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February 5, 2009

Consumption-Based Chargeback: Now More Than Ever!

MoneypieIn times of plenty, it is easy to gloss over the specifics of where your IT budget is going, but in leaner times these details become more significant. That's why the ideas of cost transparency and consumption-based chargeback have made such a comeback in recent months.

Even some organizations traditionally resistant to the idea of chargeback are starting to come around, because it makes so much business sense:

  • It highlights the value that IT brings to the business. Chargeback and cost transparency take the mystery out of IT costs, and really underscore the extent to which IT enables the business. This makes budget-related conversations with both the customer and the folks in the executive suite more constructive.
  • It ensures that the accountability for IT spend is shared between IT and the business customer. When business units are suddenly forced to pay for the IT services they consume, they put more thought into the services they buy -- maybe each employee does not need a top-of-the-line laptop and Blackberry? maybe not all hosted applications need <0.01% unscheduled downtime? etc.
  • It makes tough business decisions that define today's tough economic environment more intelligent. One important business decision that many are having to make today is how and where to cut IT costs. The way most businesses do this is by cutting specific projects, or cutting a percentage of costs across the board. These kinds of broad strokes often end up hurting the business more than they help it! Cost transparency and chargeback take the guesswork out of decisions like this, and enable a more intelligent conversation.
Equally important to the newly fashionable chargeback adoption is that the much-maligned "old chargeback" has evolved and matured into the business-friendly "new chargeback":

Old "Accountants First" Chargeback: The old idea of chargeback was a somewhat arbitrary allocation of IT costs to business units, based on coarse metrics like headcount. In this model, the business units had no clear understanding of what they were paying for. This often resulted in unfair distribution of IT costs, and a lot of gripes from customers -- and justifiably so. Why should R&D pay for some of the IT resources consumed by Manufacturing? This is not the kind of chargeback that puts customer first.

New "Customer First" Chargeback: For chargeback to really work, it needs to have a mature, accurate, service-based cost model behind it. This model must be able to compute unit costs for each IT service and assign costs based on consumption, and the costing methodology must be made transparent to the business customer. Having such a service-based cost model as a foundation ensures that IT costs are distributed fairly and alleviates a lot of the common gripes about chargeback, because it helps business customers understand what they are paying for.

The upshot of all this is that now is a really great time to implement IT service-based cost recovery principles at your organization. Whether you choose to do full-scale chargeback or "shadow invoicing," this is a worthwhile project that will lead to IT spend reduction and higher accountability both for IT and the customer, as well as position IT as a key contributor to the business.

Posted on February 5, 2009 | Permalink

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