IT Chargeback and Demand Management

Many IT organizations are moving to a shared services model and implementing ITIL framework precisely because of the alignment to business needs and effective management of IT resources it provides. The notion of charging customers for the products they consume is fundamental to the capitalist principle of assigning resources based on value, supply and demand. When an IT organization develops a fair and transparent chargeback model—even if it is just used for "showback"—the same behavior takes place; business leaders start to control the demand for IT services based on the value they provide to the business and make choices to lower the cost of services.

"Technology Business Management is a key ingredient to helping CIOs manage the business of IT and provide transparency into the cost of IT services to business leaders." Rebecca Jacoby, CIO, Cisco Systems

Get Started with a Simple Bill of IT

Whether you are pursuing a full chargeback policy or just want to show transparency into the cost and usage of IT Services, start with a Bill of IT. Apptio cost transparency templates and visual modeling environment can get you up and running in a matter of a few short weeks. Data can be input from rate card forms, spreadsheets, general ledger reports or direct data feeds from systems management software—whatever form your data is in today. The important thing is to start providing cost transparency, and build on its success as you go.

Automating IT Cost Allocation

IT organizations that have a good understanding of their fully-loaded costs to deploy an IT service are more effective at managing their costs and eliminating wasteful practices.

The next step in driving a good chargeback or allocation policy is IT Service Costing. To understand the true costs of an IT Service, including all cost drivers (hardware, software, labor, facilities, overhead), IT organizations should use Activity Based Costing (ABC). ABC understands which support tickets are allocated to each IT services and which VM's host which applications for a fair and accurate cost allocation model. Chargeback based on ABC not only provides the greatest accuracy and fairness, but enables superior cost management.

Deep understanding of unit costs helps IT managers make more informed cost optimization decisions, such as:

• Which server or desktop platform is most cost effective to own and maintain?
• How can I optimize my storage tiers and types for cost?
• Where are cloud computing (SaaS, PaaS, IaaS) offerings more cost effective?
• What virtualization strategies or VM standards most cost effective?
• How do I track my application portfolio's cost and usage for application rationalization?

Quality and Utilization

While cost provides one side of the value equation, usage and quality of service metrics provide the complete picture. A complete Bill of IT should show key value metrics like service consumption, quality of service metrics and/or resource utilization. These parameters not only help business leaders understand the cost of the services, but help drive better resource alignment.

A Path to Chargeback

While most organizations today are not ready for a true chargeback model—one where line of businesses (LoB's) are directly charged for the IT services they consume—"showback" policies provide a good stepping stone, build trust in the process and foster many of the good behavioral changes desired.

The biggest reason companies fail at enabling successful chargeback policies is an allocation metric that is not fair, accurate or easily understood. If a business leader cannot understand the methodology or doesn't think it is fair, they won't support it. The best policies allocate costs based on consumption (activity based costing) and on metrics the business understands (headcount, business transactions, usage, product delivery, etc.)

Start with a Showback program that is completely transparent in its allocation policies and Service cost make-up, and one that provides a seamless path to true Activity Based Service Costing and deep service cost and quality analysis.

IT-Business Alignment through Demand Management

A Bill of IT fosters better understanding across business leaders of the cost to deploy and maintain IT services and encourages behavior that increases cost efficiency and good IT practices. A Bill of IT forms the basis for Demand Management, a practice in which Line of Business leaders regularly review the consumption of IT Services and align budget with the business' most important initiatives.

Demand Management is one of the most effective ways to reduce cost in IT. Over time, a surprising number of applications and infrastructure are no longer used, or at least not required by business consumers, but are never turned off or "un-subscribed." These represent low hanging fruit in recouping IT costs—up to as much as 5% of the infrastructure or software budget—by turning off the software license, remove support/maintenance, redeploy infrastructure.

But the longer term benefit of proper Demand Management is better alignment of IT to business needs. Once the Line of Business manager is accountable for their IT spend and has transparency into the cost and consumption of IT Services, they can choose to increase spend in higher priority areas and cut spending where it is least valuable. And when business leaders are in charge of the IT budget, they become fierce champions of new IT projects that help them reach their goals and hawks of business practices that are wasteful.