ITFM | Anne Milkovich | 8/16/2013

IT Financial Management Summary

MSU’s IT financial management model needs to change; targeting FY14 to develop a new model, FY15 to
implement.

The Problem
1. Revenue sources are going away:
 Wireless and DHCP eliminate IP address charges as a source of funds
 Charging for disk storage is no longer practical
 Self-service catalog sales eliminate “parts and pieces” markup
 We need site licenses that we can’t easily “sell” and markup as a source of funds
o Individual licensing has high transaction cost
o We can’t demonstrate compliance with license agreements
o Selling creates a financial disincentive to stay current, creating security vulnerability and
operational inefficiency
o Major vendors are changing their licensing models

2. Costs are increasing associated with better IT management practices:

 Global workstation management is needed for security and operational efficiency (LANdesk)
 Back-office systems are needed to manage IT services for improved customer service and
operational efficiency (service management, project management, financial management,
portfolio management, collaboration management)

3. Our current chargeback model is flawed

 We can’t definitively say what services we offer
 We don’t know the cost of delivering those services
 We don’t know if we are delivering the services the university wants
 We don’t know if we are charging for the right services
 We don’t know if we are charging for services the right way
 We have two funding models and are doing them both wrong:
o Central funding with no demand management but low transaction cost
o Chargeback funding with demand management but high transaction cost

Demand management measures and meters consumption of service such that consumption can be
gated and costs can be allocated. Without demand management IT becomes the Department of No
because ungated demand will always exceed supply.

Because we implemented a chargeback model with high transaction cost we think chargeback is bad;
because we implemented central funding with low transaction cost we think central funding is good.
What we need is good demand management with low transaction cost regardless of funding.

There are two models for demand management, either one can have low transaction cost:

 Chargeback reports consumption, allocates and recovers costs and gates consumption through
direct consumer charges.
 Showback reports consumption, allocates and recovers costs through central funding, and gates
consumption through executive accountability.

Page 1 of 2
ITFM | Anne Milkovich | 8/16/2013

The Solution
Implement a sound IT financial management model with low transaction cost and good demand
management.

1. Define the service catalog.

2. Assess the cost of delivering each service.
3. Identify which services the university wants.
4. Decide how to cover the costs of the services with low transaction costs and effective demand
management.

Effective IT financial management has the following characteristics:

 Services are measured and metered in understandable ways, like cell phone or cable TV bills.
 Consumption is reportable.
 “Common good” and infrastructure services are incorporated into customer services or centrally
funded.
 Information security is a cost of doing business and a common good service.
 Service charges do not disincent good behavior or incent bad behavior.
 Costs are allocated and recovered through minimal transactions.

Example
We used to recover network costs by charging for IP addresses. The more people in your department
the more your department consumed network service, metered by the number of IP addresses you
needed. The transaction cost of charging for each IP address was high. Cheap and easy hubs and
network attached devices emerged; charging for IP addresses incentivized attaching hubs. Ubiquitous
wireless access and DHCP arrive, eliminating IP addresses as a one-to-one measure of network
consumption.

How do we gate demand for network consumption and allocate the cost of service to the correct cost of
business with low transaction cost?

A Network Impact fee could be calculated per FTE that includes the cost of maintaining the network,
licensing, hardware, staff time, information security. Total up all the costs of supporting the network
(not easy but doable), divide it by the number of university FTE, and allocate it to each department
based on their FTE.

In the showback model, the network costs would all be centrally funded and an annual report of
consumption and allocated costs would be provided to executives. Pressure from above to control costs
is the demand management method.

In the chargeback model, the network costs would be projected for the fiscal year and the funds or
budget transferred from that department to IT in one transaction. Transfer of funds to cover their cost
of business is the demand management method.

Showback, i.e. a severe scolding, isn’t as effective at gating demand as transfer of funds.

The chargeback model adopted by ITSD a few years ago projects ALL IT costs for the biennium, including
projects, and allocates it to departments. That might be reasonable for common good services
(infrastructure, information security) but probably not practical for consumer services (workstation
support, departmental server hosting) and not as effective as a demand control.

Page 2 of 2