Not-so-nasty chargebacks

For IT department leaders who must routinely justify the costs they pass along to various business units through delicate chargeback arrangements, solid market research is a necessity.

By their very nature, chargeback scenarios can instigate ill feelings between IT and other corporate departments. "You usually see chargeback scenarios in a troubled IT department and in environments where business units are having difficulty trying to get value out of IT," says Baschab.

"Chargeback mechanisms tend to cause underinvestment in critical infrastructure components, as well as significant internal dysfunctional behavior."

Yet for many corporations, chargebacks are a fact of life and aren't all bad. "We use tracking by business unit and an allocation process to charge the business," says Golden. "Typically, this can be a pretty nasty process, and ours is not without conflict. However, because we now develop our budgets and business cases together with our business partners, most of the spend is known upfront, and that minimizes surprises. We also provide complete transparency to all business unit heads."

Sean Worthington also recalls mixed experiences with chargebacks from his days as head of the IT departments at Silicon Graphics and other large organizations. "When I have employed chargebacks, the organization desired to have control over IT spending. However, the chargebacks allowed me to more precisely allocate the IT costs back to the customers of those IT services," says Worthington, who is now CIO in residence at Planview, an IT portfolio management company.

In fact, chargebacks can be highly effective, especially in situations involving easily measured expenses. "Chargeback is best for commodity service and cost recovery when consumption is fairly predictable and demands drivers are clearly understood and manageable," says Scott Holland, senior director and IT program manager at The Hackett Group, a strategic advisory firm in Atlanta. "This is often the case for maintenance projects -- for example, when IT dedicates a certain level of full-time equivalents to another department's maintenance needs and recovers through a chargeback instead of a budget transfer. This helps IT keep management control over those FTEs, where they may have lost management control if a budget transfer was arranged."

In some cases, chargeback arrangements are morphing into IT usage allocations. Specifically, business units are charged for their consumption of resources, such as storage or network traffic volumes. "For instance, a particular business unit in a financial services company might be processing a million trades per day," says Howard Rubin, an analyst at Gartner. "IT can figure out how much this takes in terms of storage, networking resources, etc. Consumption becomes visible, and charges are assessed based on system volume and unit cost."

Allocation of IT resources based on usage often holds practical appeal for business unit leaders. "When both IT and business units know the level of support they are dealing with and the costs involved, the mutual satisfaction level is increased," says Brian Schwartzentruber, principal consultant at GlassHouse Technologies Inc. in Framingham, Mass. "Unit costs are per gigabyte, per server, per port or anything else that affects the delivery of service."

By moving toward usage allocations, corporate IT departments might be able to use the budgeting process to begin functioning more as internal service providers to business unit customers. In his book, Baschab recommends this approach and suggests the use of inter-enterprise contracts to clarify expectations. "Actual hours for supporting the business unit are tracked in a time reporting system, and actual hours are billed. Service levels are defined, and the IT department is responsible for achieving service levels guaranteed," he writes.

As a rule, IT leaders should no longer view annual budgeting pow-wows as the corporate equivalent of a root canal. Instead, CIOs should turn these exercises into opportunities for change. "To the extent that the budgeting proc­ess remains a blunt instrument to force IT spending to a certain limit and keep it there, it will continue to draw criticism that IT is expensive, unresponsive and ineffective," says Holland.

Indeed, the CIO grown tired of regular budget bludgeoning should consider a more proactive stance and demand not only a seat, but a voice at the budgeting table.