IT Chargeback – To Do Or Not To Do?
The eighties were the days of corporate decentralization: companies were looking to take apart their large headquarters and minimize their corporate overhead. Corporate offices were viewed as inefficient, expensive and underutilized. Services such as HR, IT, admin services, accounts payable and purchasing were to be paid for by the lines of business themselves, where each line of business was to spend as much as it wanted to, and could, afford.
Decentralization had its drawbacks, however. Organizations lost their economies of scale, redundant functions were created, operation centers were underutilized and overall strategies for support functions were lacking.
As a result, in the nineties the wheel was turning back to centralized control, with companies seeking to counter inefficiencies and oversubscription of resources. The challenge has been to consolidate operations, reduce cost, and maintain (or increase) service levels. The concept of Shared Services emerged.
Shared Services has changed the old, centralized model from a monopolistic market to a competitive market economy, where the lines of business can not only influence their service costs and shop around for less expensive services, but request a different level of service altogether.
In a parallel development, the concept of chargeback has been reborn, allowing for the allocation of cost of services to users (products or services), based on consumption and/or usage.
Implementing a Chargeback Approach – the Benefits
After realizing the benefits of a Shared Services environment and creating a Shared Services line of business, many companies fall short and fail to continue to implement a chargeback model. More specifically for IT, costs are centralized and the overall strategy is set, but costs are not allocated and remain the sole responsibility of the IT managers and CIO. Furthermore, the CIO is tasked with defending IT budgets and any increases or changes in spending (even though these are requested by the lines of business).
In my experience with ABN Amro Services Company (AASC), the benefits of implementing the chargeback model have been enormous and should not be easily dismissed. The changes that are brought on are well worth the efforts, and are usually highly supported by the lines of business.
As part of ABN Amro Bank, AASC is required to maintain a minimum allocation methodology to its clients. We realized, however, that there are many more benefits to the chargeback methodology if used to its full capabilities. Some of the benefits we realized are listed below:
- The burden of negotiating increases in budgets shifts from the IT group to the line of business. As we were able to demonstrate the ability to charge on a per user/usage basis, we were able to isolate the areas requesting increases and changes to their services. The IT management team was able to remain neutral and have the lines of businesses negotiate the increase in spending. Also, it allowed our IT budgets to increase, but produce lower unit costs as volumes increased. In fact, our IT budgets increased in 2004. (These areas charge on a per unit basis; as volumes increased, we were able to demonstrate lower unit costs in spite of an overall budget increase.)
- Allows IT to charge actual users for actual costs to support a more accurate costs allocation. We were able to isolate the increases and only affect the lines of businesses requesting the increases.
- Increase the lines of business accountability and responsibility for spending. Migrate from the "all you can eat buffet" concept to pay for only what you eat. This works both ways, as we noted at AASC: clients receive the full charge of an increase, and receive the full benefit of a decrease. Costs are more client-specific and are no longer absorbed by all clients.
- Allows for tier pricing. The IT group can create tier pricing for its different client; again, not burdening the clients that do not need the specialty items. At AASC, we created a tiered desktop support: three tiers differentiate in price and level of service.
- Helps identify savings opportunities. When costs are being allocated to specific areas, more meaningful analysis can be performed and savings opportunities can be found. In addition, the costs can be benchmarked more effectively to validate the costs structures.
- Allows for the emergence of product profitability. At AASC, we were able to create powerful analyses of products and services, and determine real profitability. Products which were once deemed very profitable were exposed as high users of resource (and thus not as profitable as thought!) when IT services were directly allocated to them.
How do I do it?
Implementing a chargeback methodology is not as complicated as one might think. A few steps should be followed and a minimum amount of resources can implement it. The system an organization selects can vary drastically, depending on size and needs. There are many packages on the market that can support chargebacks.
As a suggestion, before you are ready to move forward, make sure that the lines of business are supportive and that you have showed them the benefits they will realize from this. It will be much more difficult to move forward if you do not have their support.
Once all are aboard, here are some of the steps you might follow:
- determine which activities the IT organization is performing (for example, desktop support, mainframe, network support, etc.);
- allocate the budgets to these activities, based on their resource utilization;
- determine the unit of measure for each activity (i.e., CPU seconds to allocate mainframe usage, number of desktop to allocate desktop, etc.);
- create rates for each activity;
- assign usage of resource to clients;
- create a process to capture the monthly volumes and bill the clients for their usage;
- create usage reports and SLAs, and review with clients.
The steps to implementation are no different than any other ABC method. However, the points to focus on are the monthly processes after implementation, and the SLA. In today’s environment, it is very important that clients know you are delivering what you promised to deliver, and at the level you promised.
What to Avoid?
Do not overcomplicate the system. After utilizing resources for the implementation there should be no more then a handful of people supporting the chargeback model. Automate as much as you can and avoid any manual changes. When determining allocation, determine the unit drivers and allocate based on actual usage. Try to avoid generic allocations such as headcount and percent of budget. As much as possible, allocate the entire budget. However, keep in mind that partial allocations are better then no allocation.
Implementing a chargeback methodology by itself does not save money. However, it allows you to identify areas where money can be saved. Allocating resources to users, products and services can identify areas where over-spending occurs, and where inefficient processes and duplicated spending exist. It allows IT to better justify its costs and be evaluated on a per unit cost, and not on overall budgets. Here are some reactions we have had in-house:
- "Now that costs are more transparent and we understand them better, we can use this knowledge to change our spending behavior. We welcome the change." Jim Jendra, FVP Capital Markets and Trust LoB, Finance.
- "When you are able to take the emotions out of the process, and you know the cost of doing business, it’s a good thing. We have over 200 sub-LoB that we report P&L on – having the refined, more accurate chargebacks helps us with better reporting, and is a better reflection of the real cost of doing business." Mark Holmes, SVP Commercial LoB, Finance.
At AASC, as we continue to roll out the chargebacks, we are continually looking to identify additional items to unitize our costs. We have proved that, when the clients are receiving charges on a per unit costs, budget negotiations and explaining actual charges become much more efficient and "painless." What we see in the future is that 100 percent of our costs will be charged on a per unit basis, and that what we review with clients will be the unit costs. The total budgets almost become irrelevant.