Archive for the ‘IT Billing and Chargeback’ Category

This is a guest post by Mark Robinson, Solutions Consultant Director at Digital Fuel.

Every day when I get in from work, my house is lit up like a Rio Carnival float because my children have no concept of turning the lights off. To them electricity, heating, food and even the roof over their heads is “free,” so what incentive is there for them to use any less?

I am sure you have all seen the same behavior in the workplace. I am not suggesting that your business units are like children, but they do quite likely think of IT as free and so behave accordingly.

Last week, things came to a head with my kids when I shouted at them, “Do you know how much it costs to run that light bulb?” Of course, being children and therefore masters at arguing, they turned it around on me and asked what the answer was. And that was a problem because I didn’t know either.

So, my first lesson was do my research before going into battle (I am sure Tsun Tzu said something about that in “The Art of War”) but it also told me that all of the things we preach about IT Financial Management apply in the home too. Clearly my children needed visibility and understanding of the costs that they were so wantonly racking up in order for them to feel just a little bit inclined to control them.

I also proved that things needed to be presented in the right way to make sense. Showing an electricity bill with a price per KW/hour just prompted a million other questions and it was only when I worked out the cost per bulb that it became meaningful.

Maybe I am fighting a losing battle over the lights but you can certainly apply the same principles to managing the IT costs of your business. Business units cannot make rational business decisions about their IT consumption unless they are presented with a breakdown of the costs; how those costs are impacted by their consumption and an understanding of the alternatives. This idea of “showback” is hardly new but the technology to implement it through is what turns it into reality.

Of course, once I had shown my children the electricity bill, one of them whined that it was not fair, that it didn’t matter if they turned off the light because the others would just turn it back on again.

Once again, the same principles apply in IT as in family life. If we are going to apportion costs to business units, it needs to be done in an equitable way. Not just fair in terms of what they are getting for the money but fair compared to their peers. But that is just the start – ultimately we want the business to be able to understand the costs and the reasons behind them to give them predictability to control their usage and service choices so that they can do something about it.

I must go – someone has just turned all the lights off.

It is widely agreed that “IT must run like a business,” but sometimes it’s not clear to everyone in the IT organization exactly what that means.

To make it clearer, let’s consider the ultimate business equation:
Revenue – Expenses = Profit

As a CEO for quite a few years now, I know firsthand that it’s not always quite that simple, but any business that isn’t profitable will not be around for very long. At Digital Fuel (and every other business I know) we look at every line of business and product offering to determine profitability – now and in the future.

So what does this mean to IT? If IT is to be seen as a true, credible strategic partner to the business, its business value must be measured – in dollars and cents.

Expenses

This one seems easy since IT has plenty of expenses and has traditionally been considered a cost center (this is of course changing now, with more and more IT organizations run like businesses). But the difficult part is tracking each of those expenses to a service line so you can truly understand the costs.

This is difficult, because the underlying cost drivers are extremely complicated. For example, a business application such as customer relationship management (CRM) has underlying costs that include license costs, license maintenance, server maintenance, network, security, administration, consulting customization, security, overhead, and more. In addition, each of these line items can have its own underlying cost drivers. As you see, IT costing can get very complicated, and in fact, attempting to do it manually is nearly impossible (unless you’re willing to make mistakes).

As complicated as IT costing can get, it must be done. After all, if you don’t know exactly how much you’re spending on something, you can’t evaluate the business value you’re receiving from that spend.

Revenue

This one is more challenging, since few IT departments have actual revenues. But there are ways to give business units an invoice for their IT consumption and it helps the business stakeholders tremendously.

Some organizations have developed mature chargeback processes, which deliver an actual bill that must be paid – the ultimate in running IT like a business. Chargeback helps IT budgets stop being a bottomless money pit. Instead, the business units who actually use IT become responsible for picking up the tab for the IT products and services they consume.

The result: Chargeback shifts the burden of justifying IT expenses from the IT organization to the users – the business units. Those business units now become much more careful in their demands for IT services, and make sure they actually need something before they ask for it. The results for the business as a whole are, needless to say, extremely positive.

But not all organizations are ready for that or want to operate that way. Showback may be an option where a bill is presented that shows consumption, even if there is no actual payment. After all, chargeback is meant to encourage business units to change their behavior and consume IT more responsibly, and if show back can achieve the same result, it can be a great solution. Any step towards giving the business more visibility into their IT spending and consumption will drive smarter business decisions and greater IT value.

Seems like the good old discussion about chargeback vs. showback has come to life again. Several esteemed writers have recently touched on this subject.

Well truth needs to be told, the majority of companies still don’t perform full billing and chargeback for IT services. Statements like “We tried it but the hassle was not worth the benefits“ are still heard in IT corridors and conference rooms. That said, Chargeback is definitely getting some back wind recently and more and more companies are considering doing full chargeback. This is driven by the move to centralized shared IT and the growing adoption of shared virtualized resources, in which case you must breakdown cost by usage.

Also the growing awareness of running IT in a cost effective manner is driving organizations to empower BU’S to take responsibility over their IT spend by performing chargebacks. Here comes into play a method that seems to be very popular recently as well, show back, a lightweight, less formal version of chargeback. This method is the process of showing BU’s and P&L’s what was the actual IT spend of their organization but not actually charging back. This is much easier to achieve as you don’t need to deal with setting a price/ rate list, which chargeback requires.

Personally, I find that the difference between companies who perform chargeback and those who just do show back is less a matter of taste and choice but more a function of the business structure. Companies who are divided into multiple legal entities and P&L’s will usually do full chargeback. They simply need to for tax and regulatory purposes. Companies who have a simpler structure will stick with show back as a method for behavior changing.

They say a good leader is tested in his absence. Well, I will test that some day. In the meantime, I get filled with joy and know we are doing well when good things happen without me even knowing about them.

The joy of when you get your company from 0 to a place where deals you’ve never heard of just close and features you have never thought of are added to the product is unbelievable.

I was reviewing demand generation campaigns today and watched a presentation prepared by Cummins on their use of our solution for billing and chargeback and the benefits they have achieved.

Cummins has been my customer for more than 5 years now. I have visited them many times. We have presented jointly in different events. But I have never come across such a simple, straight-to-the-point, fact-based story of our joint success. No glamorized design or sophisticated marketing copy, just pure value as it comes straight from the Midwest.

Watch the presentation here:

I love those moments when you have a great revelation in understanding something. I had one of those today.

For some time now we’ve been trying to figure out why Business Unit Visibility into IT Cost, or IT cost show back, is one of the main drivers for our business.

We are of course aware of the opportunity to optimize IT costs by gaining visibility. We also know that visibility to business units creates responsibility and ownership over IT spend – we have seen it happen many times with our customers who are using our IT Cost Management solutions.

But there was something else we were unaware of. The type of functionality our customers were looking for – what-if analysis, IT forecasting, re-forecasting – these all drove us to feel there was something additional, a need of our customers that we were missing.

Well we found it.

Profitability Predictability!

IT is highly unpredictable when not managed correctly. IT spend is a small but a growing part of operating costs, and it is the most unpredictable part. The result: IT is an area of risk and surprises for business units who must be able to predict their profitability.

This core need of a Business Unit for predictability is driving the need for easy-to-use IT cost transparency solutions and analysis, such as those offered by Digital Fuel.

I love it when it all becomes clear!