A Chargeback or Showback system is a method used to fairly allocate IT costs to internal businesses based on their use of defined IT services at rates based on levels of consumption. Although many different types of IT allocation strategies exist, some of these allocation strategies provide no real insight into IT real costs and lead to the perception that the cost of IT always seems to exceed its value. These factors have led business executives to demand greater IT cost transparency regardless of the chargeback or showback method.
Some experts agree that IT chargeback and showback, or the practice of selling or identifying IT services using consumption-based rates, is the most effective means of clearly accounting for IT costs and the relationship to business value.
IT chargeback or showback addresses two key issues:
1) illustrating IT’s business value, and
2) facilitating demand management.
A chargeback and showback method allows business units to see what they’re paying for and provides the perception that IT is no longer this big black hole. A single, large line-item expense on a business unit profit-and-loss statement or showback allocation report provides no information about what exactly that cost includes and makes it impossible for business executives to connect their IT costs to any business outcome or measure of value.
A chargeback and showback method also provides accountability for IT service consumption – demand management. Knowing the actual cost or internal relative cost provides users the detail they need to make decisions about cost vs. value when determining what is needed or not to achieve their business objectives. A lack of financial feedback leads to over usage and waste and makes it impossible for business units to be accountable or involved in managing IT spending.
A mature IT chargeback and showback method can improve alignment of limited IT resources with business needs. Usage-based billing provides departmental insight of the businesses most important IT services, helping assure requests for more accurate IT operational budgets and new investments.
If chargeback and showback accounting has such clear benefits, why aren’t more companies using it? It is thought that more than half of IT shops don’t use or have not implemented current chargeback or showback methods and automated tools, because these organizations either don’t see the benefit or don’t know where to start.
The doubters are generally business managers at companies where chargeback or showback has been poorly implemented. For example, most IT organizations who seek a quick and easy way to initiate chargeback or showback bypass the necessary step of creating a Service Catalog and implementing a repeatable and scalable method to do cost allocation. This naturally leads to complaints by business owners that, “the cost allocation is not fair,” or “it doesn’t provide enough details on services rendered,” thus tarnishing the entire concept and the value of the technology organization to the business.
The benefits of chargeback and showback billing require some up-front work, starting with an IT Service Catalog. With a catalog in place, the next steps entail mapping various infrastructure assets and support personnel to each service and tying service usage to organizational consumers (either individuals or business units).
Recommendations: How to Get Started
Here are some recommendations you can implement now to improve or initiate your chargeback or showback program.
- Create a service catalog.
Identify and align business services to technology capabilities currently being delivered to business units.
- Gather service costing information.
Start with gathering data and information from the finance department about the cost and expense of each technology-based product and service.
- Relate services and costs.
Create a financial cost model of how technology services and costs are related and allocated to business units.
- Make it plain.
Implement greater IT service costing transparency that plainly details the relationships to budgets and/or P&L statements.
KEDARit’s Services Utilization Manager (SUM™) SaaS product delivers the cost allocation methodology and automated tools necessary to quickly define and visualize the business utilization of technology services, and achieve greater service costing transparency. It accelerates the client’s development and analysis of services as defined in the ITIL® Framework guidance on IT Financial Management.
We invite you to attend our Services Utilization Manager (SUM™) webinar on March 15th, 2012. You will receive more in-depth information on how you too can build a comprehensive Service Catalog.