by Bernard Golden

Cloud Computing: Why You Can’t Ignore Chargeback

Nov 05, 2010
Cloud ComputingVirtualization

You might think that users would prefer to avoid chargeback because they currently get resources for free, and implementing chargeback would result in more budgetary outflow. But you'd be wrong, says's Bernard Golden.

One of the most controversial issues in cloud computing is chargeback: pricing consumed resources on a granular basis. Amazon posts its prices publicly for all to see — so much for compute, so much per gigabyte sent over the network, etc. Chargeback in the cloud computing arena is the same kind of highly granular pricing associated with use of internal resources.

The reason chargeback is controversial is not, perhaps, for the reason you might expect. You might think that resource users would prefer to avoid chargeback is because they currently get resources for free, and implementing chargeback would result in more budgetary outflow.

But you’d be wrong. Resource users already pay for consuming IT resources, it’s just that the costs are typically quite lumpy — perhaps so much per month for a server (whether physical or virtual), plus an associated IT overhead cost where large swaths of IT’s costs are assigned to user departments on some kind of budget algorithm.

Why Chargeback is Controversial

One reason chargeback is controversial is that it’s really hard for IT groups to accurately assess the actual cost of a resource on a granular basis. Different types of direct IT costs (e.g., servers vs. storage) get assigned to different budgets and groups within IT, which makes it hard to roll up costs to get a true picture of resource costs. This is not to mention the fact that other costs (e.g., power) may actually be paid by entire different divisions of a company (for example, data center power is often paid by the facilities organization).

In this sense, IT chargeback reminds me of hospital billing. If you’ve ever tried to get an accurate accounting of the fee for a hospital service prior to getting the bill, you know that it’s impossible. Hospitals just don’t work that way. Every group in the hospital does its job, assigns its service codes, and at some point down the road all of the individual cost assignments are totaled up and sent along in a summary bill.

So too does IT do its job and eventually tots up its costs and divvies up the number among different user groups, but good luck if you want to find out what the real cost, say, of an individual server hour is.

Another reason chargeback is controversial is for an unexpected reason — some user groups prefer confusion in billing because they “overconsume” IT resources and, consequently, get a sweet deal on their costs. Of course, for every “overconsumer” there’s an “underconsumer” that’s paying for more than they’re using, but…Mr Overconsumer is going to fight chargeback tooth and nail.

There’s been a lot of discussion that perhaps chargeback is not necessary — that just sharing information with resource users is sufficient. This is referred to as “showback,” with the notion that a resource user, when confronted with how much, for example, storage it’s consuming, it will act to conserve resource use. In general, I feel that is a naive belief, borne out of a hope on the part of IT groups that indicating resource use will enable them to avoid the hard work of identifying specific costs for resources that are consumed.

And that’s really what’s at the bedrock for these discussions about chargeback — accurate cost assignment to those who use IT resources. With Amazon Web Services, it’s very clear how much one gets charged, and that the charge is based on Amazon’s costs (with a profit margin for Amazon as well, of course).

Regarding internal IT resources, chargeback is designed to accomplish the same thing — to ensure that all IT costs are associated with granular resources and also that the costs of those granular resources are accurately assigned to those who consume them. That’s it. Simple. But not easy.

A Crucial Business Need

But the controversy over accurate cost assignment is, to my mind, being joined by a second reason chargeback is controversial but extremely important. And that reason, may, in fact, be more important long term.

Let me explain by starting with an anecdote.

It’s no secret that the world of media-oriented consumer electronics is transforming quickly. The rise of digital formats is upending traditional media that were played in predictable ways — think cassette tapes played on a Walkman.

Today, however, digital media is upon us with a vengeance and is making mincemeat of traditional distribution. These changes, however, also provide the opportunity for new media services (think Pandora) that are, at bottom cloud based. Another example is the rapid conversion of Netflix’s business from physical DVD distribution to on-demand digital streaming. Another cloud service.

This means that manufacturers of consumer electronics have to respond and figure out how to incorporate cloud services into their products. In other words, they have to figure out how to integrate IT functionality into their products.

I was talking to someone from a consumer electronics company and he told me that design engineers at his company obsess with how to remove an additional one dollar of cost from their devices. The pressure to cut costs in these hyper-competitive markets is relentless.

So imagine that you’re building an IT-infused device and need to keep your costs down. It would be pretty important that you understand exactly how much it costs for the IT portion of that product — on a very granular basis.

And that’s why chargeback is going to become even more important. It will move from accurate cost assignment (essentially a budget assignment exercise) to a product design cost element, in which knowing exactly what the total cost structure of the product is crucial.

When designing a product, input cost (i.e., resource price) is an extremely important signaling mechanism. Only when the true cost of IT resources used by a product are known can a product designer forecast whether one cloud service or another is a better decision. Absent accurate prices, the designer faces the danger of mispricing the end product.

In other words, chargeback is moving from an overhead cost assignment exercise (interesting, but perhaps not really crucial) to a cost of goods sold effort and, believe me, understanding the cost of goods of a product is vital to determine what to offer and how to set its price.

Therefore, chargeback is going to become a more important issue in the near future and pressure will build on internal IT groups to truly reflect — with great granularity — the fully loaded cost of delivering specific resources. The chargeback controversy will soon shift from whether it’s important or not to how soon it can be implemented — and I wouldn’t want to be the CIO who responded with a “we’re thinking about it.”

Bernard Golden is CEO of consulting firm HyperStratus, which specializes in virtualization, cloud computing and related issues. He is also the author of “Virtualization for Dummies,” the best-selling book on virtualization to date.

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