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.” 

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

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.

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 last published in June 2014

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What are your most useful chargeback tips?
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This is an important part of my business as I sell, install and support Equitrac and Copitrak cost recovery, print control and workflow systems. Printing/copying in an unregulated, uncontrolled environment is perceived by users as "free." It is not. Significant drops in volume can be expected when users must identify themselves to make copies, and when print activity is monitored. In many professional environments, actual billback takes place -- passing the printing cost on to external customers. In other instances, accurate tracking of office equipment use is monitored and used to sub-alocate budget internally.
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Great article. As the research director for the Technology Business Management Council, I've been somewhat surprised at how few companies implement chargeback for IT. Our TBM Index survey shows that approximately 17% of large companies use chargeback to allocate the cost of IT. And its use varies quite a bit from industry to industry: for example, nearly one third of banks employ chargeback for IT costs, but just 9% of insurance companies do.

Chargeback can be a very useful tool for managing demand and encouraging value-based consumption of IT resources. But too often corporate finance chooses not to support it, sometimes out of fear that chargeback distorts business behavior! Admittedly, we've seen cases where chargeback becomes its own "cottage industry," including various attempts to rig the system of charges. Despite these challenges, chargeback remains a very valuable tool for many companies and should be considered by anyone trying to shape demand.

A very useful interim step is cost transparency with showback. In other words, report the total costs of your infrastructure, applications and services to your business partners based on how much they've consumed. It's important here to show them not only total costs but also the volumes consumed. There are practical ways to do this, including software like Apptio, that automate the analysis and reporting by using your raw data.

One all-too-common mistake is to pursue chargeback based on general ledger line items. This approach is often employed by corporate finance divisions who use allocation rules based on headcount or revenues. A much better approach is to base the charges on consumption of infrastructure, applications or services – things that make sense to your business consumers.

Another objection to charging back is that IT is just a few percentage points of your revenue. This line of reasoning is dangerous. First, IT often represents a significant portion of a firm's capital spending and must be carefully managed. Second, IT is essential to running, growing and innovating our businesses; we must get all the value we can from our limited ability to fund it. Chargeback can help with both of these challenges.
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