Question: “WWWeb Marketing”

WWWeb Marketing is a decentralized firm specializing in designing and operating internet marketing web sites. The firm is four years old and has been growing rapidly but it only shows a small profit. Wwweb has three profit centers design division, server operations and the crawler division. The design division devises internet marketing strategies for external clients including innovative web sites and web based marketing strategies. Server operations maintains the clients web sites on WWWeb servers. The crawler division operates WWWeb proprietary search engine that clients can use for internet based marketing research. In addition to these three profit centers WWWeb has an IT group that maintains WWWeb servers and telecommunication lines to the internet.

The IT group is a cost center. The current annual IT budget is $548,000 for personnel, hardware and software leases for the servers and telecommunication costs. The cost of the IT group is not allocated back to the three divisions, the CEP of WWWeb argues that the IT group is a common resource and is essentially a fixed cost. Adding another client web site or performing a web search does not generate any additional IT cost to the firm because WWWeb IT group has excess capacity. WWWeb CEO argues “Any charge for IT back to the divisions will cause the divisions to avoid using our IT resources. As long as we have unused capacity on our systems we should be encouraging our people to use the capacity.”

WWWeb currently uses about 80% of the capacity of its server’s routers and fiber optic high speed lines to the internet. The high speed lines are the pipes through which all client server web traffic flows. These high speed lines are also used by WWWeb email traffic and the crawler divisions marketing research web searches. Currently the IT systems are performing well and WWWeb users experience few delays and minimal interference from other users. However the three profit centers managers are projecting growth in their businesses and expect to reach capacity on their servers and communication lines within the next 12 months. When this happens the managers predict that they will experience significant service degradation.

Jose Coronas had of WWWeb IT group has called a meeting of the three division managers to discuss the terrific deals being offered by telecom companies and hardware providers. Given the current slump in the economy WWWeb can roughly double the capacity of its servers and high speed access limes and lock in these low rates for two years. The incremental cost of doubling the IT groups capacity is to raise its hardware lease costs and access line costs by 20%. IT currently spends $18,000 a month on hardware leases and access lines. If it were to double its existing capacity the total monthly cost would rise to $21,600 Mr. Coronas believes his existing IT personnel can handle the additional server and line capacity. Coronas and the three division managers recommend that WWWeb acquire the additional capacity and lock in these attractive rates.

a. Analyze WWWeb current policy of how the three divisions are charged for IT costs and whether WWWeb should acquire the additional capacity.

b. Should WWWeb change its policy of how it charges IT costs to the divisions? If so what changes would you recommend?