The cost conundrum — managing the overflow

The cost conundrum — managing the overflow

Do chargeback schemes address the cost conundrum of enterprise IT?

In the early days of IT, companies developed what became known as chargeback systems.

Technology costs were calculated by recording the time mainframe and mini-computer systems spent processing information, and clients or business departments were charged accordingly.

“There was a time in the mainframe era when IT was a bureau service and you could account for compute and CPU cycles as they were used,” says Wayne Allen, head of data centre transformation at Unisys ANZ.

“As we moved towards open systems, chargeback became more about being a resource and shared service, and more about asset management.”

Today, chargeback has developed into a specific resource management discipline where IT costs are assigned to a specific business, department or person within an organisation.

However, make no mistake: Chargeback is one of the most politically fraught corporate accounting schemes ever devised. And it remains one of a CIO’s ongoing challenges.

The reason it’s fraught, says Andy Rowsell-Jones, vice-president and research director at Gartner, is because it’s both a political and relationship problem. At its core, the problem can be found with the mechanisms used to calculate how IT costs are charged back to various departments which use an organisation’s IT services.

“The idea of chargeback has been rattling around for a long time,” says Rowsell-Jones. Using the analogy of a free medical service, such as the UK’s NHS, trouble occurs when a service is virtually free. Because the service is free, demand is virtually infinite.

“If you don’t find a way of using price as a signal, your customers will continue to demand more and more from IT because it is not costing them anything,” he says.

How it starts

Arriving at this point of tension for CIOs where the business demands infinite, or unlimited, services begins when an organisation adopts an unsophisticated form of cross charging.

In this scenario, an organisation’s IT systems cost $x, with each functional department of the business charged a percentage of that total cost for the services rendered by the IT department.

That’s only part of the story for the IT department and the CFO who want a more transparent breakdown of IT costs, however.

“The next stage that most organisations find themselves in is a hybrid form of chargeback,” says managing director for business development and marketing at Capgemini, Deepak Nangia.

“The issue is that when business units become different sizes, some are doing more revenue, some less, some are making more use of IT than others, some less,” he says. “Questions start being asked as to why one department is effectively paying more relative to its size.”

At this point, the politics referred to by Gartner’s Rowsell-Jones come into play. Business unit leaders begin to think they are onto an exceptionally good deal (and therefore never think about it again). Either that or they come to the view they have received the wrong end of the stick: Paying more for IT services than another department.

Relief from this tension can arrive in the form of a hybrid approach to chargeback where IT costs are allocated to business units depending on their size and the extent to which they used an enterprise’s technology infrastructure.

“If IT is worked as a cost centre infrastructure costs are allocated proportionally,” says Cap Gemini’s Nangia. “If there are 500 desktop users in one department, then the cost of providing them with a desktop service is the overall cost divided by the number of users.”

IT à la carte

As an organisation expands, however, the hybrid model of chargebacks can also stop being effective and the notion of a menu of services starts to take hold.

“Think of it as a menu in a café,” says Rowsell-Jones. “It’s $3 for a coffee, $7 for cake and so on. The same concept applies with a service catalogue for IT. They will have service items and put a price against them. Setting up an email account will cost $x, a banking transaction might cost $y, and configuring a PC will cost $Z.”

The attraction of the service menu concept for CFOs and CIOs is the perception it both drives down costs and accurately apportions costs where they are actually consumed.

More mature organisations take the approach one step further and include tiered service levels in their service catalogues. They may offer platinum, silver and bronze services, and business units pay proportionally for the services they want delivered.

Yet this remains a rare approach. “Service catalogues are still not as common today as CIOs might want them to be,” says Nangia. “There should be more uptake than there is.”

The tiered service levels of a catalogue come into its own in cases where immediate service is needed, or when something can wait a few days. An example, points out Rowsell-Jones, is the loss of a laptop.

“If it’s a senior executive, and he or she wants a new laptop immediately, then there’s a cost associated with having that new machine sitting there ready to go,” he said. “That sort of service is the platinum level service that the IT department can offer.

“But if it’s a lower level staffer, or if the executive decides he or she can do without the machine for a few days, a new machine is ordered from the vendor, delivered, configured and finally handed over to the staff member. That might be bronze service. The cost of the laptop won’t change, but the cost of the service levels associated with delivering the laptop will.”

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