Bring Software Cost Under Control with an Effective Chargeback Strategy

IT chargeback is a very powerful tool that allows managers to control the increasing IT costs of the company. By establishing a fair cost allocation system, companies can easily charge each department or business unit for their use of storage and software resources. Thus, the responsibility for controlling IT costs shifts to the business units, which would become accountable for their own use. The IT chargeback mechanism should take into consideration the reasons for implementing it, how easy it would be understood by anyone in the company, easy to manage, control and verify, and fair to most business users.

IT chargeback mechanisms should be handled properly to avoid misunderstandings between the IT department and its internal customers. Cost transparency can prove the business value of IT systems and infrastructures by offering flexibility to the company to keep up with the current technology and to adjust contracts with the service providers through actual usage of their IT services. Another is that the IT administrator can take accurate usage data as a basis for internal billing based on actual use, which is necessary to help IT and other business units in communicating and improving cost-awareness.

Why Chargeback?

When considering a chargeback program, an organization must first establish the reasons for implementing IT chargeback. What chargeback policy can be put into place? What methods can be used to allocate costs back? What fair and practical methods can be set? What would be the impact of chargeback to the IT budget? Understanding chargeback allows business units to be accountable for their own usage. And depending on the way the chargeback system is structured, it can also drive positive user behavior.

What is the most effective chargeback system for the company?

In putting the right systems and processes in place, a balance must always be made between the precision of the system and the difficulty of collecting the necessary data. An effective chargeback system should have a detailed usage report for each IT-related expense, which could be used in splitting costs in order to foster fairness and avoid counter-productive behavior among users.

Determining the best allocation model for an organization is key to a successful implementation of IT chargeback. One model could charge usage by distinct number of users. Another model may be based on the elapsed time of usage. A third model may be based on maximum concurrent number of users per user group. The chargeback system can also combine these different models, and the duration can be monthly, daily or even hourly, depending on the need, available licenses, agreement (base payment for service only, pay for usage only, or with a limit and pay for excess usage), and so on. In any case, it will need reports that define product and service offerings, track actual costs, manage demand, and provide accurate and effective billing.

Why should we?

One example of an effective implementation of a chargeback system is that of Projektengagemang AB. This company is one of Europe’s fastest growing engineering firms, present in more than 30 locations. They provide consulting services and solutions for a variety of companies in the fields of oil & gas, energy, construction, design, and others that rely heavily on PLM and G&G applications to support their production activities. Their IT department is responsible for delivering software solutions, mainly products from Autodesk, Solidworks and other 3D/production applications, to their 38 subsidiaries. But like many companies, managing software costs had been a challenge for them and they saw a need for a fair cost allocation process that would charge each of their subsidiary companies based on actual application usage. Projektengagemang AB has now streamlined its cost allocation process by producing “chargeback invoices” that are itemized by user and cost center, delivered quarterly to each subsidiary company.

Reporting systems that leverage IT chargeback can help administrators to clearly see the factors that are driving costs and to budget accordingly. Such a system provides end users with more transparency into which business decisions are creating expenses. It also helps management identify how to achieve greater profitability. There would be increased awareness of the business value that IT brings to the organization. Lastly, IT operations and expenditures would be aligned with the business by integrating them into business planning, strategy, and operations.

With careful consideration on what allocation model would be best for the organization, an effective IT chargeback program can help IT administrators articulate the cost and value of their services throughout the organization.

Learn more about chargeback and determine the best chargeback system that would fit your organization’s needs.

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