Good start - still a long way to go.
[You may have received a earlier (identical) email which I sent in error from the wrong email account ] The Fully Allocated Costing (FAC) methodology described in this paper is fairly traditional, using as it does Direct, Indirect and Fixed & Common (called “Administrative” in the paper) costs. Whilst this can be useful as a management and budgeting tool, you can run into serious problems if its use is extended to form the basis of cost recovery. This is because it is dependent upon various formula and assumptions that are essentially subjective, and which tend to be historic rather than forward-looking in nature. It is for this reason that FAC methodologies have been dropped by almost all telecommunications regulators in favour of some form of Forward Looking Long Range Incremental Costing (FLLRIC) methodology. I am not suggesting, however, that ICANN should adopt a FLLRIC model. That would be overkill, particularly as very little capital investment is involved. None-the-less, it is important that the community recognizes the inherent problems with the FAC methodology when used for cost recovery. Let me give a few examples. On page 11 of the paper, it is stated that: “General costs not associated with an EAG interest area or functional areas (for example, rent, accounting, and human resources) are spread proportionately across all groups.” The only indication of what “proportionately” means is given on page 17 where it says: “These allocations primarily follow the allocation ratios established by review of the labor allocations.” We are NOT told whether these ratios are based upon total man-hours or manpower costs, both of which could be considered “labor allocations”. The two can be quite different depending upon the grade of the staff involved. In any event, it could be argued that the rations should be based upon, for example, the total of direct and indirect costs rather than just manpower. The resulting allocation of Fixed & Common costs is likely to be very different in each case. Another simple example is the allocation of the cost of “IANA functions services”. We need to know the total cost involved and how it is calculated, and then the rations that are used to distribute these costs. Are these based upon the number of entries in the root, the average number of queries per day, staff man-hours or what? There are many, many similar examples that I could quote. I am not suggesting that any one answer is “fairer” than any other, merely that whichever option that has been chosen is the result of the subjective judgement of the person preparing the analysis. Where this is done as a management tool, this doesn’t matter as long as management generally understand the parameters being used. Where it is being used as a basis for cost-recovery, it is absolutely essential that the assumptions and formula are published and agreed by the parties involved. As they usually start from diametrically opposite positions, this can be a long and tortuous process, which is one reason why the FAC approach is rarely used by regulators! In summary, therefore, whilst this paper is an excellent start, it must be recognised although the balance sheet may be historical “fact”, the EAG is merely the “opinion” of the compilers and that there is a long way to go before it can be used for cost-recovery. David A Archbold .ky Domain Manager and Managing Director ICT Authority