Fund Your Network the Right Way

How would you feel if the phone company charged you for wiring your house, and then claimed to own the in-premises wiring and charged you a service fee for its use?

More by N. Dean Meyer

How to Fund IT Innovation

The Secret to Successful Project Teams

“Not fair!” you’d say.

But this is exactly what some IT departments do. They demand funding from clients to wire new buildings, to augment the wiring in existing buildings, and to install wireless access. Then IT claims to own the entire network and charges clients for the connectivity! Naturally, clients get upset. They feel they’re being double-charged, even if the calculations can show that’s not true.

Beyond this, clients demand control over their spending. In our market economy, nobody tells you that you have to buy something you don’t want. Thus, it would be natural to assume that if clients are asked to pay for any portion of the IT infrastructure, they have a right to decide what to buy. Controversy arises when IT wants to change the network and clients say no, or when clients want to use a different technology than what IT proposes. If IT forces them to buy things they don’t want—under the guise of “policy” or “technical imperatives”—then clients feel they’ve lost control of their money and resentment is inevitable.

Furthermore, we’re accustomed to a simple rule: If you paid for something, you own it and have every right to control it. So when clients fund infrastructure, they have every right to feel they “own” the assets they paid for. But this assumption undermines IT’s ability to manage an enterprise network.

When it comes to building wiring, there’s even more confusion. Business units are tenants in buildings owned by a corporate facilities department. If clients pay for the wiring and then move, does the next tenant have to reimburse them? Or does the facilities group pay for and own the wiring—in which case does it decide what kind of network to put in?

When I found such confusion within a state government’s IT department, I thought it was an isolated case. But then I found the same controversy within a university’s IT department, and again within a corporate IT department. When I asked around, I found confusion about who pays for network infrastructure to be commonplace—and worthy of a column to sort it out.

Why Ownership of Infrastructure Is Confusing

To begin, let’s consider the challenge from the viewpoint of the IT department. IT needs funding for the one-time costs of installing building wiring and wireless access. Then it needs funding for the ongoing operational costs of the network.

Whether the IT department charges clients directly, allocates its costsor has its own budget (which clients believe is provided to IT to benefit them), ultimately clients pay. You can’t ignore the issue for long just because you don’t charge back your costs to clients. If clients look at where your budget went, they’ll see that it went to buy infrastructure instead of the projects they requested. Psychologically, it’s all their money.

The network isn’t the only area in which confusion arises about who owns the infrastructure. For example, many IT departments charge the cost of a workstation to clients through chargebacks, allocations or the core budget. Then IT claims to own the workstations and retains the right to control their use, including when to replace them. The same thing happens with application servers. If they’re charged to clients as part of the application implementation project, clients have every right to feel they own them. This assumption becomes an obstacle to enterprise capacity management and server consolidation or virtualization.

How to Fund the Network

So how should you fund your network? Typically, the network is considered part of the IT infrastructure. So first let’s define “infrastructure.”

Some may interpret the term to mean the layers of hardware and software below applications and tools. However, this definition isn’t at all useful in addressing the funding question because it doesn’t tell us who owns the assets.

I’ll use the term infrastructure to mean all assets that the IT department owns for the purpose of providing use thereof to others. That includes networks, servers, middleware, shared-use tools like e-mail, and even applications when IT owns them and runs them as an application-service provider. It excludes those same technologies when clients own and operate them.

Now, let’s address the funding for network wiring and wireless access as an archetype of funding for all infrastructure.

If I haven’t convinced you that asking clients to pay for things you own is a bad idea, I trust that your own real-life experiences tell you so. So what are the alternatives?

One is to get funding from clients and then grant that they own what they paid for. But this, too, is unacceptable. If IT loses control of the network from end to end, it can’t ensure integration, security or reliability; and it can’t manage enterprise capacity.

The right approach, then, is not to ask clients for funding directly at all. So where’s the money to come from? You can tap two sources, depending on the size and nature of the project.

First, for small or ongoing infrastructure investments, you can create a fund by building a small margin into the rates you charge for infrastructure-based services.

Even if you don’t recover your costs through chargebacks or allocations, you need to define exactly what projects and services can be expected for a given level of budget. To do so, you need to price your products and services. Each deliverable must bear its fair share of indirect costs, including the ongoing cost of the wiring and wireless access.

With the proper rate calculations, you charge clients for a service they consume, but never for assets that you own.

Second, for large investments like wiring a new building, you should designate in your budget a project that’s funded by the enterprise, and you should treat the money as you would a loan from the bank. (I call this “venture funding,” and you can read more about it here.) Once you purchase your infrastructure, you may depreciate it, with the depreciation expense built into the rates you charge for infrastructure-based services. It’s as if the enterprise is serving as a “bank” that loans the IT department money. The depreciation expense is analogous to the loan repayment.

For those IT departments that don’t charge back, the project is portrayed as a distinct line item in the budget, reducing the number of client deliverables that the rest of the budget can fund.

For those IT departments that are expected to recover all costs from clients through chargebacks or allocations, the treatment is no different. You still need a bank to loan you money for infrastructure, and it still needs to be portrayed as a distinct line item in the budget. “Full cost recovery” does not mean that IT gets no budget from the enterprise. A core budget is still needed for ventures (as well as for “greater good” services like standards and policy facilitatiaon). The cost of the network investment is recovered through the IT department’s rates and returned to the enterprise.

By the way, the funding you request for infrastructure ventures should include not only the capital, but all expenses required to ready the asset for use. For new services, the funding includes financial losses incurred while service volumes ramp up to a reasonable level of infrastructure utilization. This is no different from the business plan an independent business presents to the bank to get a loan.

What If My “Bank” Won’t Give Me a Loan?

There are some obstinate CFOs who don’t understand their role as a “bank” and who continue to insist (inappropriately) on full cost recovery. If logic, politics and common sense do not prevail, what’s a CIO to do?

The answer is found in the way you present the need for funding to clients. It’s critically important for clients to understand that they are not paying for the IT department’s infrastructure. But clients can be asked to provide funding—as long as it’s portrayed as a loan rather than a purchase.

One IT department I worked with had no choice but to get the funding for infrastructure from clients. But we worked out a clever arrangement for doing so. They explained to clients that the money provided by the business units was a loan that would be paid back over the next three years in the form of discounts on the services delivered using that infrastructure.

In other words, the depreciation (loan payments) was deducted from the total cost of service to give the clients a discounted rate. Once the loan is repaid, the rates go back up to the fully burdened cost.

This approach served two purposes. It clarified that IT owned the infrastructure. It also allowed the IT department to publish rates for infrastructure-based services that are both sustainable—that is, the rates cover all costs even after the loan is repaid— and applicable to other clients who didn’t supply the initial funding.

Not Just Bureaucracy

All these financial mechanisms may sound terribly complex and bureaucratic. But the fact is, IT needs to know the full cost of its products and services. That’s fundamental to any rational resource governance processes, and to managing clients’ expectations.

The key is to calculate rates (whether charged to clients or to the core budget) that include a fair share of indirect costs. Indirect costs include the ongoing investments (like updates to existing building wiring) and the depreciation of one-time, big investments (like wiring a new building).

With the proper calculation of rates and funding channels for ventures, you have a chance to make needed investments without turning over to clients the control of your infrastructure.

You can read another version of this column on consultant N. Dean Meyer’s website with links to other Beneath the Buzz columns, relevant white papers, books, and other resources. Contact him at dean@ndma.com