Tuesday, August 03, 2010

IT Chargeback, gain or pain ?

Every so often, the subject of chargeback raises its head, and challenges (un)conventional wisdom. In the recent past, it has been in the news as a critical requirement for deployment of cloud computing. Many reports have been written on why IT chargeback makes sense—especially in a diversified enterprise, with multiple business units using IT services provided by a corporate function. Almost everyone uses the rationale that chargeback helps IT allocate fair (?) cost to consumers of these services, and thus possibly provides the budgeting framework for KTLO (Keeping the Lights On) or BAU (Business As Usual).

I looked up IT chargeback on Wikipedia, and found the paragraph below as the closest definition:

“IT Cost Transparency is a new category of IT Management software and systems and that enables Enterprise IT organizations to model and track the total cost to deliver and maintain the IT Services they provide to the business. It is increasingly a task of Management accounting. IT Cost Transparency solutions integrate financial information such as labor, software licensing costs, hardware acquisition and depreciation, data center facilities charges, from general ledger systems and combines that with operational data from ticketing, monitoring, asset management, and project portfolio management systems to provide a single, integrated view of IT costs by service, department, GL line item and project. In addition to tracking cost elements, IT Cost Transparency tracks utilization, usage and operational performance metrics in order to provide a measure of value or ROI. Costs, budgets, performance metrics and changes to data points are tracked over time to highlight trends and the impact of changes to underlying cost drivers in order to help managers address the key drivers in escalating IT costs and improve planning.”

A mouthful indeed! Now, I agree that IT cost transparency matters, but chargeback? Having been part of enterprise IT across industries and IT models that included chargeback systems or none at all, my perspective:
  1. Chargeback systems are important if IT is a “service provider”, and needs to justify every expense; innovation will have limited scope in this context
  2. Chargeback systems will always be challenged by the majority of business units, as being an unfair practice
  3. You will be required to reduce costs year-on-year irrespective of volume, and especially when business goes through recessionary cycles
  4. Even after automation, the effort required for maintaining and managing data can be humungous. This will have the IT team on a defensive stance, churning out unusual associations of metrics in reports
So why is chargeback coming back again? Does virtualization, cloud service, or the next disruptive technology suddenly turn the tables in favor of chargeback? Does it really matter which specific function or business unit pays for the service, considering that it’s a zero sum game for the enterprise? So why should you bring in the complexity of managing unit costs for transactions, memory, CPU, storage, bandwidth, man hours and licenses?

When IT shops struggle to get incremental budgetary support, the practice of chargeback is typically seen as a vehicle to justify the high cost of KTLO or BAU. This is evident if you consider that with the exception of manpower cost, all other metrics have been on the downward spiral over the last decade. Thus, marginal reductions in these KPIs help in sustenance of inflated budgets, while keeping the attention away from metrics that matter (like contribution to business growth, profitability or customer retention).

CIOs should carefully evaluate why they need to implement IT chargeback mechanisms. After all, if they have aspirations to move to the next level of evolution, they should be enamored by business, and not expend energies counting pennies.

4 comments:

  1. If the IT function of an organization is satisfied (in their context) being a cost center then charge back is perhaps not so critical. But for It function aspiring to move up the maturity curve and become a business function that delivers real business value (not just provide boxes and connections) then it needs to devise a way to allocate its cost to businesses. I don't know how the charge back should be calculated and always found it debatable given the practice of tracking human resource effort in IT is usually questionable.

    In my observation and limited experience when a charge back or for that businesses are charged for an IT service, the ownership of the initiative or the IT part of the project improves. Also a push back to business to justify the need for investment in a IT initiative does result in weeding out unwanted projects and freeing up bandwidth. A the same time the credibility of the IT function as a whole to deliver what they say or commit is critical else they are viewed as an hindrance especially on business critical initiatives

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  2. I agree that CIO's shouldn't become bogged down with counting pennies, but they wouldn't have gotten into their position without at least a small amount of financial responsibility, right? Thats just what it seems to boil down to, being responsible with the funds they are given. Great article, definitely food for thought.

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  3. Infact charge back is discussed when IT is looked as a cost center. When the CIO can talk, focus on & measure the Business benefit delivered, costs of IT usually become a lesser issues.

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  4. Enabling IT Chargeback can educate each department to show the true cost of their actions. Chargeback can enhance best practices by creating cost awareness for each department.

    It also helps stakeholders make well informed decisions. IT chargeback can be used with a technology strategy aimed at getting executives to understand the requirements necessary to accomplish business objectives, so CIOs can deliver the right mix of technology to support these goals.

    Providing decision-makers with timely and accurate historical metrics about IT asset usage will have implications for technology evaluation, and can improve planning of future technology investments for the organization.

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