Cloud Computing: How to Craft a Smart Chargeback Strategy

While the cloud is certainly not the IT industry’s first attempt to harness cheap commodity computing power “on the fly,” the hype around it has been fuelled by the high levels of uncertainty prevailing over the slow recovery of the economic climate.

In this context, for all the promise cloud computing offers to reduce capital expenditure and management burden, while increasing speed of response and ability for IT to flex and scale with business demands, it also reignites the knotty issues of IT chargebacks — an approach to IT funding that, due to its complexity, was in the past somewhat of a recurring nightmare for CFOs and CIOs.

Shifts in Responsibility

IT budgets can be assigned by business unit, project or overall annual requirements. But cloud computing, as a centralized IT resource charged on a usage-based billing model, blurs traditional budgetary lines, reviving the concept of the IT function charging its costs back to individual departments. Despite the daunting challenge of developing a costing model and socializing this new financial agreement throughout an organization, IT chargeback methods are just as important as architecture, support or lifecycle considerations when building a cloud.

In the past chargebacks have been difficult to implement, as calculating the full cost of service delivery is an extremely complex process due the range of variables associated with it. With cloud computing, organizations can build flexible IT resourcing into their operational expenditure for managing cheaper, sustained and predictable business workloads. At the same time, they can access extra resources on-the-fly when a business unit needs it, to get a new project up and running quickly for example, without having to factor in the extra hardware, power, maintenance and labor costs usually associated with new IT capital expenditure.

Putting IT in Control

On the face of it, the fact that cloud computing is fundamentally based on a chargeback model would seem to put the CIO firmly in control of IT as a central business resource and enable him to alleviate some of the pressure on the CFO. Reducing capital expenditure is almost always a good thing, but decentralized, tangible resources allow for more traditional, consistent and obvious budget and resource division. Problems can arise when a department queries their share of the cloud services budget in comparison to other departments or as a proportion of the IT bill to the business overall. While the benefit of a flexible environment is to address peaks and valleys in usage, these patterns can also engender concern about how costs are allocated between different groups.

This is why it is essential that any CIO considering a move to cloud computing must work with the CFO to agree on standard procedures upfront for procuring, accessing and monitoring cloud resources and service levels to ensure each business unit only pays for the IT they need and use. Private clouds, at first glance, seem as though they’d be reasonably straightforward chargeback environments. However, questions of ownership still do manifest themselves, namely: What department should pay for the operating, support and maintenance expenses linked to the cloud? The answer is that all departments partaking should own a part of the operating expenses.

Unlike in a public cloud governed by a third party, in a private cloud direct application usage expenses are not the only cost that must be issued as a chargeback to an IT department. Thus, the additional costs must be split based on fair usage statistics. The good news is that this is a fairly simple proportion to figure out when given the right tracking information; the difficult part is finding the appropriate management systems to monitor and control usage of the private cloud.

The fundamental components, therefore, of implementing a robust chargeback infrastructure include:

• Coming to an agreement with the business around the appropriate pricing model for cloud resources

• Collecting accurate usage information through a cloud lifecycle management solution

• Ensuring this utilization information, as well as the associated costs, is visible by the user through the services portal from which they manage their cloud services and request new cloud services

• Aggregating these costs according to relevant business entities, whether project-based or departmental, to roll up meaningful costs and enable future business decisions with solutions

• Aligning this new pay-per-use model with the financial systems and decision processes of the business

IT departments with well-developed business service management (BSM) software deployments that allow them to align IT resource with business demand will already have a head start into the cloud. BSM enables businesses to align IT service delivery with the priorities of the business — ensuring that IT is supporting the business in the places it needs it most. Management software is key to managing this process and can be used to ensure that in the case of pay-as-you-go computing, budgets can be set depending on the relevance each user group has to the business priorities at any one time.

Get it right and IT funding becomes a vastly simpler process, guaranteeing that business departments pay only for the resources they consume and ensuring that the post-recession CFO has one less challenge on his plate.

About the Author: Mark Settle, chief information officer for BMC Software, joined the company in 2008. He has served as the CIO of four Fortune 300 companies: Corporate Express, Arrow Electronics, Visa International, and Occidental Petroleum. Settle has worked in a variety of industries including consumer products, high-tech distribution, financial services, and oil and gas. He received his bachelor and master’s degrees from MIT and a PhD from Brown University. He is also a former Air Force officer and NASA Program Scientist.

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