By Ken Hardin
With Gartner EXP analyst and former CFO Jeremy Grigg.
This interview originally appeared in the IT Business Edge weekly report on Maximizing IT Investments. To see a complete listing of IT Business Edge weekly reports or sign up for this free technology intelligence agent, visit www.itbusinessedge.com.
Question: You've said moving to a chargeback system results in a net savings of around 30 percent of the IT operating budget. Why does chargeback save money?
Grigg: A lot of things that are easy to incur as costs become much more studied and more difficult decisions for business units. I'm particularly thinking of the areas of applications development, where if there is no cost—no charge to your own cost center for developing applications—the demand can be nearly infinite. In fact, my training is as an economist, and economists always say when price is zero, demand is infinite. Nowhere does that apply more than IT. In other areas like storage, you end up with a system where mailboxes on the e-mail system are free or without some form of constraint, you'll find that the demand for usage of storage resources also rises like mad, and we find that areas like that experience significant reduction in demand as soon as there's some sort of pricing associated with incurring those sorts of services.
Question: How can a CIO sell chargeback to the business units, given that up until now, IT has been "free" to them?
Grigg: We've found that there are generally four drivers for business units. The first is simplicity: "Tell me what it is that I receive, how much it is that I owe, and I'll pay it." The second is typically the primary driver, and that's fairness: "I'm happy paying the costs for the IT services that I consume, but I'm damned if I'm cross-subsidizing any other stinking business unit." Fairness is a big one, but often IT organizations think that fairness is the only driver, and they miss the third and fourth ones. They are predictability: "Okay, I'll pay what I owe, I just need to know what I owe well in advance so that I can budget for it, and there better not be any variations or I'll miss my numbers." And controllability: "I need to know that I can get cost reduction out of my IT spending because my revenue's just gone down 15 percent, and I have to get a 15 percent savings in my cost base. What can I get out of IT?" Those four drivers are inconsistent with one another—you can't have all four of them. You have to understand what's important to the business units and if you do that, you're more likely to get to some sort of consensus around the system.
Question: What does it cost to operate a chargeback system?
Grigg: Chargeback systems vary very widely in the level of the costs needed to run them. I was talking to a huge U.S. oil company that's around the world in its operation. They have an IT budget of about $1.6 billion in size, which is a big IT budget, but nowhere near as big as some of the banks. For example, Citigroup is about $6 billion in size. Now, that oil company had 566 full-time employees running their chargeback system for IT, which is a horrible waste of money, because after all, this money isn't generating any new revenue and while it contributes to the reduction of cost, every dollar that you spend is a cost in itself. By comparison, a few weeks ago, I spoke to a bank, Bank Nationale Pieree, and they're running a chargeback system for about an 800 million euro budget, which is about 1 billion U.S. dollars. They have four people running their IT chargeback function. Why is it so grossly different? The oil company chose to charge by transaction pricing and they were doing a lot of very manual financial processes involving general ledger transaction, and the bank was using many more simple structures like tiered pricing. They were using lots more charging by headcount and they were using lots of simple time and material stuff for projects—what we call direct cost chargeback—and they managed to get the balance right.