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Building A Business Case For Cloud-Based Chargeback Solutions

Building A Business Case For Cloud-Based Chargeback Solutions

Done right, chargeback is able to bring visibility into resource utilization, helping enterprise IT allocate costs, plan, budget and consolidate resources.

Strictly speaking, there is no business case for an IT chargeback solution. Still, if you think about it, there’s no business case for your computer either. Sure, you could use a computer for such value-added tasks as application development or database management, but you could also be wasting your time watching cat videos on YouTube, goofing off on social media or playing Candy Crush.

Same goes for chargeback, loosely defined as the determination of IT costs and the allocation of those costs to the departments that use them. The idea is that chargeback invoices will train the line of business owners to efficiently use shared IT resources in a way that will drive down units consumed, lowering their own administrative costs and thus the total costs of the cloud that the entire enterprise uses. But chargeback only adds value if you use it right.

There are real barriers to using cloud-based chargeback solutions right. The one that everyone forgets is process. Financial management is as much a key IT service management (ITSM) process as tracking your SLAs (service level agreements) or fulfilling requests. In fact, if you don’t have a real service catalog, then you haven’t defined what you’re charging back for, so you may as well leave the shrink wrap on the chargeback software. ITSM process maturity has to be solidly in place or chargeback just won’t work.

The next major barrier is metering. It’s great if you know that you want to charge storage by the gigabytes allocated and compute by processor-minutes, but it’s another thing to know how many of these units are actually consumed. Here’s a hint: If you don’t know how many units you have, you probably don’t know how many are being used.

Or by whom. Remember that there are reasons why somebody raised a hand and said, “We need a chargeback solution.” There’s probably a lack of control and cost transparency. And it’s not just shadow IT and runaway costs.

There’s probably a department that insists on using an obsolete application, even though it’s out of support and has been replaced elsewhere in the organization. Or a team that over-provisions its storage resources simply because of a mentality that they’d rather have the capacity and not need it than need it and not have it. Or those that don’t do any capacity management and end up stealing (as there’s no other word for it) resources that have been allocated to other departments. And in case you think that’s not your problem, remember that if you’re leading a project, stakeholder management is as much a part of your job as anything else.

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Cloud-Based Chargeback Options

One of the first things you probably learned as an IT manager is that “doing nothing” is always an option. Unless someone besides the accountants is clamoring for chargeback, don’t do it. There needs to be some kind of driver -- regulatory compliance, top-management sponsorship, a high-priority project with a dependency on chargeback -- for you to even consider it.

If you are directed to get your costing and allocation under control though, it’s because you’re overpaying for stuff. Don’t make matters worse by overpaying for a chargeback solution.

First of all, remember that you already have a perfectly good cost accounting tool, and it won’t cost you an incremental dime in annual recurring costs. It’s called Microsoft Excel. It has its limits, and the more dynamic you make it, the more time it will spend auto-saving and less time it will spend actually running. And although it could be fed quantitative data from some sniffer tool, Excel doesn’t have any direct way of metering units available or units consumed.

Even so, I’d recommend starting out with a “showback” model in Excel and running that for six months to a year while you put a permanent chargeback solution in place. Showback is a less formal, less binding version of chargeback. It doesn’t provide the same level of precision, but it also doesn’t send invoices. The more casual “memos” it sends instead will be greeted with less resistance from line of business managers, giving them time to adjust to the new code of behavior that actual chargeback will demand.

So let’s assume, for the sake of putting together a strawmodel case, that you’ll be using Excel for showback for a year while you settle on a chargeback package. The assumption going into this article is that you’re already in a hybrid cloud environment and want a cloud-based chargeback solution.

You have a number to choose from. Apptio is the real up-and-comer, although Cloud Cruiser and Open iT are perfectly suitable options. VMware’s ITBM suite works well providing you’re willing to take on the vendor lock-in. ServiceNow’s IT Financial Management component is not, sorry to say, as mature as it needs to be yet. There are others, of course, to be considered if you’re doing due diligence. We won’t go into more details as this isn’t a product review, and side-by-side comparisons are outside this article’s scope. These are just some chargeback options that you’ll find when you begin your research.

Making The Case For Cloud-Based Chargeback

It was not surprising to learn that there are no easy-to-find information on building a business case for cloud-based chargeback solutions, which means we’re breaking new ground. The closest resource we could find that discusses chargeback as a cloud enabler comes from a Cisco whitepaper, which is worth a read.

Let’s outline some of the benefits of chargeback. For that we rely on the work of the Technology Business Management Council, which, although its thought leadership could be applied across all chargeback tools, is essentially a creature of Apptio, as Apptio is TBM’s technical advisor. According to TBM, chargeback’s value comes from three distinct waves:

  • Cost takeout;
  • Application rationalization;
  • Data center consolidation.

However, there are other benefits as well. Simply providing visibility into resource utilization and being able to correlate that utilization back to corporate departments is a huge advantage for large organizations. This not only brings transparency to enterprise IT costs, but it offers a way for IT to more accurately allocate costs to individual business units. Chargeback can also play a key role in planning, budgeting and forecasting.

Since we’re considering a cloud-based solution, let’s assume that the biggest cost will be subscription; that’s not to say there won’t be any one-time costs. First, it’s very likely that some money will need to be invested in advancing ITSM maturity to ensure readiness for chargeback. We’ll also need some money in the project bucket to come up with a showback model and select a cloud-based chargeback solution. This will cost more than money and effort, though. It’ll also cost calendar time of about a year. Add in a little incremental hardware plus some software to collect data, crunch the cost calculations and send the invoices, and you got your one-time costs.

On an ongoing basis, you’ll have a subscription fee for the chargeback solution, and you’ll probably need two additional people in the project management office (PMO); one at management level to handle stakeholders and other communications, and one at a junior level to take care of the nuts-and-bolts work of running the system and keeping an eye on the benchmarks.

Also, understand that none of the savings can be realized until after the transformation is complete. Cost takeout can’t kick in until Year 2, and the other two benefit sources won’t be realized until after that. If you don’t work for a CIO who plays the long game, stop reading now.

For anyone who’s still with me, here’s the business case. We start with a current state that’s already declining in expense year-over-year:

Figure 1: Cloud-based chargeback solution current state

The decline is due an assumed 10 percent per year price performance improvement on the hardware and software, and an annual 10 percent headcount reduction offsetting 5 percent/year labor inflation and 3 percent/year non-labor inflation.

By the way, here’s one benefit not to count: revenues from a so-called “sin tax”. One of the cool things a chargeback system allows you to do is to charge a premium to that knucklehead who keeps you hosting and operating an outdated, expensive system. You can rig it so that, in addition to recapturing every cent you’re spending on that dinosaur, you can make the department pay a surcharge for going against the defined reference architecture. But if your department is like most IT operations, it’s a cost center, not a revenue center. If you collect such sin taxes, you have to spread them around and reduce everyone else’s charges; you cannot actually show a revenue number to your accountants.

The target state then, looks like this:

Figure 2: Cloud-based chargeback solution target state

This includes the two extra full time employees under Labor and an $800,000/year subscription rate under Facilities.

It cost $225,000 in project costs for a small team to develop the showback model and choose the chargeback solution, another $500,000 in antecedent ITSM maturity projects, plus another $400,000 shopping list mainly for new software.

In terms of benefits, cost takeout will be 15 percent/year by the end of the five-year timeline. Also, one-fourth of the application budget will be saved and one of the three data centers will be shuttered. Most of these benefits are loaded toward the out-years, though.

At this point, we can see how the costs and benefits compare on a timeline:

Figure 3: Cloud-based chargeback solution cost-benefit analysis

Even though it’s slow to gain traction, the adoption of a cloud-based chargeback solution does eventually have a payoff. Let’s see if it’s enough to green-light the project given a 9 percent discount rate:

Figure 4: Cloud-based chargeback solution investment analysis

So it’s mildly accretive. Financially, there’s no reason not to move to a cloud-based chargeback solution and it becomes a business decision. Does your enterprise have the appetite for the business disruption? Will it truly advance its ITSM maturity, or just intend to? Most crucially, will top management accept that the benefits modeled here are dependent on a lot of subsequent work? A robust chargeback system might be necessary to realize those savings, but in itself it won’t be sufficient.

Business Case Resources:

To help you get your business case for chargeback off the ground, download this Excel calculator and PowerPoint template, which you can customize to your needs.

The Excel calculator will help you determine your current state, project costs, and target state. It includes all of the inputs you'll need so you can present the final analysis. The PowerPoint template will walk you through adding the analysis from the Excel calculator so you can present the information to your stakeholders in a logical way.

  >> Download Excel Calculator
  >> Download PowerPoint Template

To get a better understanding of the key metrics and math used in these resources, take a look at How to Build a Successful Business Case for an IT Project.

More Business Case Resources:

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