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General Information
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September 25, 2009
• Vol.31 Issue 24
Page(s) 42 in print issue
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To Chargeback Or Not?
Managers Demand Transparency To Scrutinize IT Budgets
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| Key Points
• Chargeback is a system for fairly allocating IT costs to internal businesses based on their use of defined IT services at rates based on levels of consumption.
• Although chargeback billing is often mandated by executive management, it’s likely to meet resistance.
• Using crude allocation measures such as revenue or number of employees and calling it chargeback is guaranteed to raise the ire of business mangers; chargeback requires a service catalog. Although an ideal, 100% of IT’s budget need not be recovered via chargeback. | Pay for what you use. It seems a simple enough concept, except that for years, most IT shops have been run like an all-you-can-eat buffet. The problem stems from IT’s funding model—typically crude but easily implemented allocation methods that more closely resemble a tax on business units than fees for service—which the past year’s economy and IT belt tightening have exposed as wasteful and inefficient.
“Past crude allocation mechanisms provided no real insight into IT costs and led to the perception that the cost of IT always seemed to exceed its value,” says Craig Symons, vice president and principal analyst at Forrester Research, in a recent report. These factors have led business executives to demand greater IT cost transparency. Financial experts agree that IT chargeback, or the practice of selling IT services using consumption-based rates, is the most effective means of clearly exposing IT’s costs.
According to Symons, “The single biggest disconnect between IT and its customers is that the typical IT organization manages technology assets (e.g., servers, storage, and networks), while IT customers consume services (e.g., email, document management, and statement processing).”
 Chargeback Benefits
According to Steve and Bronagh Sorota, founders of VAlign Software (www.valignsoftware.com), IT chargeback addresses two key issues: illustrating IT’s business value and facilitating demand management. Chargeback allows lines of business to see what they’re paying for, says Bronagh Sorota. “IT is no longer this big black hole.”
Symons explains the problems with lump-sum charges: “A single, large line-item expense on a business unit profit and loss statement provides no information about what exactly that cost includes and makes it impossible for business executives to connect their IT costs to any business outcome or measure of value.”
Chargeback also provides accountability for IT consumption, says Steve Sorota, so users are incented to request only what they need and not what they’d like. “Without chargeback, there’s no reason to be efficient,” he adds. A lack of financial feedback leads to overusage and waste and, Symons says, makes it impossible for business units to manage IT spending. “Each month the charge appears, and the business executive has no control over it,” he adds.
An indirect benefit of chargeback funding is that it addresses the perceived unfairness of IT allocation systems that apportion IT costs using a rough formula based on business unit revenue or headcount. According to Symons, “The problem with these allocation methods is that they don’t necessarily correlate with actual IT use, which leaves ‘light’ IT business units subsidizing ‘heavy’ IT business units.”
IT chargebacks also can improve alignment of scarce IT resources with enterprise needs. According to Symons, usage-based billing provides visibility of most important services, which can ensure IT operational budgets and new investments are spent on the right activities.
Rob Mischianti, vice president of product management at Nicus Software (www.nicus.com), says one of the major changes he’s seen recently is the use of chargeback as a decision support, budgeting, and forecasting tool.
Pitfalls & Likely Pushback
So if chargeback accounting has such clear benefits, why aren’t more companies using it? According to a recent Forrester survey, half of IT shops don’t use chargeback, and Symons believes these organizations either don’t see the benefit or don’t know where to start.
Chargeback isn’t without its detractors. “Charging back for IT services has been a controversial practice for many years,” Symons says, “so much so that a significant number of organizations have either never implemented IT chargeback or have stopped the practice.”
The doubters are generally business managers at companies where chargeback has been poorly implemented. Some IT organizations, in seeking a quick and easy way to initiate chargebacks, bypass the necessary but laborious step of creating a service catalog, with a resulting billing scheme that’s just another form of cost allocation. Symons notes this naturally leads to complaints—the systems aren’t fair, don’t provide details into services rendered, or offer no way of controlling a business unit’s IT costs—that unfairly tarnish the entire concept.
Steve Sorota says resistance to chargebacks also comes if chargebacks become too complex for the buyer, which can occur if usage metrics and billing rates are too granular or misunderstood. “The end user feels like they’re being taken for a ride,” he adds. Mischianti says another obstacle to chargeback is the expense, which runs about 1% of the total IT budget.
Resistance doesn’t always come from users; because chargebacks are often mandated by upper management, IT is often guilty of foot dragging. Chargeback necessitates rethinking IT’s deliverables, shifting from infrastructure and asset management to focusing on services and applications, which Symons notes presents a natural inertial challenge. “Chargeback can’t be done without organizational change,” he adds.
Starting Points
The benefits of chargeback billing require some up-front work, starting with an IT service catalog. Symons advises using the detailed templates from the ITIL for service strategy, design, and financial management (see www.itlibrary.org/index.php?page=ITIL). With a catalog in place, the Sorotas say the next steps entail mapping various infrastructure assets and support personnel to each service and tying service usage to organizational consumers (either individuals or business units). While cautioning against adding unnecessary complexity, they also note another challenge is setting the right rates. “If you guess wrong, you won’t recover all your costs,” says Bronagh Sorota.
Applications that are broadly shared, such as ERP systems, can prove troublesome to chargeback implementations, so it’s probably easier to continue allocating their costs, according to Symons. Likewise, the Sorotas note that highly virtualized environments are difficult to chargeback without specialized financial tracking software.
According to Symons, “There can be no more ‘free lunch’ for IT customers, but at the same time, IT can no longer allocate IT costs as a lump sum.” IT chargeback is a proven means of demonstrating IT’s business value, facilitating demand management, and regulating consumption. 
by Kurt Marko
Recommendations For Getting Started
Here are Forrester’s recommendations for organizations considering a chargeback plan.
• Implement a service catalog. The most effective chargeback results from products and services that are well understood by the business users. Work closely with business users to identify and define the business services that they require.
• Work with finance. Work closely with the finance and accounting department to develop cost models for each product and service. ITIL version 3 provides some excellent guidance for service costing.
• Assign relationship managers. The biggest immediate benefit of implementing IT chargeback is enabling the enterprise to better plan and forecast its IT costs. Relationship managers can work closely with the enterprise to help it understand and plan its IT demand.
• Make it real. After a trial period of six months to a year, link business units’ IT costs to their budgets and P&L statements. Information-only chargeback is an improvement over none, but it doesn’t really provide the accountability and incentive to change the behavior that leads to improved demand management and governance.
SOURCE: “IT CHARGEBACK ADOPTION: THE HAVES AND HAVE-NOTS”; FORRESTER RESEARCH REPORT BY CRAIG SYMONS WITH SHARYN LEAVER AND TIM DEGENNARO; JULY 29, 2009.
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