by Albert Eng

IT Budgets: It’s Time to Rethink Your Chargebacks

Feb 24, 2010

Allocating IT costs across business units should take into account their profitability and their use of technology.

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.

Chargeback 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.

Chargebacks 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—familiar situations for nearly everyone today—your 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.

How Chargebacks Can Backfire

To read more on this topic, see: Cost Cutting Tips: It Takes Money to Save Money and Chargeback: The Pros and Cons.

There 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. Another 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.

Allocations Everyone Can Understand

If 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.

There 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.

To 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.

Albert Eng is a general partner of CCM-IT Advisory. He works with global service providers and buy-side CIOs on the latest transformational challenges facing IT organizations. He can be reached at