNJohnson & Associates, Inc. 2010 20 Chargeback – What? Who? When? How? What resources do we charge? What costs do we charge? Who do we charge? When do we charge? How do we charge?

21. CNJohnson & Associates, Inc. 2010 21 What resources do we chargeback? Resources with significant or material costs Resources that can be measured effectively –Easy to collect volumes –Cost effective to collect volumes

22. CNJohnson & Associates, Inc. 2010 22 What costs do we charge? Infrastructure only Mainframe Distributed – dedicated / shared Data communications Voice communications Programming development Total IT

23. CNJohnson & Associates, Inc. 2010 23 What type of costs? Fixed costs – when? Variable costs (rates) – when? Mixed – both?

24. CNJohnson & Associates, Inc. 2010 24 How do we charge? Simple allocation Journal entries Invoices – memo only Invoices – entries to financial reports

25. CNJohnson & Associates, Inc. 2010 25 Who do we charge? At what level in the organization? –Cost center / department / division –Product –Business unit

26. CNJohnson & Associates, Inc. 2010 26 When do we charge? Monthly, quarterly, annual Rate changes Adjustments – quarterly, year end, or ever

27. CNJohnson & Associates, Inc. 2010 27 Information Provided Strictly financial Customer IT management Corporate management

28. CNJohnson & Associates, Inc. 2010 28 Type of Process Quick and dirty Slow and accurate Quick and accurate

29. CNJohnson & Associates, Inc. 2010 29 What is the cost of chargeback? Implementation Operational

30. CNJohnson & Associates, Inc. 2010 30 Chargeback Implementation Project Charter Plan Budget Stakeholders Team

31. CNJohnson & Associates, Inc. 2010 31 Chargeback Software Characteristics Software System configuration Reporting Database Application

32. CNJohnson & Associates, Inc. 2010 32 Software Cost of software Ease of implementation Cost of implementation – Consulting resources –Internal staff resources

33. CNJohnson & Associates, Inc. 2010 33 System configuration Data collection –Mainframe –Distributed –Centralization of data (application server) Application Database

34. CNJohnson & Associates, Inc. 2010 34 Reporting –Web-based –Drill down to details – job, project, user, etc. –Reporting security by business unit or user –Reporting user guide / training

35. CNJohnson & Associates, Inc. 2010 35 Database Comprehensive relational database Optional database versions

36. CNJohnson & Associates, Inc. 2010 36 Application Easy to use –Intuitive, easy process flow Easy maintenance –Customers –Rates –Users Administrators Reporting

37. CNJohnson & Associates, Inc. 2010 37 Chargeback Operations Data collection Application processing Reporting Staff requirements

38. CNJohnson & Associates, Inc. 2010 38 Data Collection –Daily Automated data loading Monitoring – errors / corrections –Monthly Automated data loading Manual data loading Monitoring – errors / corrections

39. CNJohnson & Associates, Inc. 2010 39 Application Processing Maintenance for updating –Customers –Rates –Report Users

40. CNJohnson & Associates, Inc. 2010 40 Reporting Standard reports Custom reports User read-only access to database

41. CNJohnson & Associates, Inc. 2010 41 Staff Requirements Technical Financial Administrative

42. CNJohnson & Associates, Inc. 2010 42 Technical Skills –Mainframe –Distributed –Application –Web –Reports

43. CNJohnson & Associates, Inc. 2010 43 Financial Financial analysis Support for data input Results monitoring

44. CNJohnson & Associates, Inc. 2010 44 Administrator Finance system administrator –Monthly processing monitor –Customer questions

45. CNJohnson & Associates, Inc. 2010 45 Total Cost of Chargeback Software maintenance Hardware resources Staff resources

46. CNJohnson & Associates, Inc. 2010 46 Summary Slide Chargeback – Why do we do it? How do we define successful chargeback? Chargeback – What has not worked? Chargeback – What has worked? Chargeback Best Practices – Myth or Possibility?

47. CNJohnson & Associates, Inc. 2010 47 Summary Slide (cont.) Let’s Build a Best Practices Chargeback System –High level management support –Chargeback Philosophy – Why? Best Practices Chargeback System –High level management support –Chargeback Philosophy – Why?

48. CNJohnson & Associates, Inc. 2010 48 Summary Slide (cont.) Chargeback Best Practices Characteristics –Equitable –Repeatable and Accurate –Understandable –Controllable or Predictable –Economical

49. CNJohnson & Associates, Inc. 2010 49 Summary Slide (cont.) Chargeback benefits? Overall cost of IT Chargeback – What? Who? When? How? –What resources do we chargeback? –What costs do we charge? –What type of costs? –How do we charge? –Who do we charge? –When do we charge?

50. CNJohnson & Associates, Inc. 2010 50 Summary Slide (cont.) Information Provided Type of Process What is the cost of chargeback? Chargeback Implementation Project

51. CNJohnson & Associates, Inc. 2010 51 Summary Slide (cont.) Chargeback Software Characteristics –Software –System configuration –Reporting –Database –Application Chargeback Operations Data Collection

52. CNJohnson & Associates, Inc. 2010 52 Summary Slide (cont.) Staff Requirements –Technical Skills –Financial –Administrator Total Cost of Chargeback What Have We Missed?

53. CNJohnson & Associates, Inc. 2010 53 Questions / Comments

54. CNJohnson & Associates, Inc. 2010 54 CNJohnson & Associates, Inc. 11433 Buttemer Road Phelan, CA 92371 760-868-2080 Voice 760-269-3150 FAX Charlie CNJohnson.com http://www.CNJohnson.com 2010 2010 All rights reserved. This presentation may not be duplicated in any form without the expressed written consent of the author. Contact Information