Alastair Walling over at Market Based Management Institute has a good post on the need for internal markets in corporations. His key point: things that are not priced get overused. So if a corporate department is not charged for IT support, it uses too much, causing a shortage, and everyone gripes about the non-responsiveness of the IT department.
Some staff functions are hard to appropriately allocate, but here’s a great system. It’s the one I started under at First Interstate Bank. I was asked to allocate my department’s cost among the major divisions of the bank. I was told to plan on meeting with the managing committee to justify my allocation to each of them. And my boss told me that he’d conduct my performance review by strolling down the executive floor, sticking his head in all of the top guys’ offices, and asking, "How’s Conerly doing? Is he helping your area?"
The result: I was very focused on serving all the functions of the bank, and they paid the cost of my department. If one of the EVPs had thought I was too expensive, he could have told me to cut back on service to his department. So I managed my department to be both valuable and cost effective.
My fellow bank economists were full of stories about tugs of war for their time. One, who reported to the CFO, had to cut back on services to the commercial lending area simply because the CFO didn’t want to subsidize that area. No way to run a staff department. Pay close attention to what the guys at the Market-Based Management Institute are saying.