Leadership

Decision Support: Chargeback works in theory, but does it work in practice?

There are many compelling arguments for IT charging other departments for its services. But read on for some "gotchas" that you should look out for.

To an IT manager, the notion of chargeback—charging user departments for IT costs they incur—can seem very attractive. After all, instead of IT having to decide the level of expenditure for new technology, and perhaps being looked at as a seemingly bottomless cost pit, each business unit can decide what it needs and how much money it can spend. In addition, it's extremely hard for a decentralized unit like IT to know how all business units are working together to meet business goals and how to best meet the needs of those units.

The article ”Chargeback for good or evil," which appeared in the March 1, 2003, issue of CIO magazine, gives some of the advantages of chargeback:
  • The tab [for technology] is picked up by the people who actually use the stuff.
  • The shock of actually having to pay for what they consume can make users more cautious and disciplined.
  • It injects a note of rigor into an enterprise's business model.

But is chargeback all it's cracked up to be? It may be possible that it's one of those things that look better on paper than in practice. Recently, many TechRepublic members, who have experienced chargeback systems first-hand, expressed their opinions on the subject.

Practical tips
Member Czahrobsky@nephdocs.com worked for one company that implemented a chargeback system. He felt compelled to warn other IT departments about the shortcomings of this fairly attractive option. To ease the road for others, he recommended the following:
  • Don't charge back everything. Many IT projects that end up essential to the business may never get off the ground if they require sponsorship.
  • Be careful what you expose. The initial response may be very negative since the costs of doing project work get weighed by each department head against his/her own salary. There's no economy of scale or valuation of expert service going on in their heads, just bottom line sticker shock. You could find yourself competing with so-and-so's nephew for work.
  • Prepare for cutbacks as a probable result. Without very strong ROI for everything your department does (how many of us can claim that?), technology will be viewed as a necessary evil, and heads will roll.
  • Control the process. Rate each request before relegating it to chargeback status. Consider charging back projects as an acid test for your demanding users that might not have thought their ideas through. Often they will be willing to settle for less if there's an off-the-shelf solution that meets some of their needs.

Member mxyzaptylk@mindspring.com offers another tip. He cautions that if your entire budget is based on chargebacks, prepare to see your whole IT function collapse when customers enjoy themselves "carving your turkey." If you want to keep the organization going, "you should exclude all backroom costs (i.e., network, server, and frame support) from the chargebacks, as well as training costs, supervision, management, and charge-basis items like supplies and benefits." He also cautions that you'll have to deal with the unforeseen "like that great new Oracle system some finance executive falls in love with." That alone, he says, can wreak havoc. Ultimately, msyzaptylk says that a chargeback system must be implemented carefully or your customer will see you as merely another expense they can cut at will, especially if the CFO is also the CIO.

It's difficult to anticipate many of the effects of chargeback. Member jevans4949@aol.com shared a couple of unexpected experiences he had when using a chargeback system. In the 1980s, he worked for a UK City Council. One feature of its chargeback system was to charge disk usage by dividing the total cost of the disk storage system by I/O count. "One year," he said, "the Finance Department introduced a new system with very high I/O. The result was that the charge per I/O to other users went down."

In addition, his organization had a data prep unit that divided its total cost by the volume of data processed. "The result was that often departments would go to an outside bureau to get a job done while the in-house staff sat idle."

Many other members expressed their reluctance to engage in all the red tape that would be required in a chargeback environment. TechRepublic would like to know how you feel about chargeback. Send us some mail or respond in the discussion following this article to relate your experience with chargeback or to offer your opinion of its efficacy.

About

Toni Bowers is Managing Editor of TechRepublic and is the award-winning blogger of the Career Management blog. She has edited newsletters, books, and web sites pertaining to software, IT career, and IT management issues.

0 comments

Editor's Picks