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CIO Unplugged 9/7/11

September 7, 2011 Ed Marx 6 Comments
The views and opinions expressed in this blog are mine personally and are not necessarily representative of current or former employers.

IT Chargebacks: Yes or No?

Chargebacks or not, the real conversation settles around value. Value is a balance of costs and service. If you deploy chargebacks, simplicity is key.

I am a proponent of elegant, yet simple chargebacks tied to service levels. Costs and services are adjustable levers that create the value defined by the organization.

Having served community hospitals, academic juggernauts, and for-profit health systems, I’ve employed a variety of methodologies. Every institution is unique, with culture, strategy, profitability, and leadership all playing a role in determining best practice and overall value. There is no one-size-fits-all answer.

Gartner identifies seven common chargeback approaches. They do a great job of summarizing the pros and cons of each. I will skip the detail.

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I avoid approaches that have significant maintenance costs associated with the operational mechanics. At one organization, I spent significant resources maintaining, defending, and negotiating our detailed chargebacks. We were able to charge back to the end user level, but with 300+ applications and associated hardware, we hit a point of diminishing returns. From an academic perspective, this looked beautiful, but costs eroded the benefit.

At another organization, we applied no chargebacks. Demand became insatiable. This led to the tragedy of the commons. All parties were unhappy. When demand went unchecked, services were perceived as free and IT costs spiraled out of control. Although clearer than a blue sky, the cause and effect cycle still became irrelevant due to a lack of associated sacrifice (cost to business unit) and defined value. Normally, a commons environment renders effective governance models impotent.

My preference: a simple model where costs are correlated with service levels at an enterprise level. Take total IT operational expenses and allocate costs on a single, rational, and easy to measure metric, i.e. the number of employees or number of end-user devices. Despite the limitations of these metrics, they are measurable and have a basis in logic. I do not go to the application level (per drink) or hardware cycle methodologies, where the complexity increases exponentially.

In the fictitious example below, the allocation of $1,000 per user comes with a negotiated service level of 4 on a 1-5 Likert scale. The service level is measured and the performance reported routinely. If the enterprise demands a higher service level, then there will be a negotiated fee increase. If the enterprise demands a price decrease, a revised service level is negotiated. Therefore, the service level becomes the lever for any discussion related to IT costs for the same basket of goods.

This model works well for demand management and governance as well. If the enterprise wants to make IT-enabled investments, the business case is developed. The business case includes a section on IT costs. In continuing the fictitious example, let us assume the enterprise wants to add an EHR at a cost of 25M annual operating expense. Using the model, IT costs increase from $1,000 to $1,250 per user at the current service level of 4.

During the EHR approval process, the enterprise understands and accepts that IT costs per user will increase and the allocation goes up. The elusive “business and IT convergence” is enabled at this intersection where strategy is executed knowing IT implications to include costs and service levels.

ORGANIZATION OPERATING PRE EHR   $100,000,000
COST OF IT/SERVICE LEVEL 4 3% $3,000,000
END USERS/COST PER 3,000 $1,000
CORPORATE USERS/ALLOCATION 500 $500,000
HOSPITAL A USERS/ALLOCATION 1,000 $1,000,000
HOSPITAL B USERS/ALLOCATION 1,500 $1,500,000
TOTAL COST IT   $3,000,000
     
ORGANIZATION OPERATING POST EHR   $125,000,000
COST OF IT/SERVICE LEVEL 4 3% $3,750,000
END USERS/COST PER 3,000 $1,250
CORPORATE USERS/ALLOCATION 500 $625,000
HOSPITAL A USERS/ALLOCATION 1,000 $1,250,000
HOSPITAL B USERS/ALLOCATION 1,500 $1,875,000
TOTAL COST IT   $3,750,000

To execute this model, you must nosse te ipsum. You must be well organized and have a published service catalog. You must know your costs and be able to measure and report your service levels.

Most importantly, you need to execute to those agreed-upon services and levels while keeping your costs in line with your enterprise commitment. There is the shared value.

No perfect solution exists. Work with your enterprise leaders. Pick something. Experiment. Adjust. You will know when it is working. Until then, keep refining.

(I will go into service levels as they relate to chargebacks in a subsequent post).

Ed Marx is a CIO currently working for a large integrated health system. Ed encourages your interaction through this blog. Add a comment by clicking the link at the bottom of this post. You can also connect with him directly through his profile pages on social networking sites LinkedIn and Facebook and you can follow him via Twitter — user name marxists.

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Currently there are "6 comments" on this Article:

  1. The idea of IT charge-backs is something I have always supported. IT like many other support departments is there to assist and serve the operating units and if all costs are ‘buried’ in IT, while the ‘value’ is buried in the operating units a true justification or reconciliation never happens. Department units will perceive the services as ‘free’ and when some one pays little or nothing for something, then there is a tendency to see the value as negligible.

    But here is the part that many IT departments miss. If you initiate a charge back system and get the corporate buy-in necessary don’t stop there. Don’t expect your operating units to automatically see the value in IT services. Sure they will quickly see the costs (as they get internally billed or transferred from IT to their budgets), but you can’t assume they see or understand the real value. To communicate the value somebody in IT needs to take on the role of a ‘marketer’ or ‘communicator’. Very few operating department staff know how to complete an IT ROI analysis; they will need your help. If the CIO’s office does not initiate this task working with the units it will never happen. Without it, when next years big budget crunch hits the operating units that are seeing millions charged to their budget will simply say ‘we should cut the IT component in our department costs’.

    Value justification is a core component of a good marketing and sales process. Too very nasty words rarely used in the non-profit healthcare world. For a charge back system to not bite you in the butt, you’ll need to become very adept at both.

  2. Great article Ed.

    I have 2 questions, both based on the assumption that since you referenced the Likert scale and noted service level is routinely measured that you are doing so via a customer satisfaction survey.

    Perhaps you could address these in your future column.

    1) If the only basis for the chargeback is the number of users, how does that avoid the tragedy of the commons dilemma? A dept with 100 users is going to have a fixed cost allocation with no disincentive to overuse or over-demand IT services, other than their real or perceived service may diminish. Which leads to..
    2) Have you ever experienced a request from a business unit to ‘return’ partial payment of their allocation if your service level drops below the agreed upon 4? Perhaps due to demand from another area or project, a particular business unit experiences less than expected service and their satisfaction rating for the last measuring period is 3.5 for example.
    thanks, Gary

  3. I just wish that you guys were as interested in the patient safety, outcomes and unintended consequences of what you are doing as you are about ROI. profits, and budgets. BTW, what is ROI anyway? Does it include the time wasted by professionals trying to find disease critical information, or the RITZ charm school programs that hospitals are purchasing to teach their employees bedside manners in the age when EMRs take up most of their time?

  4. Suzy,
    I agree… wasted time should be factored into the Return on Investment (ROI) calculation. Also oucomes and unintended consequences. For example, if an unintended consequence causes a never event, which causes a $3mill malpractice suit, it all needs to be part of the calculation.

    As a former CFO I have always said ‘bad’ patient care, whether IT related of not, costs money and must be included in any ROI calc.

  5. Thought provoking comments on chargebacks. It’s interesting the IT group provides what we could call “shared services” to the hospital for IT services/support, but if other groups are billed for those services, it’s considered a chargeback. Why not simply call it the charge that it is? It’s probably just semantics. But I think if each user group’s P&L showed cost for the shared service (also let’s say on headcount by the user department), then maybe the idea of shared expectations might be improved. After all for each internal buyer, there’s an internal seller, but with a tip of the cap to the book of Acts, it’s not always better to give than to receive.







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