So the question is, why have allocations at all? And if we do have them, how do we make them work for IT instead of against it?

Why Have Allocations?

Why do people impose allocations, when they invariably lead to such troubles? The reason generally cited is cost recovery. The corporation wants to associate all costs with the various business units to measure their respective contributions to profits.

From an accounting point of view, this might make sense. It might even make some sense to spend lots of time and money working out a complex formula to try to make the allocations more accurate by relating them to business units' utilization of IT's products and services.

These allocations are not chargebacks or fees for service, where charges result directly from specific purchase decisions. Allocations are high-level formulas that distribute cost pools, and trying to make them accurate is like trying to make a silk purse out of a sow's ear. Nonetheless, to whatever degree of accuracy people wish to pay for, allocations do succeed at the accounting objective of assigning IT costs to business units.

From a governance point of view, however, holding business unit leaders accountable for their bottom lines and then imposing a tax they can't control is begging for a fight. Of course they're going to quibble about costs and attempt to micromanage the CIO. Their bonuses are on the line! Meanwhile, allocations as "taxes" don't encourage either IT or its clients to reduce IT costs or align technology spending with business strategy.

The bottom line so far is that allocations make the accountants happy while costing a lot of effort and creating a lot of controversy, with no positive effect on actual costs or IT alignment.

How can we make something positive out of a mess like that? It takes a mind shift, followed by a change in the mechanics of calculating and managing allocations.

A New Mind-Set

First, the mind shift. The usual way people think about allocations is as a price paid for a bundle of products and services. But despite all the efforts to define SLAs, the exact content of that bundle isn't entirely clear. What's more, business strategies are dynamic, and clients' requirements change during the year. Getting too specific isn't the answer, because it can damage the IT organization's agility and alignment.

Instead, think about an allocation in an entirely different way: as a prepaid account—money put on deposit with IT at the beginning of the year in order to buy products and services throughout the year.