This article dives into the potential of Chargeback of IT Services in an organization, why you should consider implementing it and how to avoid the most common pit falls.
As IT over the past decade has become embedded in almost every business activity in mid- and large cap companies, the cost of IT has become far more difficult to estimate and control. Companies spend large amounts of money on IT, both for daily IT operations and IT improvements (projects), creating a higher need for being in control with the cost of IT.
In big organizations with heavy demands for IT services delivered by its internal IT department running on a yearly allocated budget, it is almost inevitable that you encounter the "IT is free” mentality within the business units - the “IT is free” mentality being when business units discard the cost of developing an IT solution as they are not directly influenced by it.
This ultimately creates a huge gap between what the IT department delivers and what creates value for the business, as tons of resources are spent on projects that lack real commitment from business units. This often cause poor adoption when the final product is delivered. Also, no transparency of cost exists with no real idea of where the benefit is highest when putting in extra coins in the IT endeavors.
The potential benefits of Chargeback
Ensuring a real commitment from business units requires that they have a stake in the money spent on designing and developing the IT solution from the beginning to the end. Here, Chargeback actually serves as a huge driver for alignment between IT and the business units. Why? Because you are simply more aware of your IT endeavors when they are sponsored by money coming from your own pocket. When its money coming from your own pocket, research shows that you instantly become more focused on the making of the IT solution (Jeanne Ross, et al., 1999), hence making you far more interested in keeping track of what is developed and making sure you benefit from it in the end.
By introducing Chargeback, the CIO will first of all get in control of his/her cost of services provided to the business units. The first step in this endeavor is to implement the Showback model which is the process of defining the TCO of all costs in the IT department and then splitting these costs out to the different services. This way, the CIO gets a complete cost overview and knows what IT demands is being covered by what and at what cost.
Chargeback may have the potential to enhance IT and business unit partnership. Introducing Chargeback also increases the quality of the financial cost/benefit part of the business case(s), as cost of IT is much more transparent and aligned with business needs. Thus, Chargeback not only helps the business define the business case in the beginning of the IT projects, but it helps creating the financial foundation for making the business case an active value adding tool throughout the entire project and the benefit realization period post project.
Chargeback versus Showback
Showback is not about being able to show the cost of licenses across all features of the IT offering catalogue, but showing the total cost of e.g. Telephony (that includes some license fees, hardware fees, support and maintenance fees etc.). This IT cost transparency method not only serves as a tool for identifying which IT services provided to the business needs to be optimized to create appropriate value, it also serves as the tool for comparing our services delivered to the SBUs with what you can find externally.
Even though Chargeback is a fairly simple funding method, one of the biggest pit falls is trying to implement the method without acknowledging the needed level of IT financial management maturity both on the IT side and the business side. With too low maturity, the ability to create the needed level of cost transparency is not possible, hence creating a wrong foundation for decision making towards the IT investment portfolio. Also, the low level of maturity can cause the business to mistrust the offering prices and not see the IT department as a trusted partner.
From touching upon the ‘WHAT’ and ‘WHY’ of Chargeback, the next big question is of course ‘HOW’. A followup article will soon look into explaining a simple step-wise approach securing the foundation for implementing Chargeback and then how to do it.