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FullCost: THE CONCEPT: Internal Market Economics
Internal Market Economics
The concept of internal market economics is captured in a handful of simple statements:
- Shared services organizations are businesses within a business, "selling" products and services to the rest of the enterprise (whether or not money actually changes hands).
- Spending power belongs to customers (even if the organization receives budget directly). Customers decide what they'll buy; and they must live within their means.
- Everything the organization sells (its catalog of products and services) has a true, full cost to shareholders/taxpayers/donors. The organization charges customers only for the things they buy (not its overhead).
- To be comparable to alternatives (like outsourcing), rates must include all indirect costs, but exclude costs which vendors don't incur (such as corporate-good services like policy, which are separate services).
- A shared services organization needs a source of direct funding for infrastructure and innovation (like loans from the bank, not from customers).
More on how internal market economics works....
The implications of internal market economics are profound. To name a few....
- Customers defend your budget, since it becomes theirs to spend on you.
- Expectations match resources, since customers know when their spending power runs out.
- Costs are cut, since demand is managed and all costs are driven by the organization's sales.
- Alignment with customers business strategies is virtually automatic, since customers buy what they most need.
- Funding for infrastructure and innovation is explicit, not left to customers' largess or unreliable year-end money.
- Managers become customer focused and entrepreneurial, and are frugal to keep their rates competitive.
There are many other problems it solves and benefits it delivers.
Implementation is straighforward, and comprises two steps:
- Planning: a business plan, a budget, and a catalog with rates.
- Actuals: portfolio management, utilization accounting, invoicing, dashboards.
Why implement Planning (budgeting, catalog, rates) before Actuals (chargebacks/showbacks, etc.)?....
FullCost: Why Planning before Actuals systems
| "Dean is a world-class expert on IT financial management. He goes far beyond a surface understanding of the topic, with deep and nuanced insight into the organizational and political dynamics surrounding it." |
| Charles Betz
Research Director, IT Portfolio Management, EMA
A more detailed description of how internal market economics works....