Use an IT Chargeback Model to Build Business Relationships

Empower your business partners to spend efficiently.

Influence behavior with a chargeback model based on informed consumption and shared accountability of IT costs through continuous optimization.

IT chargeback isn’t about cost reduction, it’s an ITFM tactic to continuously align IT investment to business value and IT services to customer need.

If IT chargeback were only about cost recovery, with no aspiration of fairness, organizations would settle for an even-spread allocation for each business unit (BU) and call it good.

But they don’t.

It’s time to reframe the purpose of an IT chargeback model as less about recovery and more about shaping demand by building business relationships.

An IT chargeback model frames value

IT has historically been a black box, with no way for business units to see how much they’re spending—or what they were getting in return. With no view of either spend or output, BUs are unaware of how they control their IT costs through consumption choices.

A chargeback model provides BUs with choice—to spend how they wish, on the services they want.

Here are five steps to implement a chargeback model that reframes ITs relationship with the business.

Five steps to an accountable chargeback model

#1 Price each IT service

Communicate IT value in terms BUs understand—with unit rates per service.

IT doesn’t need to get into a value conversation with BUs. “Value” is subjective, and corporate IT shouldn’t take on the role of telling the rest of the business how they should or shouldn’t use IT to deliver business goals.

Should IT offer up choices and articulate trade-offs? For sure

Should IT deliver edicts on the specific services BUs should use? Probably not.

Like any other resource they need to pay for, BUs bestow “value” by deciding what to pay for.  An IT chargeback model reframes value away from the subjective and toward market forces of supply and demand.

#2: Avoid institutional turbulence

A legacy cost-recovery system is tolerated through familiarity. A new IT chargeback model isn’t given the same pass.

BUs need to understand the benefits of an IT chargeback model.  There is an assumption that something “new” must be “better” than what came before—IT has the burden to explain the delta.

If Marketing’s budget has the same $1M shared IT services bill every year, the sticker shock of the first year will be met with acceptance by the third. Familiarity is lost, and confusion reigns if, in year four, a chargeback system is rolled out with different BU allocations.

#3 Build confidence in chargeback model

Change is hard, and trust is earned.

Build buy-in for a new chargeback model by temporarily running your old cost recovery method in tandem with the new.

Have a soft launch for stakeholders to make a like-for-like comparison, and then a go-live when the new chargeback model runs alone.

Demonstrate how a chargeback model reduces the pain of year-end true-ups. Nothing undermines confidence in ITFM processes than going back to a BU with either a surplus (“Great. The year is at the end. When do I get to spend this?”), or an ask for more from (presumably) a close to exhausted budget.

Cost-based billing removes the need for true-ups because you are billed per monthly actuals, but it means those bills are “seasonally lumpy.” Cost-based billing codifies unpredictability for BUs with variable consumption patterns.

Budget-based chargeback models, layered with IT-context, deliver predictable bills with minimal true-ups. There will always be some reconciliation between plan and actuals, but that’s minimized by tracking cost recovery throughout the year.

A hybrid billing model may be the best tactic to build confidence in your chargeback model. Some services have flat actuals spend throughout the year—leverage cost-based billing. Other services vary by business cycle—leverage budget-based billing.

It changes behavior if people are charged with what they use. Our TBM journey was started by finance to demystify IT to explain to our businesses about the functions we support. We’ve done a lot in the last couple of years to tell that cost story better, and now that we’re talking about value, we’re becoming a key part of Cargill’s strategy.

James Pleis,   IT Finance Lead for Global IT, Cargill

#4: Generate stakeholder buy-in

Increase accountability for IT spend by building buy-in.

Corporate IT is not the only game in town. Anything as a Service (XaaS) compels in-house service offerings to be compared fairly with external ones. When BUs see these comparisons to be unfair, they ratchet up their own shadow IT spend to minimize interactions with the new chargeback system.

Unfairness is amplified if new charges are dramatically different from the old. Higher service unit rates could imply a newly coined profit center; lower ones would call into question all the ‘excess’ charges from the past.

IT Finance teams must fully understand the composition of bills so that they can be the voice of authority in the face of BU questions.

#5: Socialize bills early and often

Socialize monthly bills early and often. Socializing those bills helps build trust in the new system and provides visibility into levers BUs can pull to control spend (e.g., through different tiers of desktop support) and the composition of service unit rates. This is the future state the stakeholder has signed up for.

Successful implementation of a new chargeback system is dependent on giving business stakeholders room to understand and validate changes to their monthly work. Early access to what that looks like allows relevant business stakeholders to advocate for the solution through implementation.

Business consumers and their analysts can explore statement details and gather facts on their own; BRMs can explore bill details to understand charges and evaluate alternative services. Individuals need time and space to become comfortable with change—a successful chargeback implementation should have that built into its plan.

Download: 6 Best Practices for Communicating The Business Value of IT