A service catalog with rates is another outcome of an annual planning process.

Rates are the fully burdened unit-costs of the products and services in the catalog.

Even if an organization does not publish a price list, it establishes an implicit rate when it promises a certain level of service for a given budget. But there are many reasons why rates should be explicitly calculated and published.

Benefits of Rates

Obviously, rates are essential for internal service providers that charge (fee-for-service) to some or all their clients for any portion of their consumption.

But a service catalog with rates is valuable to all organizations, with or without chargebacks. It serves a number of purposes:

• A service catalog helps to clarify accountabilities for deliverables.

• Rates are used to estimate the cost of incremental work that arises mid-year.

• Rates communicate valuable information to clients. They represent the true cost to shareholders/taxpayers/donors of purchase decisions. With this information, clients can decide whether or not it's economic to buy a product or service.

• Rates are essential to a demand-management (portfolio management) process. If your budget is treated as a checkbook managed by clients, then rates are needed to invoice the checkbook as work is delivered so as to know what funds remain.

• Rates provide the basis for fair, defensible assignment of costs to business units.

• When fully burdened rates are projected into the future, they provide the basis for calculating the total cost of ownership of proposed assets. This is essential to ROI calculations.

• Rates provide the best basis for benchmarking (outsourcing comparisons). Costs should be fully burdened, but don't include anything that a vendor doesn't include (like enterprise-good services).
  Anecdote: Unfair comparisons to outsourcing....

• When managers understand their catalogs and rates, the culture shifts to one of frugality, innovation, and entrepreneurship.

Importance of Accuracy

Rates, like the costs of deliverables in your budget, must represent the full costs of each product and service.

Direct costs are easy. The challenge in calculating rates is the proper apportionment of indirect costs -- spending not associated with a single project or service. Indirect costs come from both vendors and internal support services which one group sells to another group within the organization.

Accuracy is essential. If the cost model isn't accurate, then some services will be under-priced and other services will be over-priced.

When some products are under-priced, clients tend to buy more than is economically wise and waste money on poor investments.

Other products will be overpriced, and will appear uncompetitive. Clients will ultimately find another way to get that work done (decentralization or outsourcing).

As you lose market share on the over-priced services, you're left with only lines of business that are losing money. As you sell more of these at a loss, support systems become strained and negative variances grow.

Thus, rates must be based on the true, full cost of products and services. An accurate cost model is essential.

Calculation of Rates

The service catalog with rates is published before the fiscal year begins, as is the budget. Both require a cost model that apportions all indirect costs to your products and services.

Both your rates and your budget should be based on the same cost model. This not only saves time and effort. It's important that the rates charged during the year add up to the totals promised in the budget.

Thus, an integrated process for business/budget planning and rate setting is advisable.

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