How can my organization successfully implement IT chargeback?
For organizations initiating IT chargeback, some of the first questions are often basic ones like “What is IT chargeback?” and “Why should our organization move to a system of IT chargeback?” This article takes a look at frequent issues organizations face immediately after deciding to move forward with IT chargeback.
Step 1: Selling the chargeback idea
Chargeback is a team sport! Chargeback success relies on IT, business units (BUs), and corporate functions (CFs) working together.
When IT budgets are centralized and owned by IT, the BUs and CFs don’t see the IT cost. For them, IT feels like a free and unlimited resource. Moving to a model where the BUs and CFs will be charged for the IT products and services they use is a big change requiring collaboration.
Imagine receiving a surprise electricity bill when you have never paid for electricity before. Surprise chargeback won’t work and initiating chargeback as a surprise won’t help to establish trust and partnership.
The BU and CF 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 be a surprise to them when chargeback happens.
Step 2: Organizing for chargeback
Let’s be honest, IT is good at IT. Finance is not the primary skillset of IT.
Many IT organizations don’t have the people or skills needed for an effective chargeback. Finance skills will be important. IT will need to do new things like model the costs of products and services, set rates, and calculate bills. All with the goal 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.
»Related content: The controversy of chargebacks in the cloud
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 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):
- Allocation – Allocation uses methods like pass-through for actual costs, or percentages or weightings to spread costs of products and services across customers. A common complaint with the allocation approach is that percentages and weightings can unfairly burden customers for products and services they don’t use or use very little.
- 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 kind of extra recovery or refund at the end of the year to break even.
- Cost + admin fee – IT adds a small markup to account for overhead and other costs.
- Price or rate – IT sets prices or rates in advance by working with their customers to forecast future demand.
»Related content: How to successfully implement chargeback and run IT like a business
Step 3: Putting the right systems and processes in place
Can you use spreadsheets for chargeback? Yes. Should you? No.
With those questions answered, let's move on to discuss some of the right systems and processes successful organizations use to implement chargeback. The systems and processes will need to do the jobs of (not exhaustive):
- Defining product and service offerings
- Tracking actual costs
- Managing demand
- Planning rates
- Calculating bills
- Transferring money to IT
- Marketing and selling products and services
- Sharing chargeback bills and reports with customers
- The corporate finance system is critical. The corporate finance system must process the chargeback bill (also referred to as the bill of IT) to enable transfer of money to IT.
The systems must be multi-user systems that provide auditing capability and scalability. This is why spreadsheets are not a good choice.
Step 4: Baseline the current state
Let me butcher a cliché for a moment. “You can’t know where you are going until you know where you have been.”
Capture the current state and include:
- Total IT costs
- Total cost of ownership for each product or service
- Total IT cost by BU and CF
To capture the current state, the following information is also needed (not exhaustive):
- Portfolio of products, services, applications, technologies
- Asset inventories
- Capacity, usage, and utilization
This is a great opportunity to use and validate the systems and processes from Step 3, above. Store the baseline current state in the systems and use them both for defining and pricing products and services for chargeback.
Step 5: Transfer the IT budget to the business
That’s right, IT needs to transfer its budget to their customers. IT can’t have a full budget and do chargeback.
There are many strategies for transferring the budget, including:
- The big bang – The whole budget all at once.
- Staged transfer – Break the transfer down into smaller batches.
- Never 100% – Some organizations choose to keep some IT budget for management, innovation, or more.
Transferring the IT budget is a fundamental change for an organization and requires support and commitment from corporate finance and senior leadership.
Some organizations can take advantage of tax optimization opportunities by charging legal foreign entities for IT products and services. We mean real big dollars, like one Digital Fuel customer that has used chargeback to support $90million in annual tax deductions.
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 and CFs own the budget, they have choice. IT needs to be an attractive option for their customers.
Maximize likelihood of BUs and CFs buying from you by clearly defining and communicating:
- What IT sells
- What value IT delivers
- How IT is better than other options
And deliver well so that you can retain happy customers.
Step 7: Continue to learn
An essential component of all implementations is ongoing learning and process improvement.
To learn more, download the free eBook: "Showback & chargeback: How to use IT cost recovery to optimize costs by shaping consumption and demand"
You can also learn more about Apptio's chargeback capabilities here.
Editor's note: This post was originally published on the Digital Fuel blog, which has since been retired (January 2018). It has been updated here with new links and resources.