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Chargeback Demonstrates IT Value in the enterprise

By Mark J. Denne

January 01, 2007 — CIO —

If IT is to be perceived as valuable, it has to have a price. Usage-based chargeback is the best way to build a price-to-value relationship for IT services, and it is one of the cornerstones for running IT as a business within a business. As long as IT has a solid understanding of its operating costs, it can use pricing as a strategic tool for improving alignment with the business by giving executives better understanding and control over IT resources. Different models, with different classes of service, can be used to drive more cost-efficient consumption of IT and to achieve more effective matching of service to business need. Four basic methods for pricing IT value are described below.

Subscription Pricing

The simplest chargeback model, subscription pricing is a pay-per-use model in which pricing is per unit of time, which is much easier to monitor and measure than consumption-based pricing. The operational cost of the IT facilities is calculated and amortized across a subscription period (for example, one year) and then divided between all the users of the service. Depending on the operating profitability goals applied to the IT organization by the business as a whole, an element of gross margin may be added—perhaps to create a pool to fund IT research or future projects.

Advantages

* Simple: If, for example, five lines of business were subscribing to a service that cost $60,000 per month to provide, the subscription charge (assuming a break-even business model) would be $60,000/5 = $12,000 per business unit per month.

Disadvantages

* No usage monitoring or penalties: It assumes all parts of the business will use the service at the same level on a constant basis, with no penalties for excessive consumption or peak time usage.

* No cost justification: There aren’t metrics by which the actual level of consumption can be measured, calculated and justified to skeptical consumers.

Peak-Level Pricing

The peak-level approach takes the subscription model and adds a mechanism to monitor and record peak consumption. Consumers are billed according to their peak use, not according to their average use.

Advantages

* Simple to meter: Only peak-level usage needs to be monitored and recorded.

* Clear cost justification: Easy to show when consumers are using more than the base level resources.

Disadvantages

* Penalizes variability: If there are just a few peaks of usage during a given period, the scheme can seem unfair. But shortening the analysis period—say from six months down to one—and the measurement intervals—from weekly to daily, for example—can solve the problem.

 

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