The highly contentious practice of charging back IT costs to departments or business units – “chargeback – is gaining ground rapidly according to a survey published last week by Compuware.
The questioning of 100 IT department heads at large UK-based companies found that a surprising 52 percent were currently using some form of chargeback scheme and another 24 percent said they were planning to use it in the next two years.
Although chargeback has been around as an idea since the 1980s, these figures would still signal a major structural change in the way large companies are justifying and planning IT investment. If three quarters of large companies are really using or looking to use chargeback in its more advanced forms then an interesting fringe fashion has finally made the transition to being mainstream.
The survey left some important questions unanswered, however. If its popularity really has surged the survey shed no light as to why this has happened so suddenly. It would also have been interesting to understand why a quarter of respondents were choosing to avoid chargeback despite its apparent benefits.
The underlying principle of chargeback is elementary. Instead of a company handing cash to the IT department at the beginning of each year to spend as its managers see fit, the IT department bills individual business units or departments for the IT it provides to meet their demands. The benefit is that departments are forced to ask for only what they need, increasing efficiency and making it easier for boards to see where IT costs are really being generated. Nobody asks for what they don’t need if they have to pay for it. IT departments become more responsive to real business needs and less locked into the centralised mindset.
In April, a survey commissioned for storage vendor Veritas showed similar levels of interest in chargeback as those noted in Compuware’s survey but offered a more complex and qualified view of its rise. According to that study, while 67 percent of those questioned described themselves as using chargeback, 35 percent admitted to using it only in a very basic form.
A closer look at the figures revealed that 7 percent were charging company business units according employee numbers, with a further 7 percent according to hardware usage and 8 percent based on measured software consumption. They figures sound modest but are actually surprising as the technologies to enable companies to monitor such usage in an integrated way are relatively new.
IT and efficiency
The conventional explanation for chargeback’s rise is that the tough spending climate for IT departments has increased the attractiveness of a tool that can clearly relate investment and spending to real business usage.
“The rationale behind it is the idea of authenticating the value that IT brings to a business. […] Being charged for service makes you think twice about it.” suggests Compuware’s regional technology manager Mike Lucas. “There was always a certain amount of it going on.”
Tony Occleshaw of Veritas - which markets a chargeback system that called “Command Control” to its sizable customer base - agrees. “If you’re a large company spending millions on IT you need to know you’re spending it in a correct way.”
So it promotes efficiency of upfront spending but what about the downsides? Like every other commentator you speak to, both openly admit there is a danger of creating bureaucracy and cost in the process of administering chargeback but take the view that its popularity still represents a maturing of IT. Any chargeback system should be implemented incrementally, they stress.
“Charging business units for applications that they never or rarely use is somewhat unfair and creates resentment. “Basing chargebacks on real application usage takes into account the entire IT infrastructure from bandwidth through to storage,” says Lucas of Compuware.
So, predictably, there are pros and cons to the idea. You spend more wisely while accepting the risk that this saving will be lost in other ways such as encouraging department heads to spend days counting beans. But who really gains from chargeback’s rise and does anyone actually lose?
On the face of it, IT departments win because they are no longer marked as a cost – departments pay the bill. But Occleshaw reckons the rise of chargeback is symptomatic of the change in the way IT has changed from being seen as a competitive advantage to being seen as a necessary utility. In his view, this would tend to accelerate the outsourcing trend because IT becomes simply one the functions carries out by a company in the process of doing business.
This may or may not be a good thing, depending on what type of outsourcing arrangement ends up being used. Outsourcers have a reputation in certain sectors for keeping staff costs to a minimum and employing certain skills only if they need them.
If the IT department stays in-house, it’s future is no less dependent on budgets than it was before. Once the cost in being borne at business unit level, they may be as likely to cut as would senior management in the old days of headcounts. Companies can end up using chargeback as another form of accounting scheme for shuffling money around in the same way but accounting for it differently.
Does the business itself really gain? In many cases, the answer could be yes, assuming the system of chargeback is implemented in a way appropriate to the business. But the key to investment not whether it was made in a chargeback system or not, is the quality of the decision making.
“2001 saw the decline of the IT department and the rise of the accountant. You could argue that this gives them more power to make negative business decisions,” says IDC analyst Jamie Snowdon. “They are good at running business-as-usual, but are they good at strategy or investment?” he asks.
Chargeback makes cost a major issue and assumes that the relationship between investment and payback can be successfully explained by the heads of a business unit. If it can’t then innovative projects might fall under a chargeback system that would be tolerated in the more ad-hoc traditional IT cost approach.
It all comes down to whether you believe that IT can be innovative enough to make a competitive difference to a business. The industry promotion of “utility” computing would suggest that IT is a mere enabler and does not any longer offer the competitive edge it once did. In this model, it is how much you spend relative to demand not what you spend it on that matters. This may be correct in most cases, but the long-term risks for some businesses are still not well charted.
What is clear is that a lot of software and serve companies will use the whole utility computing and chargeback idea to make good money from companies who need the technology and thinking done for them.
“IBM thinks about it. Accenture thinks about it. And that comes at a cost,” says Sneddon.