by CIO Staff

Misused Chargeback Can Increase I.T. Spending

Mar 01, 20033 mins

Chargeback can be improperly applied, with disastrous results. A faulty chargeback system led to outrageous IT costs at USAA, a $10 billion financial services company in San Antonio that serves U.S. military personnel and their families. The experience with chargeback contributed to the company’s decision to split the IT function into a standalone business unit, says Steve Yates, who in most other businesses would go by the title of CIO, but instead is styled as the president and CEO of USAA’s Information Technology, an entity legally separate from the parent company.

A simplistic application of chargeback, recalls Yates, had led USAA into a high-cost death spiral by the time he arrived in 1999. Directly linked to divisional revenue, the cost allotments bore no fixed relation to IT usage. And with charges set at the beginning of each fiscal year, no adjustments were made in the event that divisional usage came in under budget or that planned expenditures weren’t made. The result, he says, was a chargeback system that produced the wrong kind of behavior. “IT costs kept climbing?it was a kind of creeping socialism, with people saying, Hey, I’m being taxed for it, so I’ll have more of it. Year after year, IT costs would ratchet upwards,” Yates says. By the end, IT expenditure was growing four times faster than company revenue, a rate that was clearly unsustainable.

Prior to Yates’s appointment, a decision had already been made to move away from chargeback and instead to adopt a kind of “internal outsourcing” model, where divisional charges were more directly linked to costs?meaning that the business units effectively outsourced IT to the IT function, but on a pay-as-you-go basis, buying the functionality they needed and no more. But things went from bad to worse in Yates’s first year. Inaccurate assumptions about utilization rates, unexpected indirect costs and wildly uneven programming requirements over the calendar year led to a sea of red ink?and red faces, as Yates and his equally new CEO scrambled to first explain what had gone wrong and then prevent it from ever happening again.

Yates has since brought IT costs under control. Horror stories of roomfuls of junked PCs (still on lease and still on maintenance) at locations across the United States are now a distant memory, IT headcount has dropped from 3,800 to 2,700, and overall IT spending as a percentage of revenue has fallen by 3.5 percent since 1999, Yates says. He is left with an appreciation for the power of chargeback to change behavior?but not always in the manner intended.