There is a lot of turmoil with the transfer pricing (chargebacks) in my company. Being that we are in a responsibility accounting model and the commercial and internal IT department is a cost center, we seem to be somewhat limited in the flexibility of our chargeback method. I did read an excellent article from Management Accounting Quarterly describing an activity based costing model which would be a more effective method for us. I will preface this by saying that a change to a profit center may be the easiest way to make this idea work. Currently, we over-recover, but that recovery is not been seen as “real money” that can be spent and it does not transfer from one year’s budget to another.
Additionally, there are some practices that I see from hardware(OEMs) and software vendors that the company should put into practice. We have applications that continue to reside on equipment that is end of life or end of service life. All during the periods of end of life, the cost of maintenance is going up significantly. The vendors don’t want to support the hardware and software, so you pay dearly until they no longer want to support it all. Why can’t our IT department take the same stance? Once hardware or software reaches the point of unsupportable (end of service life) we still have applications deployed on it. From a recharge perspective, the IT department has not put enough pressure (in this case financial) on the business unit to evacuate the equipment. Priorities would change if the BUs would start seeing absorbent cost increases to their P&L besides the increases in maintenance costs. I’m not even going into the risk management issues of being on equipment that isn’t being updated and could be exposed to security issues due to the lack of upgrades to the software.
I once did some side work for an independent contractor. He once told me of a customer that was such a pain to manage that every time they called, he would continue to raise his hourly rate. He hoped that they would think the amount was too crazy to pay and would leave him alone. I’m not sure they ever went away. However, I don’t think he thought they were over a barrel and wanted to fleece them. I think he just wanted them to go away. So, I don’t propose we raise chargebacks to the point the BUs want to go outside our own company, but I think adopting the OEM approach to support would be appropriate. It’s the general carrot and the stick approach. The IT department must define what the preferred paths and behaviors are for the BUs and then making it “unattractive” to want to do it any other way. I think this model will work for more than just chargebacks. It can work for their selections of development software and technologies and equipment that these solutions can run on.
The key to making this successful is to define the path well. If it isn’t, I am afraid the IT department will discover the business end of the law of unintended consequences.
