Hi -

I have a customer who is looking for best practices around allocating administrative overhead. I would appreciate any thoughts or suggestions that anyone can provide on improving their current overhead allocation strategy.

Customer's Current Process: Administrative overhead is allocated to every service based on headcount (primarily HR or workstation support) or total cost of service (primarily Finance, CIO support).

Process Pain Point(s):

• Due to the “total cost of service” allocation factor, one change in one line item in one service will result in a rate change for every service and every customer until the budget is finalized. This aggravates our oversight bodies. If we “freeze” all overhead changes, we end up with an allocation that we can no longer explain once rates are finalized.
• Once the budget is passed and rates are set, we don’t allocate overhead based on actual administrative costs, actual headcount or actual service costs, because the manual effort is too labor intensive. Therefore, service performance analysis is inaccurate.
• Cost loops – administrative units consume IT services whose costs include administrative overhead.

Process Future Needs

• To implement best practices for dealing with administrative overhead.
• To track and report monthly overhead costs for each service area.

Thank you!

Yuji Higashi

What is the value of adding OH to allocations? Note this is very different from saying OH does not need to be managed. The business owners receiving the OH allocation can't do anything about OH, either on the driver (most often) or on the amount of OH. If this is true, what is the value of showing/charging them OH?

One alternative is to charge OH to the decision makers that can influence it as a service. The TBM office comes to mind as a potential OH candidate. Business owners do realize the benefits of having a TBM office but can't do anything about it. In my opinion this is a service that should be charged to the CIO, where the benefits and cost meet.

Following this logic, the concept of OH becomes 100% subjective depending on where you stand in the organization.

Use the many tools TBM provides to enable the transparency needed to manage OH. As a service!

A great question,

I like to concept of allocating all the IT overhead to a service and then allocate this to at the highest level possible.  Certainly avoids the inevitable iterative allocations.

My concern is treating OH as anything other than a variable cost.  Small companies have very little overhead and as they grow the accumulate overheard, but the quantum is not fixed.  Bad behavior increases overhead and strong communities reduce the overhead needed.  It's as much a question of culture as size.

This approach also seems to apply to the non-IT use case (e.g. HR, Finance, Communications, Legal etc).

As for IT.  The most common forms of overhead are:

- Management / leadership :  allocate directly to the respective team

- CIO and the Office of the CIO :  Allocate  by IT spend

- PMO : Allocate by project spend

- Architecture, strategy and service delivery :  Allocate by service / application spend

- Security, vendor management and purchasing :  Allocate by IT spend

- TBMO :  Allocate by IT spend

- IT Communications / Change management :  By IT Spend

Personally keeping these objects distinct and having their own allocations complicates the model, but provides transparency and allows the consequence of poor behavior to be identified and tracked.  For example, if the Project discipline is lax then the PMO slowly grows to compensate.  That consumes project spend.

A great question...sorry for the late response.

Tim