Rates and Cost Recovery

• There are rate descriptions for services on the following links:
  
  • Application Hosting
  • Application Hosting: Web Site Hosting
  • Application Hosting: California Home Page Web Site
  • Equipment Hosting
  • Storage
  • CA.mail
  • Server Based Computing
  • Network
  • CALNET
  • Recovery
  • Training & Event Center

Overview of the DTS Cost Recovery Function

As a department that provides centralized services for other government entities, but does not receive a budget appropriation from their respective fund sources, the Department of Technology Services (DTS) must recover the cost of providing services from its customers by charging service rates and depositing that revenue in the DTS Revolving Fund from which all DTS operations are funded. As discussed below, the use of a chargeback model has many benefits and is used by the DTS and its customers for monitoring performance and making business decisions in several different ways. The cost recovery function is made up of three primary tasks Cost Accounting, Rate Setting and Billing. Cost Accounting is a fairly regimented process that is executed according to business rules and is designed to provide an objective estimate of the total cost of providing services. Billing is the process of creating invoices and collecting payments from customers. In contrast to the other two tasks, Rate Setting often requires a difficult balance of objective cost analysis with the more subjective disciplines of marketing and forecasting customer demand. Because the DTS service rates represent the cost of business to the DTS customers and the sole source of funding for the DTS they are a critical component of the DTS Financial Management and the methodology for how they are set should be well delineated so that stakeholders will have a clear understanding of how the rates are determined.

Rationale for the Chargeback Business Model

There are many benefits to the chargeback business model upon which the DTS Financial Management practices are based. The following represent the primary reasons for implementing a chargeback business model for the DTS:

• Provide for an adequate level of financial resources to support the provision of centralized information technology services.
• Encourage customers to utilize the DTS services efficiently by enabling them to determine, in a timely manner, the volume and cost of each specific service they utilize and, thereby, modify their use of those services.
• Establish cost recovery methods that are consistent with the requirements of state control agencies and the federal government, and which will facilitate predictable levels of funding for the future acquisition of centralized information technology services.
• Provide customers the opportunity to compare the DTS billing rates with other providers of similar services by having a standard means to report utilization and costs.
• Provide the DTS with information to make formal valuations of IT Services and plan for investment based on cost recovery and business benefits.
• Recover IT costs in a fair, consistent, repeatable manner.
• Influence customer behavior to promote the effective and efficient use of information technology.

Rate Setting Policies

Given that the process for setting rates is not entirely formulaic and that they are a fundamental link between the DTS and its customers, there is constant pressure from stakeholders regarding rates based on each stakeholder respective expectation. Many of the expectations listed below are mutually exclusive and efforts to meet an expectation in one area may cause the DTS to fall short of expectations in another area.

Customers:

• All Customers want as much service as they can get for the lowest price they can get.
• Some customers want additional services bundled into existing rates.
• Customers do not want to pay for services they do not receive.
• Customers expect that our financial management practices will not create problems regarding their ability to claim reimbursement from the federal government.
• Customers expect that the DTS can discuss the components that make up the rates they are charged.

Taxpayers: Citizens expect that their tax dollars are spent as efficiently as possible.

Internal Customers: Costs and revenues are key measurements of business performance and service managers expect the principles used to establish these measures to be sound.

Financial Oversight: The Department of Finance and the Legislature operate under the assumption that the rates charged for services are tied closely to the costs to deliver them.

Federal Government: The federal government expects that the DTS will not charge federally funded programs for costs that they indicate are not allowable or through methodologies that are not reasonable and consistent.

DTS Guiding Principles for Rate Setting:

In order to establish and maintain the integrity of the cost recovery function the DTS proposed and the Technology Services Board approved a set of Guiding Principles for Cost Allocation and Rate Setting.  The approved document is attached as Appendix A.  The principles that were adopted for rate setting are as follows:

• 1. The Department strives to have reasonable rates for comparable services.
• 2. The Department rates must be justifiable and supportable.
• 3. The Department internal systems should provide accurate and timely cost and activity data for rate setting and billing purposes.
• 4. Services will be periodically reviewed to determine the most appropriate rate-setting methodology according to the type of service (that is, measured usage, subscription, direct bill).
• 5. The revenues generated from the rates should fully recover the costs of the service, plus allowable reserves for working capital and equipment replacement. In order to facilitate the adoption of new services and/or the transition of customers to more efficient technologies, this principle may be suspended for a specific service for an actively managed period of transition. This exception will only be made for a documented policy objective and for a defined time period, after which the service is required to be compliant with the principle.
• 6. The effort required for rate setting should be commensurate with the benefits derived.
• 7. The rate setting process should provide mechanisms for ongoing rate review from a financial, technical, and business perspective.