Let's face it: Your department is a cost center without a revenue stream to offset your cost structure. Hence, you are totally reliant on the revenue-producing units within the company to pay your way.\n\nChargeback mechanisms aim to allocate IT costs across all business units, but different businesses have varying interests in how you spend that money. If you're charging them equally, without regard to their usage or their profitability, it's going to get you into trouble. \n\nChargebacks usually aren't controversial as long as the business units are doing well. But if a business unit is losing money, or if a corporatewide cost reduction is mandated\u2014familiar situations for nearly everyone today\u2014your colleagues will come looking for you to reduce their allocations. They won't care whether they leave you holding the bag or make you stick their share on someone else. But an effective chargeback mechanism allows IT costs to scale up or down based on demand and usage.\n\nHow Chargebacks Can Backfire\nTo read more on this topic, see: Cost Cutting Tips: It Takes Money to Save Money and Chargeback: The Pros and Cons.\n\nThere are a few ways that simplistic chargeback schemes backfire. Here's one scenario: If your allocation is made on a percentage basis according to a business unit's gross revenues, you penalize the profitable businesses even if they didn't use more technology to succeed. Imagine the smile on the face of the executive who leads an underperforming business unit when you charge him less for doing poorly. And imagine the quandary if the underperforming business had spent more on IT than the successful one.\nAnother example: You create a shared services group with a chargeback mechanism that gives you the funding to maintain some bench strength and make investments in your utility. Your group is an internal vendor servicing other IT verticals within your company. It's supposed to drive efficiencies and lower IT costs due to economies of scale and reuse. However, you may also end up spreading cost overruns or the losses from failed projects. Business heads end up paying more than they did before. Now you're competing with outside vendors, who are pitching lower prices to your line of business CIOs. \n\nAllocations Everyone Can Understand\n\nIf either of the above situations sound familiar, it may be time to overhaul your chargeback mechanism. Start by getting executive support. Changing your company's IT chargeback scheme will alter business unit profitability in some fashion, so you need business leaders' buy-in. \n\nThere are many ways to define a chargeback scheme that is tailored to each business unit's needs and performance. Allocating costs according to some unit of measurement feeds more accurate charges. Viable measures include the number of users or applications supported, processing power, storage quantity and number of servers. Your methodology must be aligned with a strategic approach for reducing costs and, ultimately, the business value that IT brings.\n\nTo test whether you have it right, see if you can pass savings on to business units that work with you to gain efficiencies. For example, if an application was responsible for the bulk of an IT expenditure for three business units but it didn't provide enough business value, you would phase it out and replace it with a more efficient application. Your chargeback should reflect the savings to those three business units, but not affect the charges to business units that don't use the system in question. This is easier said than done, but worth the effort because it aligns IT spending with the value it delivers to each business unit.\n\nAlbert Eng is a general partner of CCM-IT Advisory. He works \nwith global service providers and buy-side CIOs on the latest transformational challenges facing IT organizations. He can be reached at Albert.Eng@ccm-ITadvisory.com.