Time for a little payback

Ian Bellard’s motivation for revamping Scotiabank’s IT chargeback system four years ago was primarily defensive. He wanted to rid the “noise” from client functions that stemmed from the perception of charges as “opaque and not understandable and hence wrong.”

Scotiabank did have a system in place, albeit not transparent, said the vice-president of the office of integration. “The problem is we’d send it back as a block of technology charges. And at that point, a big honking technology charge comes across.”

But there were proactive reasons too. Line of business leaders were not taking ownership of their IT expenses, and therefore not altering their department’s consumption of services based on those charges.

IT chargebacks are technology costs that are typically billed back to the departments requesting IT hardware, software or services.

The chargeback process is, in part, about managing IT demand, but it’s also about managing the behaviour that drives that demand, said Craig Symons, vice-president with Cambridge, Mass.-based Forrester Research. As a result, IT departments with crude cost-recovery systems that offer little control often find demand outstripping supply, he said.

Create a service catalogue

Creating a chargeback system should begin with IT departments building a service catalogue that forms part of overall service portfolio management, said Symons. The catalogue should convey identified services, associated costs and the level of service that IT can provide.

A catalogue is useful for two reasons. First, IT can begin accumulating data around services consumed, by whom, how often and when, and therefore identify where the demand is high and prevent bottlenecks. Second, line of business users can begin to alter their departments’ consumption of services once they see the cost breakdown that tells them “in this new world, I’m paying $10,000 a month for e-mail services, $5,000 a month for help desk services, etc.,” said Symons.

But creating that service catalogue can be tricky, he said, because IT departments often don’t understand how to define those services and allocate costs.

Determine service costs

Scotiabank’s approach was to translate charges into services that were relevant to the lines of business leaders, said Bellard. For instance, they won’t care to know about license costs, rather “what’s the cost of that thing that’s sitting on my desk?”

The general philosophy that was applied to calculating charges, said Bellard, was to assign a cost to things you could “see, touch or feel” and that were associated with cost. For instance, departments were billed for CPUs, disks, and IT staff workdays (estimated daily cost based on salary). Outsourced projects are also charged back in their entirety to the line of business.

The Toronto, Ont.-based University Health Network (UHN)’s chargeback system determines cost by dividing the overall infrastructure cost between all departments – a formula based on the number of assets (desktops, laptops, phones) in each department, said Cara Flemming, senior director of risk management and decision support with UHN, & controller for shared information management services.

Determining the overall infrastructure and telephony costs was easy for UHN, given the services were managed by external providers who billed the organization, therefore providing a concrete charge, she said. Support services, however, were not charged back to users but instead funded from a central IT budget because support, Flemming explained, was not as strongly influenced by the number of users in each department as was something like hardware.

“So we tried to keep it linked as much as possible to services that were driven by the number of desktops in the organization,” she said. UHN introduced its chargeback system in 1996 to allow IT to better control asset growth and to prevent those assets from going missing across the multi-site hospital. The move was also to encourage departments to take better care of their technology. Prior to this, all costs were borne by a central IT budget.

Manage culture change

Symons acknowledged the difficulty with identifying services and costs, but said given the “zero precision” that has traditionally plagued chargeback systems, arriving at a close approximation is a good place to start.

Dissatisfaction with a chargeback system may arise when allocations don’t reflect usage of services and hardware, said Symons — as with factors like headcount, revenue, operating expense, and square footage occupied. “The problem is none of those necessarily translate into the actual consumption of IT.”

But culture often compounds the issue, he added, making it difficult for IT, which has been operating as a captive technology provider for years and years, to make this shift all of a sudden to become a service provider. Also, Symons said, IT departments are reluctant to define services and costs knowing they won’t be competitive with third-party providers, causing some departments, if permitted, to choose cheaper alternatives external to the company.

Often software can alleviate the complexity of a chargeback process by making it sustainable and repeatable, and by providing line of business leaders with transparent charges, said Ian Robertson, senior regional consulting manager with Houston-based Acorn Systems Inc., which provides an application that allows companies to allocate accurate IT costs to operational areas.

The company also provides consulting around business strategy, defining the chargeback process and implementing the software. Besides ridding an organization of too many manual and labour-intensive processes for determining costs, a repeatable methodology is also great for calculating the effect that expanding operations will have on the departmental budget, said Robertson.

Achieve buy-in

Introducing a chargeback system involves typical change management in that it starts with the realization that the IT organization can’t keep functioning as status quo, said Flemming.

The heads of IT and finance should champion the new system, she said. “I don’t think you can make a wholesale change in a large organization without that.”

But on IT’s end of things, a chargeback system can mean bringing in new expertise to manage that process, such as service, account and product managers, said Symons. “You really have to start thinking of the IT organization as a third-party service provider”.

Some IT organizations have gone as far as to make a profit from services, said Symons, an approach he doesn’t recommend because it only amounts to moving funds from one pocket to another. But worse, he said, is when CIOs who are paid based on profit levels make decisions that benefit IT, rather than the organization as a whole.

SIDEBAR: Facilitating the chargeback process

There are some approaches a company can take to facilitate the whole chargeback process, said Ian Bellard, vice-president of integration at Scotiabank.

When first implementing a system, don’t overthink the model – instead, just bear in mind that chargebacks should only include “discrete, measurable things, and not a wild-assed allocation formula.”

It’s also handy to outsource IT infrastructure because the resulting bill includes detailed charges that are easily broken down and conveyed to each department. When determining the cost of a service, bear in mind that someone within the organization might already be calculating it. Find out who tracks it and input the data in the chargeback process.

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