Newsletters:

Chargeback can be an Integral Part of Your IT Strategy

Mar 8, 2010
By

Lisa Erickson-Harris






Business executives are demanding cost transparency for IT all around the globe. What’s involved in managing those costs effectively? Certainly chargeback or showback is one aspect of the financial picture—the outbound side of IT costs but, much more is involved to truly manage the financial life of IT and costs within this domain.

Last year was a year for financial challenges in all walks of life. Automakers were collapsing, financial institutions in question and those around us were struggling to hold together their own personal economics. IT financial management gained steam in this environment. With a struggling economy, executives have necessarily put pressure on IT leaders to demonstrate transparency in managing costs and providing more accountability for proving the value of IT investments. These demands will continue in 2010 and far beyond.

Chargeback is an old concept. From a practical standpoint, chargeback is simply is a matter of tracking usage of IT services as a measurable unit over time, recording that usage and then issuing a bill to each “consuming” department or business unit. But billing internal departments is a political hot potato for many companies. The culture of those businesses does not support IT billing for its contribution and, as such, the internal churn this creates is not worth the political risk for many involved in IT finance.


Showback, on the other hand, is emerging as a way to track usage and educate internal groups about their consumption while avoiding the politics of chargeback. This can be effective for some organizations. Yet other IT groups cannot get respect without actually billing and having dollars come out of business unit margins for services received.

The Cloud may actually ease this political dynamic. Since Cloud computing inherently must slice and dice services (and hence infrastructure components) evaluating what services are being used, by whom, when and how much, it makes the transition to billing much easier than other architectural designs for IT. Historically, there have been many arguments that capital and operational investments support many services, not just one. Cloud computing, the economy, and the maturity of IT are all driving forward the need for less ad hoc accounting and planning. Tools must be much more sophisticated to meet current market demands.

While chargeback is an important function within IT cost management, IT executives will continue to work with the politics around chargeback—edging forward as IT matures and gains increasing respect in the enterprise. As I outline below, other cost management steps can be taken in the mean time. Cost management for IT can be broken down into the three broad categories of planning/budgeting, collecting usage data, and applying analytics to assess usage in the form of trending and, potentially, billing. Each category can further be broken down into the following:

Planning/Budgeting

Budgeting—IT budgeting occurs at many levels. In IT cost management, it looks at the budget investment within IT and how that budget will be allocated to services.

Creating a cost model tied to services—Assessing the most critical services being delivered to the business and defining them in accordance with cost management practices. This most effectively will be linked to the service catalog though there may not be a one-for-one mapping in cases where the business does not wish to track costs for less critical services.

Development of a rating engine—Determining the service unit rate can be a manual process or highly automated depending on the tool sets available. The task is to identify the cost per unit of service delivered and then apply that to the cost model.

Data Collection

Usage data collection—Deploying tool sets that can automatically collect usage data. In some cases, this may be a function of application usage. Ideally, it will represent services identified in the cost model.

Normalizing data to match cost model—Since the usage data will come from many sources, some normalization may be necessary to clean the data for use with the cost model. The rate structure can be applied during this normalization process.

Analytics/Cost-Related Outputs

Forecasting and trending—Over a period of time, IT can begin to build on usage data and its cost model to perform many predictions for IT expense. Part of the forecasting process can be to look at what-if scenarios that can positively impact IT expense.

Reporting and dashboards—For both IT and business leaders. This is the most important objective in IT cost management. It enables transparency being demanded by business executives leveraging the detailed work that went into developing a cost model and collecting data to populate it.

Bill or statement generation—Again, this can be used to move ahead with chargeback or as an educational tool for showback.

Integration to the general ledger—Connecting back to the business’ general ledger to reflect charges on a periodic basis.

In the end, whether you as a CIO seek to implement chargeback or not, it is your choice. Many will do so successfully. Some will feel the political pain. The good news for any CIO is that there are tools on the market to help with cost management including chargeback, but go far beyond chargeback. Most tools on the market today are multi-faceted to achieve the right level of IT cost management for varying organizations. Enterprise Management Associates (EMA) will be doing much more work in this discipline during 2010. I’d love to hear from you if you are doing chargeback, have chosen to stick with showback or perhaps are dancing around the two with a different approach to IT cost management. Please email me at lisaeh@emausa.com.

Lisa Erickson-Harris has over 18 years experience in the computer industry, having served in a variety of technical, marketing, and managerial roles. As a research director at Enterprise Management Associates, she focuses on service level management, business process management, small-to-medium business infrastructure management needs, and partnership strategies for channels and strategic relationships.


Tags: cloud computing, IT budgets, EMA, chargeback, showback,
 

0 Comments (click to add your comment)
Comment and Contribute

Your comment has been submitted and is pending approval.

Author:

Comment:

 (click to add your comment)

Comment and Contribute

Your name/nickname

Your email

Comment:

(Maximum characters: 1200). You have characters left.