Maximizing Chargebacks – Taking the Mystery Out of Chargeback

By Barbara McCulloch & Michelle Hannes, Halliburton

Developing and implementing a chargeback program can be a daunting task, especially in a large global corporation. It is achievable if the company understands the strategic objectives for charging back Information Technology (IT) services and then designs a methodology that fulfills those objectives. Companies implement chargeback (billing the cost of IT back to the business) or show back (providing data regarding the cost of IT services without actually billing the business) for a variety of reasons and the methodologies for chargeback can be varied as well.

Can We Chargeback?

Before embarking on establishing a chargeback program, IT must determine if chargeback is achievable. One of the key requirements is for IT to have a solid grasp of where they are spending company dollars on IT services. If IT costs are scattered and poorly understood by the IT organization, establishing any type of chargeback program will fail. By building a clear understanding of what IT funds and the services provided with those funds is the first place to start. It may be necessary to begin with costs that have good controls in place, starting with a single service and expanding as additional controls are put into effect.

Reasons to Chargeback

When considering a chargeback program, a company must define the objectives that implementing chargebacks will fulfill. Understanding the strategic goals for chargebacks permits a company to build the appropriate chargeback structure to ensure success. For example, a company must determine if all IT costs will be recovered or if chargeback will only be used for a portion of IT services. When deciding how to prioritize what will be charged to the business, the following drivers should be considered:

1. Providing Transparency / Communicating Value

In a world driven by technology, IT costs continue to grow and IT services are becoming more complex. Business units within an organization need to have a good understanding of the IT services they consume, their associated costs and how those costs will impact their bottom line. Providing transparency into the cost of IT drives realistic discussions regarding the true cost of providing IT services and more effective decision making in the management of technology assets company-wide. At a base level, providing transparency to IT costs brings about the understanding that the services are not “free.”

2. Drive Behavior

Chargebacks are also used to drive employee / management behavior. When chargebacks are allocated down to the employee level, they provide insight into the IT investment made for each user of IT services. Depending on the level of granularity, employee level chargebacks can provide visibility into each hardware device and software title as well as showing the cost to support and maintain the asset over time. This cost visibility and awareness of financial impact encourages employees to actively participate in the asset management process. Managers participate more in hardware /software reclamation and reuse to adjust the financial impact to their areas of accountability. Changing employee and manager behavior regarding IT assets can improve overall efficiency and help lower IT costs.

Chargeback Methodology

Determining what to include in a chargeback program is dependent on the results an organization hopes to achieve. There are a number of IT services that can and should be considered for chargeback. None of these are exclusive and a combination of chargeback methodologies may need to be implemented to achieve the strategic objectives of a chargeback program. These may include:

Usage Based Charges

Usage based charges can be driven down to the employee level and include areas such as Hardware / Software; Server and Storage, and Mobility (cell phone / smartphone). Charging out the cost and ongoing support of hardware provides employees and managers insight into all assets assigned and in use in a business unit. Support charges can include cost for desktop support, network, and base image licensing which are charged on a monthly basis. Employee level chargeback of hardware and software related costs provide clear visibility into the cost to maintain an asset in the company’s environment and the impact of retaining that asset in a department. Assets which are no longer needed by a specific employee may be reassigned or re-purposed, thus reducing the need to purchase new equipment and eliminating unnecessary costs either within the employee’s department or elsewhere within the company. Usage based charges drive reclamation and reuse behavior by allowing managers to control their costs and result in cost savings at a company level.

Applications Development Project and Support Costs

In IT organizations with a large application development / support staff, project chargeback provides visibility into total project costs as well as the ability to monitor the costs in relation to the project budget as it progresses. Better decisions can also be made regarding changes to the project to prevent budget overruns. When a business unit understands that there is a cost to implementing new technology or making changes to the existing tech, more scrutiny is given to projects delivering on-time and on-budget. Ongoing support costs for break / fix and enhancements are prioritized differently when they come with a price tag. When the business must plan for and take these costs in chargeback form, there is a more thorough discussion on what will be done in support of an application within a given budget year.

Business Line Support Costs

In many companies, there are IT activities directly in support of business / product line-specific technologies. Billing individual employees may not be the most efficient method of recovering this cost. For broad areas of support, percentage allocations back to business cost centers may be more appropriate. This allows IT and the business to agree on the total cost and how it will be allocated during annual planning. This is especially useful for mature applications that require support and enhancements but are out of the new project stage.

Other Overhead Costs

Some IT services cannot be attached to a specific hardware device, software title or project. These services exist to support the company as a whole and are enterprise-wide. Overhead costs categories can include the administrative costs associated with global network services, central data centers and foundational ERP costs. These costs may not have a usage based metric to calculate a chargeback. An organization can choose to consider these costs as overhead or to not charge them out. However, if the primary goal is to allocate ALL IT service costs, a per employee charge could be used to allocate these charges appropriately throughout the business.

Implementing Chargebacks

Once the “why and what to chargeback” question is answered, implementing the chargeback program will require careful consideration in several other areas. A company must determine what tools are required to administer a chargeback program. Depending on the level of complexity of the chargeback methodology, an organization should look at the following:

  • Can the data in the IT Asset Management database provide the necessary information for charging back hardware / software?
  • Will the chargebacks be global in nature?
  • If global in nature, can the tool(s) support multiple currencies?
  • What are the tax implications, if any, for operations within the US as well as operations in other countries?
  • If implementing project chargebacks, do processes exist to adequately capture and report time spent on project activities?
  • For all chargebacks,
    • Is there a way to effectively automate billing to reduce the administrative overhead for managing the program?
    • Is there a way to effectively communicate the chargebacks to the customer?
Communicating Chargebacks

An effective chargeback program will require the ability to regularly report the charges to the business. Development of a reporting system that provides the business units with user-friendly data will be critical to accomplishing the goals of any chargeback program implemented. Reporting can be as simple as providing specific cost elements in financial reports that isolate IT charges from other company costs. A more mature chargeback program will provide regular reporting to clearly indicate what service is being provided, the cost of providing the service and who is consuming the service where applicable.

A chargeback program can help IT articulate the cost and value of IT services throughout an organization. But as noted, careful consideration must be given to the “why” – goals of a chargeback program; the “what” – services that will be charged back, and the “how” – the mechanisms required to effectively manage and report, in order to establish a successful chargeback program.

About the Author

Barbara McCulloch is the IT Mgr., Global ITAM for Halliburton Company.