By Paul Goetz, EMC
Companies are now faced with explosive data volumes, IT cost constraints and underutilization of storage and other technologies that are business critical. As a result, chief information officers are considering ways to maximize resources and better utilize technology while containing costs.
One way to do this is through chargeback, which enables an organization to “charge” internal clients for their technology usage. Chargeback is also being extended beyond traditional internal cost control uses to help increase revenues. In fact, one leading global technology services company is using chargeback with its external clients to enhance its revenue-generating, managed storage services.
Although IT chargeback helps raise awareness of the cost of overallocation and underutilization of technology, it may also pose several common challenges that can limit the potential for success, including user resistance, complexity and the lack of integration with other financial processes.
A leading financial services company recently implemented IT chargeback to bring excessive storage demands in line with actual business needs, which brought about significant cost reductions. This company’s business units had come to expect an excess of storage capacity out of fear of interruption if storage capacity were depleted. Unfortunately, this practice resulted in very low storage utilization and poor use of capital assets. The IT organization used chargeback to raise users’ awareness of the costs of overallocation and underutilization, and thus quickly overcame any user resistance to attain more reasonable storage allocations.
Whether the objective is cost recovery or revenue generation, in order to use chargeback successfully, IT must adopt the mind-set of a business that sells information services to its clients. For any successful business, it is important that clients perceive a value that is in line with the costs they must pay for services. In the case of storage, chargeback helps define storage value through an accurate understanding of the cost of storage operations, better insight into current and future storage demands, and the development of a storage services catalog.
Challenges that Threaten Chargeback Success
Companies that decide to utilize chargeback face several common challenges. First, the mere suggestion of chargeback can be a political minefield because business units often feel that any chargeback is unfair. When users are confronted with having to pay for something that was effectively free in the past, the relationship between business users and IT can change from collaborative to combative. So, CIO support is a critical success factor for most chargeback initiatives.
Resistance to change could also exist within IT departments, thus increasing the importance of the CIO’s involvement. Because chargeback enables business units to see their IT costs, they can compare costs with third-party IT offerings. This visibility turns the IT environment competitive; that is, forcing IT organizations to be market competitive. The business users need to know that their IT organization is in line with the market and costs are aligned with services.
The manner in which chargeback is introduced and communicated to users can make the difference between success and failure. If the switch to a chargeback process is overly complex or is made too quickly, users tend to be unclear about the charges and are more resistant to the change. One best practice involves establishing an initial transitional period during which a limited number of storage parameters are monitored and users are sent invoices for information-only purposes. This method is often referred to as “memo-back.” Once users are familiar with the process, additional storage parameters can be incorporated and actual invoices can be sent.
Lastly, chargeback initiatives often fail because the process is isolated from other IT financial management processes. According to industry analyst firm Gartner, organizations implement a standalone spreadsheet-based chargeback system in 80 percent of cases. Many of these initiatives fail because companies have great difficulty establishing the necessary link between chargeback and other financial management processes such as planning/budgeting as well as IT service level, configuration, change, release and performance management processes. The presence of well-defined systems and IT Infrastructure Library (ITIL)-compliant processes to support each of these areas greatly improves the chances of chargeback success. For example, effective configuration management procedures lead to more accurate information about what storage resources are in use. As a result, the chargeback system is supported by more reliable, available and accessible data.
Clearly Define Chargeback Objectives
Companies that have achieved success in implementing chargeback follow a clear methodology that begins with a definition of objectives that answer the questions: What do you want to achieve, and how can this be done simply, accurately and fairly? The financial services company in the above example needed to eliminate the overprovisioning of storage and make users aware of the costs that resulted from storage capacity not being utilized. So, it chose to make utilization the sole focus of the chargeback effort.
Accurately measure costs.
The chargeback team must develop an accurate cost model to measure the actual usage to be translated into financial costs. The failure to accurately capture costs can damage IT’s credibility in the eyes of the users and have a negative ripple effect on all the other interdependent financial management processes such as capacity planning. The components of the model may include human resources, facilities, IT infrastructure, software, hardware and services costs. The actual components that are included should be based on the objectives of the chargeback effort and the level of detail that is appropriate, and should ensure that costs in the model are not double counted.
Allocate costs to support chargeback objectives.
Companies must then decide how to allocate these costs to the business units, taking into consideration the objectives of the chargeback initiative and the user decisions to be influenced. The choices range from very straightforward approaches that involve dividing total storage costs among the user community based on size (number of employees, number of servers, etc.), to more sophisticated allocations based on actual usage that more effectively link user consumption with costs.
An even more accurate approach involves the establishment of a service-level catalog that defines how much users are charged based on the volume of services consumed at a given service level. This option is very helpful in fostering conversations with business users in terms they can understand. It drives them to choose only the services that they truly feel are critical, or choose services whose costs are in line with the value of that service level for them.
Clear invoicing makes users aware of the link between actions and costs.
The last step of the implementation methodology involves developing an invoice that communicates costs to the users. Clarity of the invoice is extremely important for user acceptance, as users won’t pay for what they don’t understand. Users must clearly understand how their actions link directly to costs and how they can directly control these costs.
The most successful organizations carefully consider chargeback objectives when developing the invoice. One best practice is to draw attention to the resource consumption that you specifically want to influence. The financial services company mentioned above used the chargeback invoices to highlight the utilization conditions they were trying to avoid. When utilization dropped below a certain threshold, users would see a flashing red box in their online invoice.
Expertise in designing the chargeback invoice is critical and requires a deep understanding of end-user issues and chargeback objectives. The leading global technology services company needed a highly effective and reliable chargeback invoice in order to accurately bill its clients. The increase in clarity and accuracy of the client billing process has led to more satisfied customers and a greater ability to anticipate changing customer demands and acquire new customers.
Leverage existing tools to ensure accuracy and minimize investment.
Many successful organizations have already implemented storage-management software tools that can track and report utilization of storage resources. While organizations have had these tools for some time, many have not yet exploited the full capabilities of the software. Companies that have successfully implemented chargeback often leverage existing software to capture accurate usage data. This software is critical for the gathering, storage and management of the required chargeback data. Using a tool to provide integrated asset and utilization reports across multivendor storage increases the probability of capturing accurate usage data for chargeback purposes and more fully utilizes existing software investments.
Common Factors to Chargeback Success
Completed chargeback implementations have revealed several common factors that help ensure chargeback success.
First, chargeback should have strong executive support. Sponsorship from the CIO minimizes user resistance.
Second, individuals with financial skills and expertise should be involved in the implementation of chargeback. By communicating with business units in financial terms as opposed to discussing technology options, IT is more effective in helping users understand the financial implications of their actions and therefore the rationale behind chargeback. Being able to draw on knowledgeable and experienced financial resources greatly facilitates this understanding.
Third, the chargeback financial model created to capture costs is more likely to produce consistently accurate figures that represent actual costs when the interrelationships between chargeback and other financial processes are reflected in the system. In addition, the allocation model will more directly link user actions to costs, helping users understand how they can control their costs.
Why consider chargeback for storage now? With no end in sight to the amount of data being captured, stored and backed up, chargeback is an effective way to influence users’ decisions in a way that better supports prudent use of IT resources.
If done right, the benefits resulting from chargeback can be substantial. Users at the financial services company quickly realized that unused storage resources could be returned to the overall pool, which saved significant storage acquisition costs.
Another organization was able to reduce the number of production database clones used to support activities like test, development and reporting from 14 down to six. Chargeback motivated users to reduce their storage consumption and to see that they could limit their own storage costs by sharing clones with other departments.
Whether it is purely in a cost-recovery mode or in a revenue-generating capacity, many organizations have developed accurate and reliable chargeback systems utilizing existing storage management software investments. These companies are using chargeback for competitive advantage as business units utilize the technology infrastructure more efficiently and the IT organization becomes more responsive to changing demands. This ultimately improves the flexibility of the organization, enabling it to adapt more easily to new market conditions.
Paul Goetz is vice president of EMC Consulting at EMC Corporation (www.emc.com).
For more articles on chargeback, see:
Beneath the Buzz: Chargebacks
Chargeback for Good or Evil
Sound Off: Is IT Chargeback More Trouble Than It’s Worth?