The Chargeback Conundrum

Chargeback systems can help you manage IT costs, but some say the price is too high.

Launching a chargeback system to recover IT costs may sound like a simple matter of putting together an accounting spreadsheet. Depending on the organization, however, IT chargeback plans are often complex, and they involve much more than simple accounting. Chargeback gets right to the guts of corporate politics and even raises questions about the proper role for IT in an organization. While chargeback has its proponents, many IT leaders see it as a third rail -- not to be touched if you can avoid it.

"I have never heard a good reason to do chargeback," says former Ace Hardware Corp. CIO Paul Ingevaldson, who retired from the Oak Brook, Ill.-based company in December. He believes chargeback programs degrade the value of the IT shop. Instituting IT chargeback "means that the company thinks of IT as a utility instead of a strategic part of the business," Ingevaldson says. And designating IT a "utility" raises questions about its relevance, which is already a sensitive issue, he adds.

If a chargeback plan is implemented in a corporation where top management is not IT-savvy, then the divisions with the most money also win the most IT resources, while an emerging unit loses out, Ingevaldson says. He thinks the best alternative is a system where all the top management is involved in the IT oversight process and an IT steering committee makes strategic decisions.

Jeremy Lehman, senior vice president of technology at Thomson Financial in New York, agrees. "I'm not a big fan of chargeback plans," he says. "They introduce complexity and rely on subjective judgments about allocations. They turn the whole dynamic around IT into cutting costs instead of viewing IT

as a revenue maker."

Opposing View

But Chuck Darville says chargeback helps him run IT as a business. "We look to see if someone can do IT better, faster and cheaper," says Darville, technology planning director at Southern Co., a consortium of five power utilities in Atlanta.

Darville argues that companies that view IT as a cost center don't need chargeback. They can simply total all IT costs and divide by the number of workers, passing on that cost to each division. But that wouldn't provide the incentive for cost management in IT that chargeback provides, he says.

Southern, which has 26,000 employees, has set a goal of billing those internal customers whose decisions affect IT costs, "so they can see the full impact of their decision," Darville says.

That's one of the chief benefits of chargeback: helping IT users understand that speeds, feeds and applications actually tally up.

Chargeback "allows you to get out of the 'IT is free' world," notes Barbara Gomolski, an analyst at Gartner Inc. and a Computerworld columnist. "If you don't have it, there's an endless demand and [division leaders] always want more of IT."

Southern has had an IT chargeback system since 1997, using a general ledger program as well as a number of applications to track IT assets. The best IT chargeback plans monitor two forms of costs, Darville says. One is for "demand'' products such as PCs and printers. Each PC's total life-cycle cost of ownership is calculated upfront and a monthly charge is assessed to the appropriate department, Darville explains.

The other type of cost is for "allocated" products and services, such as cybersecurity, file and print servers, and the data network. This is a kind of corporate tax that is charged based on head count, Darville says. Fixed costs for areas such as mainframe usage are counted among allocated services.

Market Metrics

Southern's approach is driven largely by IT's desire to offer market-competitive products and services. IT managers benchmark products against those of third-party vendors to "ensure that our internal IT offerings are the best deal for the company," Darville says.

For example, the cost and quality of a network service performed internally would be compared with outsourced services available from providers such as AT&T Corp. or Sprint Corp., he says.

Both Darville and Gomolski recognize that there can be disadvantages to chargeback, including the need to hire staff to manage the process. The more detailed the chargeback plans, the more support staff required, Darville notes. Southern, for example, devotes 20 workers to managing its chargeback system.

Despite the drawbacks, Darville says the system enables him to deliver the best IT service, and over time, internal customers have grown to understand and accept chargeback. "We do get a lot of, 'What does this mean?' " he says, but meetings to review IT costs are friendly.

Even so, those who favor chargeback and those who oppose it agree on one thing: The plans can be lightning rods for those who implement them. "Chargeback is a political minefield," Gomolski says. "And if you are the one to roll it out, it won't make you too popular."


Copyright © 2005 IDG Communications, Inc.

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