Chargeback: The Pros and Cons

Should you charge business units for operations?

One way to keep business units from forcing your operational costs to rise is to charge them for their share of those operations. This can rein in ever-increasing requests for technology deployments. For example, at United Technologies, “Everything is in the customer’s budget,” says CIO John Doucette. Well, almost everything: of Doucette’s approximately $200 million IT budget, $5 million is considered general corporate overhead. “The businesses have to believe there’s value in what they’re getting. The only way to get that is for them to pay for it,” he says.

Other CIOs think linking operations costs directly to specific deployments or business units is a bad idea. “I’m not a fan of chargebacks,” says Jim Miller, CIO at ThyssenKrupp Elevator. While business managers can understand why they might be charged for a data line, charging business units a share of basic IT infrastructure “gets us into more arguments than its worth,” he says.

If you do try to charge business units for their share of operational costs, be prepared to do some tough work, says Dennis Gaughan, research director for IT governance at AMR Research. Not only do you have to determine the costs per activity, you need to calculate its value to the business. “That’s not trivial,” he says. “You have to earn a level of respect with the business before you can even begin to do this level of analysis.”

Even if you don’t charge back for operations, it does help to have an idea of those rough costs, notes Alex Cullen, principal analyst for IT management at Forrester Research. “Add a finance person to your staff to help you understand your costs and cost drivers,” he advises. That strategy works well for Learning Company’s CIO John Von Stein. “We don’t need to do allocation [to business units] because we have a good handle on the costs,” he says, thanks to a partnership with the finance department.

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Copyright © 2006 IDG Communications, Inc.

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