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IT chargeback process: Not always a best practice

IT chargeback process best practices can demonstrate the value of IT to the business, but chargeback pitfalls along the way challenge IT's role as a business partner.

Cloud computing may have caused interest in IT chargeback to resurge, but the core elements of the chargeback process haven't changed in 30 years, according to Charlie Johnson, proprietor of CNJohnson & Associates Inc., a financial and systems consultancy in Phelan, Calif. "Technology changes, and you need a new tool to "measure the cloud," he said, but chargeback best practices are about vision, not technology.

"I believe there's a certain core of best practices, but it needs to be flexible because every [company] is a little different, depending upon what their goals are," said Johnson, who will present a session on chargeback best practices at the Information Technology Financial Management Association conference in Harrisburg, Pa., this month. "A lot of the time, people don't have a clear vision for what they want to do," he said, and when that's the case, "there's a high probability it's not going to work."

Johnson, who founded his consultancy in 1992 after the bank where he was responsible for the chargeback process was acquired, is implementing a chargeback system at a global credit company. There, the multiple computing platforms make the job "complex, but fun," he said.

A half-dozen software programs are available to help IT do chargeback well, Johnson said, but the best practices for implementing them begin with one question: Why do chargeback? There needs to be a reason to spend that much time and energy, he said. When the vision is established, the questions become more specific. For example, is the chargeback system all these things?

  • Equitable: It uses activity-based costing to make sure one consumer isn't subsidizing another.
  • Repeatable and accurate: The same volume of work costs the same each month, regardless of what time or day it is done.
  • Understandable: The customer [aka business unit or user] and IT both understand the process, methodology and amount being charged for each activity.
  • Controllable or predictable: The customer can control or predict the cost of a particular activity. An increase or decrease in activity results in higher or lower costs.
  • Economical: The system itself is economical to run, including hardware, software and staff.

When he speaks of vision, Johnson doesn't mean just foresight. Business users are demanding greater IT cost transparency and visible financial analysis to understand the true cost of IT, according to Evelyn Hubbert, senior analyst and author of Forrester Research Inc.'s "Market Overview: IT Service Management Support Tools" report. "Many IT operations and development groups lack the business maturity to effectively demonstrate the business value of IT investments and operations," she wrote. The demand has given rise to a new category of business software suites designed to manage the records and delivery of an IT service portfolio or catalog.

Create a service catalog

If there is one best practice for IT chargeback, it would be the creation of a catalog of repeatable IT services. The service catalog has two major goals, according to Forrester's Hubbert: First, to structure IT (or business) services in such a way that the consumer can see the description, cost and service-level agreement (SLA) (and therefore decide whether to use it); and second, to encourage IT departments to offer standard services.

"People like to choose from a menu," said Marcos Athanasoulis, CIO of Harvard Medical School (HMS) in Cambridge, Mass. Athanasoulis was able to rein in some rogue computing at the school by offering cloud storage and computational services. At HMS, consumers pay for basic resources and can lease cloud capacity, for example, paying by the terabyte for cloud storage. "Once you hit a petabyte or even half a petabyte, you think about storage in a very different way," he said. In addition, school departments contribute their own hardware to the cloud, which works well in the "burst-y" environment of biomedical research, where one person's equipment might be idle, and another's is doing a CPU-intensive simulation.

Pitfalls lead to practical solutions

Finding one's own best practice means knowing what doesn't work with IT chargeback -- when it becomes an exercise in arithmetic and doesn't help managers make decisions, for example, Johnson said.

Bruce Maples is concerned that chargebacks put the IT department in the position of being a vendor to its business partners. "An internal vendor, true, but still a vendor," said Maples, manager of IT learning services for insurance firm Humana Inc. in Louisville, Ky. "And thus it encourages price shopping and poor comparisons," he added.

I believe there's a certain core of best practices, but it needs to be flexible because every company is a little different, depending upon what their goals are.

Charlie Johnson, founder, CNJohnson & Associates Inc.

Humana's executive team just finished reading Bob Lewis's book, Keep the Joint Running: A Manifesto for 21st Century Information Technology, in which the author refers to IT chargebacks as FEFA (full employment for accountants).

Some analysts even think chargeback is just too complex for most IT departments. Chargeback adds overhead at a time when most organizations are being told to cut back, said Gartner Inc. analyst David Coyle at a roundtable discussion with Australian CIOs this spring. The rise of the virtual machine has made the job even harder: Where once there was one client per box, now workloads are being allocated dynamically among the hardware. Moreover, people -- the biggest cost -- resist being forced into a "timecard culture": "Most organizations look at the effort involved in chargeback, and settle for allocating costs in an approximated fashion," he said.

One way to ensure there's collaboration rather than consternation between IT and business units is to pledge discounts if service levels aren't met. "Come up with three or four goals as part of an SLA contract; and if the goals aren't met, a percentage of IT billings gets taken off," suggested Len Couture, who held CIO positions in the health care, manufacturing and telecom industries, and now is managing director of Bluewolf, a New York-based on-demand provider of business services. "Say, for example, you want to increase throughput on the call center by 20%," he said. "With the hard numbers, for the first time, IT and business are focused on business objectives."

Let us know what you think about the story; email Laura Smith, Features Writer.

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