Charge-out: How to Do It Right

Charge-out systems allow the IT organization to charge other parts of the company for the IT resources they use. If properly implemented, charge-out -- sometimes called chargeback -- results in more effective use of IT resources, as well as more realistic and accurate business cases. If improperly implemented, charge-out frustrates everyone involved.

In the absence of charge-out, the IT organization is responsible for all IT costs. Business units have little incentive to provide accurate estimates in their business cases or to worry about cost overruns. With charge-out, business units are far more careful about projecting accurately, because the actual costs (and overruns) will come out of their own budgets.

There are many approaches to charge-out. Simplistic systems merely allocate the total IT costs based on some easy metric (e.g., business unit head count). This method is unfair, since some departments use far more IT resources than others. Moreover, it doesn't reward departments for reducing their resource consumption. More-advanced charge-out systems allocate IT costs based on resources actually used by each department.

Charge-out is not appropriate for everyone. It works best in large companies that are sophisticated in the ways they plan, manage and allocate IT resources. The company should already be making business trade-offs based on solid business cases, not impassioned pleas of "We've gotta have it." In addition, the company must be large enough to warrant the significant overhead that charge-out requires. This includes major internal IT systems: resource accounting, cost accounting and a standard chart of accounts. Don't even consider charge-out without these in place.

Charge-out provides the following benefits, enabling effective use of IT resources:

Reduces consumption. Operational services are monitored more carefully when the consuming department is charged for egregious consumption of bandwidth and disk space (massive e-mail files, music and video files, etc.) User departments are also more likely to cancel unnecessary services such as unused accounts when cancellation results in lower monthly costs.

Minimizes status symbol gadgetry. Many departments request the latest technology when it's "free." With charge-out, departments frequently forgo luxuries (flat-screen monitors, GPS equipment, BlackBerries and the like) when less-expensive options are sufficient.

Reduces frivolous requests. Users are less likely to request expensive services when each request results in a charge. One company's marketing department repeatedly submitted a set of complex queries against the entire consumer data warehouse, despite complaints from IT. After a new charge-out system made the marketing group pay for each query, those users refined their queries against a test database before searching the entire data warehouse.

Enables better business planning. Charge-out provides accurate accounting of all costs associated with developing and operating an IT system or service (hardware, software, staffing, telecommunications, outsourcing, etc.) This data allows more accurate estimates, prevents oversights and supports better decision-making.

Helps protect against outsourcer overcharges. Companies with charge-out know exactly what it costs to run their existing systems and have a good idea of what constitutes "reasonable" charges. They can quickly tell if their outsourcers are taking advantage of them.

These benefits make the concept difficult to resist, but charge-out systems also have some disadvantages:

Administration is complex and time-consuming and adds significant corporate (and IT) overhead. The process of tracking and allocating costs requires automated systems, additional accounting policies and associated staff.

IT must carefully match the demand for services with its available resources. If the IT organization overestimates demand, it will need to reduce costs, potentially resulting in layoffs. If IT underestimates demand, it may need to engage contractors, usually at a higher rate. This often results in nasty political battles over who pays the difference.

Poorly designed charge-out systems can create dysfunctional behavior. One retailer had a fully depreciated (i.e., "free") point-of-sale system, supported by an IT team that was not charged to Store Operations. A new POS system would have reduced overall company costs dramatically, but Store Operations resisted upgrading because its own costs would have increased.

Business units will be tempted to search for lower costs. When they are charged for IT services, business units may feel free to purchase from cheaper sources. Nonstandard PCs and rogue software can result in a fragmented, complex and needlessly expensive in-frastructure.

Charge-out is one of the hallmarks of a sophisticated organization. Well-designed charge-out systems help track, manage and forecast IT costs and resources more accurately and effectively. Leverage the benefits of charge-out into better business decisions for your company.

Bart Perkins is managing partner at Louisville, Ky.-based Leverage Partners Inc., which helps organizations invest well in IT. He was previously CIO at Tricon Global Restaurants Inc. and Dole Food Co. Contact him at BartPerkins@LeveragePartners.com.

Related:

Copyright © 2006 IDG Communications, Inc.

7 inconvenient truths about the hybrid work trend
Shop Tech Products at Amazon