Chargeback tactics to avoid an IT money pit

IT costs don't have to be a perennial black hole. An enterprise can recover expenses from IT, which must put on its sales hat to promote chargeback.

ORLANDO, Fla. -- IT has always been the unwanted stepchild of business operations; it costs money and there is rarely an incentive to understand consumption of IT capabilities beyond the quarterly budget.

However, there are ways an organization can recover IT costs, or at least show users how they consume IT services.

Pete Lesiv, principal engineer for a major government research facility, doesn't use chargeback yet, but welcomes the opportunity to show government clients meaningful information about shared enterprise-level capabilities.

“For us, it’s not chargeback as much as showback,” Lesiv said. “They don’t see costs, so it can be a real eye-opener.” 

Effective chargeback is based on clear, well-defined services – not IT assets like servers or network bandwidth. An organization without an IT service portfolio is probably not ready for chargeback.

As IT transitions from a cost center to a service provider, it makes more sense to understand technology investments and recognize how those investments are used across the business, according to Barbara Gomolski, a managing vice president at Gartner Inc. during a session here at this week’s Gartner IT Infrastructure and Operations Management Summit 2014.

Make the case for chargeback

On the surface, chargeback is an unpopular idea. No business unit wants to get stuck with yet another bill – especially when it comes from another internal unit like IT. But Gololski outlines two compelling reasons to implement chargeback.

First, understand IT costs and how its consumed provides valuable guidance to make better IT investments. It’s an ongoing opportunity to examine and implement new technologies to  address costs. For example, if the cost of provisioning a new physical server for an application is too high, it becomes possible to make a meaningful business case for a technological investment like server virtualization.

The second compelling benefit of chargeback is to implement a form of demand control. When IT is “free” and a business unit can consume all of the computing resources or services that it wants, there is no incentive for efficiency or conservation. But when a business unit actually sees – or even has to pay for – the IT services it uses, business leaders must consider and budget service usage.

Unfortunately, there are obstacles to implement a sound chargeback or showback besides the obvious political minefield involved and lack of business buy-in.

Poor definition of the IT service portfolio is a problem. Effective chargeback is based on clear, well-defined services – not IT assets like servers or network bandwidth. An organization without an IT service portfolio is probably not ready for chargeback.

Another roadblock occurs when there is little transparency to IT costs. This can be  particularly troublesome because there are multiple costs  to view  including asset, investment, technical, and business. Proper pricing takes a holistic view of the environment that encompasses the hardware, to monitoring and services. It is critically important to adopt a meaningful pricing model to fit the organization’s particular needs.

It is possible to use a variety of pricing models, and even mix models, to achieve meaningful chargeback information, Gomolski said. For example, Gomolski cited one hybrid chargeback model that provides showback data for shared IT expenses such as hardware or software, , or break down shared costs using a straightforward measure like the number of users or other operational expenses. Business units don’t pay for this – they only see their average piece of the expense. A second pool could include higher level business services and processes as the basis for chargeback.

A final concern is that chargeback should not be used as a means of managing costs. Many costs are fixed or sunk, and it is often impractical to look at chargeback or showback figures as a basis for immediate or short-term cost reductions.

Simplify and sell

Simplifying the chargeback argument can often facilitate buy-in and make it more palatable for business units. Start with three or fewer chargeback models to provide consistent assessment and reporting within the organization, Gomolski said. Showback efforts can generally succeed without 100% financial accuracy. It is always possible to develop financial transparency and improve the financial accuracy over time.

Of course, accuracy is essential in chargeback situations when budgets and costs actually impact a business unit’s profit/loss. Also be sure to drive chargeback from IT services such as collaboration, end user computing and business applications. This removes the granularity of often-shared computing resources.

When it’s time to sell the idea of chargeback within your organization, the trick is to get critical buy-in by showing the value of IT services and ways that such awareness can help business decision-making efforts.

In some cases, chargeback paradigms are compared to similar services from the external market. This carries a certain amount of risk for IT because users might opt to use those external services rather than internal IT services. But a well-developed and cost-effective IT service portfolio can potentially compete with external services and reveal value for enterprise users. 

This was first published in June 2014

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