The Pervasive Potholes of Charge-out

In an effort to allocate limited IT resources effectively across the organization, many corporations are considering establishing charge-out systems. They believe charge-out -- also known as chargeback -- will make consumers of IT services better stewards of company resources and allow the organization to better align IT usage with corporate priorities. (To learn about the advantages and disadvantages of these systems, see "Charge-out: How to Do It Right," Feb. 13.)

Will your charge-out system be viewed as fair, rational and understandable, or will it be received with general fear and loathing? The perceived fairness of IT pricing depends on choosing a pricing structure that accurately reflects actual consumption.

Don't use simplistic measures such as departmental head count. That often results in unfair charges. For example, problems can occur if one department invests in a new system that reduces its head count (thereby lowering its IT charges) but actually increases its IT consumption. Don't roll charges up into an "easy to understand" number. That's often both confusing and unfair. Most important, avoid pricing anomalies. Effective charge-out systems must produce the same charge for the same service across all departments.

Before implementing charge-out, you need to address these potential potholes:

Purchases. Are users free to buy IT products and services outside approved channels? Other departments may argue that if they have to pay for a service, they should be able to buy it at the lowest price. IT argues that introducing unsupported suppliers into the organization makes it more difficult (and costly) to manage the overall infrastructure. Unfortunately, these arguments often involve unfair apples-to-oranges comparisons. For example, after one company established laptop standards, users complained that CompUSA sold the same product for less. However, the CompUSA product had a shorter warranty, a different operating system (XP Home Edition) and weaker virus protection.

Provider. Can IT sell services outside? If users are free to buy outside services, IT may propose selling its services to other companies. In practice, selling IT services externally is often a mistake, since it can easily distract IT managers from their own company's needs. In addition, to provide external services, IT needs more internal discipline than IT shops at most large companies have.

Pricing. Most charge-out systems charge for actual costs incurred, but you can design pricing mechanisms to influence behavior. For example, more sophisticated charge-out systems offer significant discounts for off-peak use. New IT services can be priced as loss leaders to encourage experimentation, while nonstandard services (tape mounts or unsupported handhelds, for example) can be charged above actual cost.

Terms. Are your terms helpful or confusing? Express charges in user terms, such as monthly desktop cost, cost per invoice or monthly cost per gigabyte stored, rather than in technical terms. In addition, pick units that help departments understand their usage and indicate how they can control their IT costs (by reducing overly complex queries, eliminating unused mailboxes or purging files, for example).

Partial charge-out. Are costs fully or partially recovered? John Chambers, Cisco's CEO, views infrastructure as part of the cost of doing business. Cisco's IT department charges other departments only for services beyond their basic "foundation infrastructure." Unfortunately, this approach often deteriorates into political debates over exactly what is included in the foundation infrastructure.

Periodic technology refresh. How is technology refresh funded? Hotels, restaurants and retailers know they must regularly paint, replace carpeting and update their properties; they budget and plan accordingly. Most corporations understand this concept intellectually, but quarterly earnings pressure often makes them reluctant to actually fund necessary IT technology refreshes.

Project management costs. Who pays when user departments hire outsourcers? Often, outsourcers must interact with existing IT systems, but no budget is provided for project management. As a result, the outside project is often inadequately managed, or project management costs are buried in other budgets (thereby defeating the purpose of charge-out).

Politics. Does the charge-out system recover (collect) enough money by the end of the year? Some companies insist that IT recover enough money to offset all costs. CIOs who are penalized for under-recovering get very good at setting rates so that IT can collect more than is needed and then give end-of-year rebates. Their user departments get used to receiving this "free" (unbudgeted) money. Anticipating gratitude, new or politically unaware CIOs often lower the IT rates but instead suffer political fallout for eliminating expected annual refunds.

Use charge-out to leverage your all-too-scarce IT resources to produce the highest return for your organization. Just beware of the potholes, and design effective solutions to get around them.

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.

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Copyright © 2006 IDG Communications, Inc.

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