Pay Up for IT Services: How to Create an IT Chargeback Model

Business managers are increasingly being asked to shell out for the IT they use. Here's why they find it painful -- and how you can create a billing model that best meets the business' needs.

Tell business folks that you'll be charging them for IT services, and get ready for pushback. Let's face it: Business managers don't like bills, especially for things that used to be free.

From a CIO's perspective, chargeback is great. When a CIO charges back IT costs to business units, he makes them accountable for their own spending. Got business-unit managers who need a slick new marketing database or Blackberrys for all? No problem. As long as they're willing to live with the costs on their profit-and-loss statements, they can have whatever they want.

From a business executive's perspective, chargeback isn't so great. Lots can go wrong, according to survivors of failed chargeback efforts. For starters, most line managers simply believe that IT purchases and services shouldn't be allocated. Then there are administrative problems. Depending on how you do it, chargeback can be expensive to implement. At some companies, new and costly bureaucracies have sprung up as IT has tried to figure out who uses how much IT.

Yet businesses have become more interested in chargeback since 2001, when tech stocks collapsed and companies that had been splurging on IT suddenly reversed course and cut costs. In this environment, "everybody wanted to manage demand when

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there were not enough resources," says Barbara Gomolski, a research vice president at Stamford, Conn.-based Gartner Inc.

The Sarbanes-Oxley Act of 2002 sharpened companies' focus on IT governance, which has added to chargeback's allure. Now many vendors offer cost-tracking software. And many companies, particularly larger ones, are starting to track costs, including those for IT. Some are content to do so by business unit; others try to calculate costs for specific services, like answering a help desk call or dispensing money through an ATM. Cost tracking "has been a really hot area the last year or so," Gomolski says. "People are trying to associate costs with services they provide."

It's no surprise that chargeback makes the end of the quarter look a lot different. CIOs can show top management which business units spent how many IT dollars. This makes IT look more like an internal business partner that manages technology investments and less like a black hole with a burgeoning budget. At the same time, CEOs get a better idea of which business units are truly profitable.

But the politics and tedium of tracking pennies often kill chargeback before it can produce meaningful results. Penny Collen knows exactly how this happens. Now an independent IT consultant to a midmarket physicians group in the early stages of implementing chargeback, she spent much of her career working as a finance manager for a major telecommunications company that tried and abandoned IT chargeback not once, not twice, but three times.

The first time, the company turned IT into a profit center that charged market rates (and thus included a profit margin) for its services. That ended with a merger. The second time, it tried to offer services at cost, but line managers fought back, saying the costs were still too high. The third time, the company tried a limited, cost-based version of chargeback, which was eventually dropped because it was ineffective.

In general, "all of the ins and outs followed a similar pattern," Collen says. "There was an idea put forth that this would be a great way to impart accountability and eventually save money because people would be more aware of costs. All three cycles of it came on with the same sort of euphoria.

"And in every case, [IT chargeback] would go in, and the people would find that it was a higher cost to maintain than they thought and that it did increase communication, but not always positive communication." To wit, when IT communicated costs to the lines of business, the lines of business shouted back. Amid the bickering, "the corporation lost interest in devoting enough energy to keep it alive," Collen says.

Indeed, chargeback is so contentious that some organizations wanting to implement it avoid the term entirely. "I don't even use the word 'chargeback,'" says Troy Stovall, senior vice president of finance and operations at Jackson State University in Jackson, Miss. Stovall has hired a consultancy to track costs across the university, including IT costs, which eventually will get charged back. "I'm just trying to get people into the mind-set of tracking what they're doing."

To get a better idea of how to make chargeback work in a midmarket company, we interviewed several experts and IT executives. Here is their advice.

This was first published in February 2006

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