Thought Leadership & Tools

ITFM Pathway to Success: Step 6 – Chargeback

An easy-to-follow framework for implementing an effective IT Financial Management (ITFM) program.

By Pete Hidalgo, Chief Customer Officer at MagicOrange

The MagicOrange ITFM Pathway to Success is an easy-to-follow framework for implementing an effective IT Financial Management (ITFM) program. It was specifically designed to help those leaders responsible for managing the finances of the IT organization, such as CIOs, CFOs, IT and Finance leaders and their respective teams to improve their ITFM capabilities.

In order to achieve the benefits of implementing ITFM processes and best practices, a series of planned and measured steps must be taken in a methodical manner over a period of time. These benefits could include reducing costs, increasing customer satisfaction and creating greater value.

The Step 1 of the framework is to assess and plan. Businesses need to review the IT strategic plan, the current and future goals and objectives, and determine how it aligns with the business strategy.

IT services then need to be defined, to ensure that the charges for these services are transparent and that the business understands them, in Step 2. Step 3 of the framework is to ensure high quality service consumption and cost data in order to achieve cost transparency and ultimately, implement showback / chargeback to the business.

In Step 4 organizations then need to automate their processes, this will help increase transparency into service usage and costs to efficiently produce financial and service consumption reports. It will also ensure self-service reporting and data access to customers so that they can understand and regulate their service consumption and costs. Automation will help organizations perform monthly chargeback and bill of IT generation.

Step 5 is Service Costing and Benchmarking, it’s the process to determine the unit service costs of each IT service being delivered. Unit service costs are required in order to implement chargeback, where each consumer of IT services will be charged for that consumption - based upon the unit service costs and quantity consumed.

Step 6: Chargeback

Chargeback is the process of charging the consumers of IT services for their actual consumption of those services.

There are multiple reasons to implement a chargeback process, it includes:

  • Cost transparency: Understanding the true costs of providing IT services
  • Educating IT customers on the value of the IT services that are being provided
  • It is a tool to improve operating efficiencies and to lower costs
  • Enabling customers to manage their own consumption of services and associated costs

According to Forrester Research, as shown in Figure 2 below, there are numerous benefits for implementing a chargeback process:

  • Reduce spend/costs
  • More effective IT spending
  • Improve demand & expense forecasting for the IT organization and its customers
  • Key component of ITIL Financial Management

Figure 2: Benefits of Chargeback Process

In terms of dependencies, the most important aspect is that unit service costs are required in order to implement an effective chargeback process. It is presumed that the previous steps of the Pathway have been completed, which sets the stage for implementing chargeback.

It’s important to realize that when someone receives something for free, they will not be happy paying for it in the future. This is a natural human reaction that will also apply to IT Finance and chargeback.

While IT may think implementing chargeback is a great idea, the people receiving the charges may not feel the same way. This is where some kind of organizational change management program will help.

At a minimum, reach out and educate the key business leaders well in advance of implementing chargeback. It is necessary and will help ensure the success of this initiative.

IT must be seen as a partner of the business, rather than as a cost center that the business doesn’t like.

This is an area where MagicOrange can provide incredible value, by acting as a bridge between IT and the business. This could include communicating challenging issues such as a new chargeback program. By doing so, IT will gain the support of the business by helping them understand why it’s good for their organization and more importantly, good for the entire company.

Implementing chargeback must be driven from the top, so that the business leaders understand that this is not simply IT “cashing in”. The business will not be receptive to being charged for their IT services, so support from the business leaders such as the CEO and CFO is crucial.

One of the first steps to implementing chargeback is to decide what type of chargeback model to use. As shown in Figure 3, there are seven model types to choose from. Each successive model type getting progressively more complex and more difficult to implement.

Model selection should be based upon the maturity and capabilities of the IT finance organization, with an understanding that the chargeback process can be evolutionary. While the ideal model type may be #7 – Value based pricing, most organizations are not ready to start there when implementing chargeback for the first time.

Having an experienced and trusted partner like MagicOrange is beneficial, they can guide one in choosing the correct chargeback model and then help design and implement it.

Figure 3 – Chargeback Model Maturity Curve

There are some key considerations to keep in mind when it comes to selecting, designing, and implementing a chargeback model:

  1. Chargeback should be approached as an evolutionary process, where one needs to move slowly at first in order to give IT customers the chance to understand their consumption and the costs of that consumption before actually charging them for it. This gives them the necessary time to adjust their consumption behavior before actually getting charged.
  2. Start with usage reporting first, where the customers can see what services they are consuming and in what quantities.
  3. Next, move to showback, where one shows the services, quantities, and the costs.
  4. Finally, implement a chargeback model where the customers are being charged for their actual consumption of those services.
  5. Chargeback frequency – Ideally one would want to perform chargeback on a monthly basis, but this is based on the maturity and capabilities of the IT Finance team.
  6. As the frequency of chargeback increases, the level of automation must increase accordingly. In other words, it’s possible to implement a chargeback process manually using spreadsheets, but at best this is a quarterly or annual exercise where many hours of work will be required to produce charges and reporting that are less than optimal.
  7. However, having a purpose-built tool like MagicOrange to do chargeback, will enable one to reach the optimal state of monthly chargebacks faster and with less labor, thereby making the IT organization more efficient and able to focus on other high priority tasks.
  8. As one implements the chargeback model and progresses to higher levels of maturity, the quality of the data needs to improve as well. Having good quality data, where the consumer of each service is known as well as the quantities consumed, is essential. This is why Step 3 of the Pathway is so important.

Here are some principles for implementing a chargeback process:

  • Fairness
  • Influence
  • Transparency
  • Effort
  • Consistency

This Step of the process is an extremely broad and complex one, and requires detailed considerations for further discussion and consultation. The team at MagicOrange is well equipped to provide their expertise and experience in the Chargeback discipline.

Ask the Experts

MagicOrange recognizes the complexity of the overall journey to ITFM maturity and its experts are well equipped to guide its customers through the step-by-step process to ensure they realize all the benefits of a successfully implemented ITFM framework.

Guided by the MagicOrange ITFM Pathway to Success framework, customers can now drive cost optimization throughout the organization by approaching savings initiatives systematically and holistically, from the perspective of both IT supply and business demand.