As a standalone company, USAA Information Technology Co. (ITCO) has to compete with third-party technology vendors when bidding for projects. In some cases, it is more cost effective for a business unit to purchase products from technology suppliers."For our policy administration system, we bought risk rating software which saved us $1 million in development costs," says Stephen Yates, ITCO's president.

Although ITCO has introduced greater financial accountability to USAA's deployment of technology, Yates must deal with a mountain of paperwork that is a part of running a for-profit subsidiary.

For example, his staff has to calculate the amount of programming hours that application software managers will be available the following year, taking into consideration how many hours will be needed for training, staff meetings, sick time and vacation time.

"We have to calculate how much time is billable work, and it creates a lot of management grief," he explains. "We are held accountable to the financial estimates that we assign to every project, so if I am charging $100 an hour for a senior systems analyst, I have to justify those costs and break it down to $20 for training, $20 for office space, and so on."

ITCO's revenue stream comes from its monthly invoices for its services to USAA's business units. "I charge for every transaction, every hour a programmer works, everything we're responsible for."

Improved cost accounting and renegotiations of vendor contracts, specifically for long-distance calls, were factors that enabled ITCO to reduce its costs by 20% below its forecast for 2000. Although Yates is extremely proud of the company's financial performance, industry observers say that IT subsidiaries should not establish profitability as a financial goal.

"The goal of a technology subsidiary should be a zero-sum profit, and every dollar gained should be put back into the company," says Charles Johnston, vice president and director, insurance information strategies, with Meta Group Inc., a Stamford, Conn.-based technology research and consulting firm. "Many times a company CEO will want the technology subsidiary to do outside work, but USAA and Prudential do not do that. When you run the business to make a profit, that affects the goals of the organization."

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