Rate Model
Development Process & Guidelines
Policy
Overview
As a full cost recovery fee-for-service organization, UIS
is required to develop and communicate rates for our IT products and services
to customers and the University Budget Office on an annual basis, prior to the
start of next year’s budget cycle. The rate development process is a critical
component of the University-wide budgeting and planning process, as the
information we provide is incorporated into the schools’ and departments’ cost
estimates as they develop plans for the next fiscal year.
Roles and
Responsibilities
Below
are the definitions of roles and responsibilities for individuals participating
in the UIS rate development process.
All of the parties detailed below including the director, management,
financial services and the rate advisory group, work as a team in the rate
development exercise.
Director Responsibilities
It
is the responsibility of the director to oversee the rate development process
for all services offered by his/her businesses.
Each director must understand all the cost components and modeling
methodologies used to develop the rates and the impact of changes to either on
our customers. The director is also
responsible for communications to customers and advisory boards, specifically
on pricing.
Management Responsibilities
It
is management’s responsibility to understand the detailed rates that have been
developed for the businesses they support to ensure that business decisions
made (e.g. staffing resources, capital investments, changes to vendor
agreements, quoting of customer rates) are informed by that decisions potential
impact on the cost of our products and services.
Financial Services Responsibilities
It
is the responsibility of financial services to create, modify and maintain the
rate models developed for the businesses they support. Financial services will
assist the directors and management in completing all required steps of the
rate modeling process (i.e. communication to UBO, budget uploads to general
ledger, rate advisory meeting preparation etc.) in a timely manner.
Rate Advisory Groups
Several of the UIS
business units have rate advisory groups, which meet periodically during the
fiscal year. Membership is completely voluntary at the Tub level, yet it offers
the chance for the Schools and Central Administration to participate in
discussions focused on rate-setting, capital investment planning, technology
strategies, communications and other important matters related to the UIS
services. Prior to communicating next
year’s rates to its customers, the business units should meet with and discuss
rate recommendations with their rate advisory group.
Time
Table
In general, the
UIS rate development process takes place annually during the fall time frame
once the prior fiscal year has been completed. The table below highlights the
steps of the rate development process that directors and managers are
responsible for and the required date of completion.
|
Rate
Development Process Steps
|
Deadline
|
|
Prepare
preliminary rate guidance for the University Budget Letter
|
Oct 1st
|
|
Meet with
customers to understand future needs
|
Oct 1st
|
|
Review Business
Assumptions
|
Oct 1st
|
|
Prepare Rate
Development Detailed Expense Budget
|
Oct 31st
|
|
Develop Rates
|
Oct 31st
|
|
Review Rates
with Executive Director
|
Nov 15th
|
|
Review Rates
with Rate Advisory Committees
|
Nov 30th
|
|
Communicate
Rates to Customers
|
Dec 15th
|
The rate
development guidelines section (below) describes each component of the process
in further detail.
Rate Development Guidelines
Most
UIS businesses have rate models, which can calculate the projected unit costs
for their products and services using estimated inputs for: operating expenses, capital investments,
staff resources, business reserves, customer volumes, product/service changes,
etc.
Prepare University Budget Letter Rate Guidance
Prior to the start of the UIS rate development process, the
University Budget Office requires that each major University Service
Center provide rate
guidelines for the next fiscal year, which will be published on the Budget
Office website. For this exercise, the
director must provide an estimate for their anticipated rate increases for each
of their major services. This exercise
must be completed prior to October 1st. Once the UIS rate development process is
completed in November, business units should re-visit the information submitted to the University Budget Office to
identify any significant differences.
Review Business Assumptions
It is not uncommon for business assumptions in an IT environment to
change annually, or even monthly. These
changes can be the result of internal and external factors that can directly or
indirectly impact the way we do business.
Business factors, such as changes in customer base or volumes, changes
in service offerings or capacity utilization can impact the business
model. Financial factors, such as
capital needs, staffing requirements, or cost inflation factors can directly
impact the rate structure. Environmental
or external factors, such as input from advisory groups, technology trends,
vendor negotiations, or community sensitivity to rate increases can also guide
the business planning process for the short and long term. A complete list of factors that can impact
rate model development can be found in the Financial
Planning Process. Managers
must review and understand all of these factors in order to make sound
budgeting decisions.
Prepare Rate Development Detailed Expense Budget
Once the business unit has reviewed all of the business assumptions, the
business expenses relating to the planned product and service offerings for the
upcoming year can be determined by incorporating the associated changes to the
financial assumptions (increases or decreases). Business units should then complete a
detailed line-item budget template to identify estimated costs for the rate
development budget.
The types of business expenses to be budgeted may include, but are not
limited to:
·
Personnel related costs; salaries and fringe
benefits, training, telephone, space etc.
·
Cost of goods sold
·
Depreciation and interest on capital investments
·
Other vendor contracts
·
Indirect administrative charges
During the January / February time frame, UIS business units are
required to also submit a detailed budget (called the Corporation Budget) to
the University Budget Office for the next fiscal year. This “official” budget usually
begins with the rate development budget, but may also include updates and
changes made based on new information that has been made available since that
time. To learn more on the Corporation Budget
exercise, please see the Budgeting Guidlelines and
Procedures located on our website.
Apply Surpluses and Deficits
After identifying all of the
expenses for the upcoming year, the business may need to adjust the total
expenses to account for prior year surpluses or deficits. Rates must be developed so that revenues
offset expenses (including any surpluses or deficits) over a reasonable period
of time. The roll-forward surplus or deficit should
not exceed the break-even range of +/-10% of total expenses for the fiscal year
closed. If a roll-forward
surplus/deficit exceeds the break-even range, the service unit will be required
to include the use of surplus (reduction in expense), or the recovery of
deficits (increase to expense) as part of the expense budget. Surpluses may
also be used to normalize rates to customers in years where unexpected
increases in expenses occur.
When longer-term business
planning demonstrates the need to maintain working capital allowances, either
to guard against changes in business models or for rate stabilization during
implementation of new business technologies, up to 60 days of annual operating
expenditures may be accumulated over time and utilized during the period(s)
when working capital needs arise. In unique
situations, the 60 days of expenses may be extended to 90 days, when a service
center can demonstrate the need to maintain a higher working capital balance
(example: extended length of time may exist between incurring vendor costs and
correct billing of those services). These funds should be monitored and their purpose
evaluated on a regular basis.
Maintaining these funds indefinitely by the service unit to alleviate
the responsibilities of the break-even concept is inappropriate management of
the business unit balance. In all cases,
the accumulation of longer-term working capital allowances must receive prior
approval of the Office of Cost Analysis.
Allocate Costs Across Service Offerings
Where multiple services are offered to customers, the business will need
to develop reasonable allocation methods for both direct and indirect expenses.
Each service should be allocated expenses based on these methods. All direct
expenses should be allocated 100% to the specific service for which the cost
relates. Below are some examples of
commonly used cost allocation methodologies:
·
Estimated time spent
·
Production use volumes
·
Percentage of total costs
|
Expense Item
|
Expense Budget
|
Allocation Methodology
|
Allocation
Unit–Srvc A
|
Cost
Srvc A
|
Allocation
Unit–Srvc B
|
Cost
Srvc B
|
|
Salaries and Wages
|
$50,000
|
Est. Time Spent
|
.2
FTE
|
$10,000
|
.8
FTE
|
$40,000
|
|
Equipment Expense
|
$60,000
|
Production Use
|
10
units
|
$20,000
|
20
units
|
$40,000
|
|
Indirect Admin Charges
|
$10,000
|
% of Total Costs
|
28%
|
$2,800
|
7.2%
|
$7,200
|
|
Total
Expense by Service
|
$120,000
|
|
|
$32,800
|
|
$87,200
|
Apply Pricing Methodology
Once all other components of the rate model have been determined,
customer rates can be set. Rates for
each service or product should be calculated based on total expense for the
service or product offered, divided by the unit of measurement.
A pricing methodology should be determined for each billable product or
service. It will include, among other factors, a unit of measurement to be used
to calculate the price for a specific product or service. A few examples of units of measurement
currently being used by UIS groups include; domestic and international usage
minutes, average number of phone lines, estimated number of gigs, customer
FTEs, routed networks and estimated number of customer desktops. The unit of
measurement chosen should be relevant to the service or product offered, be
easy to measure, obtain and monitor, and should be an accurate and fair measure
of how resources used in providing the service is consumed by customers. Volume
assumptions should be evaluated and applied to each unit of measurement as part
of the rate setting exercise.
Using the example from cost allocation methodologies above, the unit
costs of “Service A” and “Service B” and is determined by dividing the total
costs of each service by the appropriate unit of measure:
|
Services Provided
|
Total
Costs
|
Pricing Methodology
|
Total
Units
|
Cost
Per
Unit
|
Unit of Measure
Customer A
|
Cost
Customer
A
|
Unit of Measure
Customer B
|
Cost
Customer
B
|
|
Service A
|
$32,800
|
Customer FTE’s
|
50
|
$656
|
10
|
$6,560
|
40
|
$26,240
|
|
Service B
|
$87,200
|
No. of Desktops
|
400
|
$218
|
