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ITFMA Journal

Using Chargeback to Make Smart Business Decisions

Mark Pringle, Managing Consultant, IBM Corporation

These are edited excerpts from Mark Pringle’s presentation at the ITFMA Financial World of Information Technology Conference August 2010

"Information Technology (IT) has been among the largest, if not the largest, cost center in most organizations over the last 30-40 years. The size and growth of IT expenditures over this period has led management of these organizations to seek effective financial tools and disciplines for understanding, controlling and effectively investing funds expended for technology. Probably the single most popular discipline used for these purposes has been chargeback.” – Terence Quinlan, Director of ITFMA

Why do I care about chargeback?

You don’t know where you’re going if you don’t know where you’ve been. You can’t manage what you can’t measure. Without measurement, you’re only guessing. Among the drivers for the adoption of chargeback are industrial regulations, internal and external audits, federal regulations (OMB Circular A-87), OMB Circular A-21, OMB Circular A-122), the perception that IT resource costs are unfairly charged/allocated or that there is runaway utilization or expenses.

Does chargeback make you smarter? Is there a return on investment (ROI) from it? A resulting ROI is difficult to quantify. Chargeback itself, consumes time, resources and money, but it provides cost transparency. Knowing that a resource is expensive, and possibly having to pay for it, encourages wise usage. Knowing the cost enables decision makers to make reasonable, smart business decisions. Cost transparency helps in answering questions such as: Why does hosting an image cost so much? Can I get it done cheaper down the street?

Chargeback can improve in the communication of IT financials. Most customers do not care about CPU time, I/Os, tracks, cylinders, sectors, etc. Properly constructed, a chargeback system can express IT usage in terms of business units, which are understood by customers.

By increasing the rates on undesirable technologies through punitive pricing, and lowering the rates on desirable technologies through incentive pricing, IT organizations can often affect change.

There are many success stories of how chargeback has been used effectively. As to the value of chargeback, does it save us money? Is there a ROI? Organizations have saved the organization money with chargeback, however, there is no uniform formula for calculating chargeback’s ROI. My opinion is that there is a ROI for chargeback, but it is in terms of knowledge, not money. It is up to the organization to utilize that knowledge to produce savings.


Copyright © 2011 by the IT Financial Management Association.

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