The heated debate over chargeback practices has become muffled over the last few years as the economy (including IT spending) recovered from the downturn in the early part of the decade. But when pressure mounts on CIOs once again to more firmly restrain IT budgets, the debate over who should own the costs–the business units or the central IT organization–is likely to re-emerge. Moreover, those companies that are aggressively pursing chargeback strategies will face new issues as they adopt on-demand, service-oriented architectures. These new forms of application deployment, while complicating traditional chargeback schemes, will also facilitate utility-based computing where usage- and subscription-based structures become more common. As such, cost allocation is likely to re-emerge as an important topic over the next few years.
This Research Byte is a summary of our full report, Recharging the IT Budget Chargeback Debate. This full article assesses the current state of IT budget chargeback practices, based on a special survey conducted by Computer Economics of IT managers. It outlines which IT budget line items are typically charged back to business units and how much of the IT budget is usually recovered in such fashion. It concludes with recommendations for IT managers considering cost allocation strategies for the future.
Measuring the Scope of Chargeback Practices
The key premise of chargeback strategies–that IT expenses should be allocated as closely as possible to the business activities that create the demand–seems like a rational approach to sound business management. If business-unit decision-makers perceive IT to be “free,” they will be unable to account for the true cost of business investments and activities. Furthermore, there will be a lack of incentive to make the most efficient use of IT resources. It is easy to see why IT managers, who face potentially unlimited demands for IT resources, often become the champions of chargeback strategies. But in practice, the issue is not so simple.
The complexity, practicality, and politics of allocating IT costs to business units often dictate against chargebacks. According to our survey of 94 managers of central IT organizations, about 42% of all companies do not charge back any portion of their IT budgets to business units (Figure 1).
A closer look at Figure 1 indicates that the majority of companies fall into one of three categories:
- Those that do not charge back IT costs to business units
- The nearly one-quarter of the companies that aggressively allocate all of their expenses, in one way or another, to business units
- The nearly one-third that selectively charge back only certain expenses, amounting to less–and in most cases, far less–than half of their IT budgets
To look at the data in another way, you could place the remaining 6% that charge back less than all (but more than half) of their budgets in the “aggressive” camp and conclude that less than one-third of all companies are engaged in aggressively allocating expenses to business units. On the flip side, more than two-thirds of companies are either not charging back or only selectively charging back a small portion of IT expenses to users. Most organizations clearly have a long way to go before reaching a point where IT services are delivered like a utility, with users paying for what they consume.
Chargeback Policies Vary by Cost Category
The full version of this report outlines which IT budget line items are typically charged back to business units and how much of the IT budget is usually recovered in such fashion. It also provides insights into changes in chargeback policies that are likely to occur due to new trends, such as subscription-based services.
Charging back IT expenses to business units is not a panacea for ensuring a proper level of investment in an IT infrastructure, but companies of all sizes are likely to obtain some benefits from carefully-thought-out chargeback strategies that align with company goals.
This Research Byte is a brief overview of our report on this subject, Recharging the IT Chargeback Debate. The full report is available at no charge for Computer Economics clients, or it may be purchased by non-clients directly from our website at https://avasant.com/report/recharging-the-it-budget-chargeback-debate-2007/ (click for pricing).