The Recovery Method is used to allocate the annual cost of depreciation and the associated expenses of shared capital resources. This method is the basis of the traditional Chargeback / Showback systems that are in use today.
Before open systems, the computer processing for a business usually existed on one or more mainframes. The mainframe processing usually consisted of several different application suites being used by many different business units. Since the capital expenditures were quite large, the business wanted to allocate the cost of processing back to the using group, and so the Chargeback / Showback systems came into being.
One of the issues that had to be dealt with was that the capital expenditures were “off book” (to IT), but the corresponding support costs were “on book”. This issue was addressed in an accounting manner rather than an investment manner. For most organizations, they will generally take the annual depreciation of the capital expense and assign it to the IT group. The IT group can then take the total expenditures and depreciation and “chargeback” to the clients that used the resources, on an annual basis.
However, Tax Code funding has several shortcomings when it comes to pricing services. The most obvious shortcoming is the accelerated depreciation rates that can be used within the Tax Code. What this means is that most of the costs are absorbed in the early years when volumes are lower. It also means that pricing will change from year to year based on the depreciation amounts be applied. There are many other shortcomings to this approach, but they only add to the dissatisfaction experienced by the clients.
It should be noted that the Lease and Meter methods have been developed to replace this method. These replacements are based on Total Cost of Ownership rather than on the Tax Code.
Method
Properties
Cost Horizon
The Cost Horizon for this method is on an Annual basis. Since the capital assets are “off book”, the accountants determine the amount of depreciation that is applied to the annual IT budget. The amount of depreciation is not based on any usage criteria, but rather on the Tax Code regulations that are being used by the business.
Resource Type
The products associated with this method are shared resources, and can be either a Commodity Resource or a Proprietary Resource. That is to say, the resources are of such capital expenditure that it is advantages to have more than one unit or group using the resource.
Usage Type
The type of usage associated with this method is either Dedicated (single client) or Community (mutiple clients). For one part of a shared resource (i.e. disk subsystem, mainframe, etc.), it might be possible to identify a single dedicated user while for another part there may be many. The latter condition is the one that complicates most recovery plans.
Pricing Policy
Since this method is based on a capital asset owned by the business, most users are “forced” to use the resource as if there is only one source available. Since the business has determined to use the Tax Code for the recovery rates, the IT group will set the pricing in a monopolistic manner as to recover the annual budget.
As part of the pricing policy, the IT group may determine that behavioral pricing is warranted. In this case, desirable processing periods or discouraged practices are priced at a higher level. Overall, the basic design of the Recovery method leads to an incoherent and inconsistent pricing policy.
Price Formation
The annual budget provides the basis for the Price Formation. During this process, the IT group must take into account different system and platform characteristics (i.e. processor speed, architectures, etc.) that will affect the final rates and introduces inconsistencies. It is also possible to have different rates for identical systems depending on when they were purchased or how they are configured.
Pricing Frequency
The pricing for products in the method must be fairly frequent since these are typically high cost items and this method requires a reconciliation process. Periodically throughout the year the “over / under” must be determined for the user and a corresponding corrective amount be applied to the Chargeback / Showback. This reconciliation process contributes to an inconsistent pricing policy and client discontent.
Attributes
This method uses an Activity Based Allocation method for the costs associated with the capital asset. While this is good, it does not accommodate for the overheads associated with the processing. This can result in a misapplication of costs associated with the resource.
Behavioral Drivers
Overall, the behavioral drivers are mostly negative (lowest quartile) for services within this method group. Since the method is based on the Tax Code and resource usage, the price formation is not easy and fair. Prices will change from quarter to quarter. Since the prices are constantly changing, they are not be predictable. However, if the pricing policy allows for behavioral pricing, then it is somewhat possible for the user to control their use of a resource.
Bill of IT
There really is no standard Bill of IT for the Recovery method. Since this method has traditionally been associated with mainframes, the “charges” are generally based on the policies that have been developed for the system and/or business. The “charges” could be based on the use of system components, residency (i.e. disk storage), time of day, day of week, head count, user budgets, location, or some other allocation method.
