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Implementing a chargeback and showback solution, in combination with a detailed cost allocation model, can be the key to understanding the value of IT services.
In his recent CIO Insight article “How the Federal Government Controls IT Spending,” my colleague Eric Thomas discusses the business of IT, and urges federal CIOs to “develop more robust mechanisms to fairly and equitably allocate IT costs to the consumers of the IT services” in order to “help the agency better understand the true value of the services provided.” This article provides a more in-depth look at how to capture and quantify the scope and value of IT services using chargebacks or showbacks—and how to use this information to drive change and improve performance in an organization.
Federal CIOs often find themselves in the difficult position of managing the expectations of internal and external customers, but with limited resources and increasing scrutiny. In order to effectively manage IT investments, the value of IT services must be identified using a proven approach to capture and quantify the relationship between cost and performance. The most common mechanism to identify this relationship is a chargeback in which IT departments identify the costs associated with providing services to internal customers and bill them for these services.
Chargebacks allocate the cost of IT services, hardware and software to their users. This process provides transparency into the departments and processes that generate expenses and helps identify ways to achieve greater efficiency. Chargebacks can determine cost drivers and provide insight into the value of new technologies as well as legacy systems. One of chargeback’s main goals is increased accountability. Agency budgets are limited and chargebacks require managers to validate their IT expenditures. This encourages the responsible use of IT services and helps agencies analyze and adjust resources accordingly.
More recently, the concept of the showback has emerged as a viable alternative to the chargeback. Showbacks involve the same analysis of IT expenditures as chargebacks without actually charging other departments. This process achieves the same visibility into IT costs, but allows for increased flexibility for the business areas that rely on a heavier IT spend to achieve their objectives and does not involve administrative changes to the budget and accounting infrastructure. When using showbacks, CIOs must be diligent in monitoring and reporting results to departmental leadership in order to reinforce the importance and impact of the process.
Chargebacks and showbacks provide a structured approach to categorizing and measuring the cost and performance of IT investments. This capability allows CIOs to identify and maximize the value of investments and provides a unique opportunity to quantify agency demands. Chargebacks and showbacks provide transparency and insight into behavior, needs and trends which agencies can use to drive change and determine a path to enhance performance and success.
Implementing a Chargeback or Showback Solution
Chargebacks and showbacks are excellent ways of increasing awareness of IT expenditures, but in order for them to be effective, they require a means to analyze IT investments and allocate their costs appropriately. An effective resource allocation methodology and supporting tools are needed to accurately assign costs to users of IT services. A chargeback and showback system provides cost visibility by consolidating expenses and performance metrics to establish a connection between IT spending and business processes. This capability is necessary to identify and share fiscal responsibility and accountability with the rest of the agency.
The following six steps are essential when implementing a chargeback and showback solution:
1. Identify detailed IT expenses. Cost transparency is vital to an effective chargeback and showback capability as the agency must obtain enough detail to assign IT line items to the departments and services they support. A comprehensive operating and spend plan with detailed hardware, software, contract and systems support costs is recommended.
2. Determine cost relationships. Establishing a logical connection between IT expenses and their consumption among departments is an essential part of the process. The objective is not to chargeback 100% of IT costs, but to focus on the services and systems that are easy to allocate and have an impact.
3. Apply performance metrics. Chargebacks and showbacks depend on a variety of metrics to accurately allocate costs. Traditional systems use a straight allocation of IT costs based on readily available information such as headcount or number of PCs. Other IT chargeback methodologies include measured use, flat rate and direct cost. Detailed or department-specific metrics are preferred to increase accuracy, but it is important to strike a balance between the precision of the system and the difficulty in collecting and updating the data.
4. Incorporate into accounting stream (chargeback only). Once the chargeback methodology is established and agreed upon, the accounting system must be updated to allow IT to charge other departments for their services.
5. Report and evaluate. The purpose of the chargeback is to inform departments of the resources they are using and to demonstrate that IT investments support agency goals and objectives. It is important to present and discuss the results of the system with department leadership in order to evaluate the use of their IT expenditures, as well as the value provided by the IT services they consume.
6. Keep it simple. The key is to develop a reasonable solution that adds value without being overly complicated. When possible, a simple and straightforward process is highly encouraged.
Using the right chargeback and showback approach in combination with a comprehensive cost allocation model can be the key to understanding the true value of federal IT services. Managing these capabilities effectively will drive mission and vision, promote change, increase performance, and ultimately create a more efficient business.
This article was originally published on CIOInsight.com
