6 Steps for Implementing IT Chargeback

Chargeback won’t deliver financial accountability by default. Set up your chargeback process for success by adopting best practices.

IT chargeback holds a business unit (BU) financially accountable for its IT use by providing visibility into and charging for its use of technology. IT chargeback enables your business unit (BU) partners to understand their IT costs and proactively change their use of IT to influence those costs. However, chargeback is just a tactic, and tactics must be executed correctly to deliver the desired outcome. Deciding to implement chargeback is a big decision for any organization; deciding how to implement chargeback in an organization is as equally as important.

Step 1: Determine if chargeback could help your organization

Chargeback success relies on IT and the business working together. Chargeback is a team sport, not an individual one.

Business Units (BUs) don’t see IT costs when IT budgets are centralized and owned by IT. For them, IT feels both like a free and unlimited resource as well as a black box in terms of the detailed expenses. Moving to a model where the BUs are charged for IT products and services is a significant change requiring collaboration. A business leader doesn’t want to be surprised by their first chargeback bill of IT; technology leaders need to help the business understand their first bill of IT before receiving their actual first bill of IT. One tactic is running a showback process for a few months before the chargeback go-live date, so they don’t get sticker shock from their first chargeback bill of IT.

BU budget holders need to understand the reasons and benefits of chargeback — like freeing more IT budget for innovation and better alignment with business needs. There will be detractors, but it will not surprise them when chargeback happens.

Step 2: Organize for chargeback

IT organizations need to commit to training their people to deliver effective chargeback as many may not currently have the people or skills needed for an effective chargeback. Finance skills are important. IT needs to do new things like model the costs of products and services, set rates and calculate bills — all in service of recovering costs.

Chargeback also creates the need for product and service owners: people who design, deliver, market, and recover costs for IT products and services to IT’s new paying customers.

To organize for chargeback, accountability and responsibility will need to be assigned for (not exhaustive):

  • Defining a portfolio of products and services
  • Calculating the total cost of ownership (TCO) for products and services
  • Marketing products and services
  • Defining and implementing a chargeback strategy
  • Recovering costs

With chargeback, IT becomes a supplier, much like any commercial supplier. They have products and services to market and sell to customers. The chargeback organization must decide what strategy to use.

There are many strategies for chargeback. Some common strategies include (not exhaustive):

  • Cost or break-even: This chargeback strategy is used when IT cannot over- or under-recover. The amount they recover must be equal to the cost. Prices are set to achieve this. Often IT needs to perform some extra recovery or refund at the end of the year to break even.
  • Cost + model: IT adds a small markup to account for overhead and other costs. You should be reasonably assured that it will always cover costs each quarter (probably just 2%-3% over the expected cost of goods sold (COGS) is enough), even if the COGS end up increasing slightly for one reason or another. BUs have a more consistent expectation of price, and you won’t have to ask for more money at the end to cover unexpected expenses. However, you may have to figure out a way to give the extra money back to the BUs if you didn’t need it all.
  • Strategic pricing: IT sets prices or rates in advance by working with their customers to forecast future demand. This strategy uses price to influence demand. For example, IT can shape demand for a preferred security service by artificially lowering the cost of a security service it wants everyone to use while raising the price on the legacy system it wants to discontinue. The challenge here is to make sure that the artificial price is acceptable to the BUs and that the math works out to a point where IT covers its costs.

Step 3: Make your chargeback model accountable

IT chargeback isn’t solely about cost reduction; it’s an ITFM tactic that continuously aligns IT investment to business value and services to customer needs. If IT chargeback were only about cost recovery with no aspiration of fairness, organizations would settle for an even-spread allocation for each BU and call it good. But they don’t. Reframe the purpose of an IT chargeback model and make it accountable by making it less about recovery and more about shaping demand by building business relationships. Here are some strategies to make your chargeback model accountable:

Price each IT service

Communicate IT value in terms BUs understand with unit rates per service. IT doesn’t need to get into a value conversation with BUs. “Value” is subjective, and corporate IT shouldn’t take on the role of telling the rest of the business how they should or shouldn’t use IT to deliver business goals. Like any other resource they need to pay for, BUs bestow “value” by deciding what to pay for. This applies as much to individual services as it does to a shared-services model for part of your service portfolio. An IT chargeback model reframes value away from the subjective and toward market forces of supply and demand.

Build confidence in a chargeback model

Demonstrate how a chargeback model reduces the pain of year-end true-ups. Nothing undermines confidence in ITFM processes more than going back to a BU with either a surplus (“Great. The year is at the end. When do I get to spend this?”) or an ask for more from a close-to-exhausted budget.

Cost-based billing removes the need for true-ups because you are billed per monthly actuals, which means those bills are “seasonally lumpy.” Cost-based billing codifies unpredictability for BUs with variable consumption patterns.

Budget-based chargeback models deliver predictable bills with minimal true-ups, layered with IT context. There will always be some reconciliation between plan and actuals, but that’s minimized by tracking cost recovery throughout the year.

A hybrid billing model may be the best tactic to build confidence in your chargeback model. Some services have flat actuals spend throughout the year — leverage cost-based billing; other services vary by business cycle — leverage budget-based billing.

Generate stakeholder buy-in

Corporate IT is not the only game in town. Anything as a Service (XaaS) compels in-house service offerings to be compared fairly with external ones. When BUs see these comparisons to be unfair, they ratchet up their own shadow IT spending to minimize interactions with the new chargeback system.

Unfairness is amplified if new charges are dramatically different from the old. Higher service unit rates could imply a newly coined profit center; lower ones would question all the “excess” charges from the past.

IT Finance teams must fully understand the composition of bills to be the voice of authority in the face of BU questions.

Step 4: Put the right systems and processes in place

Can you use spreadsheets for chargeback? Yes. Should you? No.

Your chargeback implementation needs specific capabilities to be successful. These include the capability to:

  • Define product and service offerings
  • Track actual costs
  • Manage demand
  • Plan rates
  • Calculate bills
  • Transfer money to IT
  • Market and sell products and services
  • Share chargeback bills and reports with customers

Spreadsheets struggle to deliver these capabilities in a timely, repeatable manner. Many companies have ditched chargeback spreadsheets and instead adopted a purpose-built chargeback solution.

Step 5: Baseline the current state

Chargeback, when implemented correctly, will influence the business’s IT consumption. Benchmark this influence by capturing the state of IT consumption before adopting chargeback. This requires using your IT cost model and operational and financial data for the following:

  • Total IT costs
  • Total cost of ownership for each product or service
  • Total IT cost by BU
  • Portfolio of products, services, applications, and technologies
  • Asset inventories
  • Capacity, usage, and utilization
  • Projects

Store the current baseline state and use them to define and price products and services for chargeback.

Step 6: Market and sell products and services

IT is not known for marketing and sales. Chargeback forces the CIO’s organization to market and sell their products and services — and also themselves.

When IT has all the budget, they are the only option in town; when BUs own the budget, they have choices. IT needs to be an attractive option for their customers.

Maximize the likelihood of BUs buying from corporate IT by clearly defining and communicating:

  • What IT sells
  • What value IT delivers
  • How IT is better than other options

Chargeback requires a cultural and tooling change for everyone in an organization. IT and its business partners have historically had a siloed view of technology spend — IT thought in terms of operations, the business thought in terms of costs. A chargeback process can help break those siloes but only if implemented well.

To learn more, download the free ebook: “Showback & Chargeback: Optimize Technology Costs by Shaping Demand.”

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