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IT Chargeback drives efficiency

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You’ve heard the complaints many times before: IT costs too much. I have no idea what I’m paying for. I can’t accurately budget for IT costs. I can do better getting IT services myself.

The problem is that end-user departments and organizations can sometimes see IT operations as just a black box. In recent years, IT chargeback systems have attracted more interest as a way to address all those concerns as well as rising energy use and costs. In fact, IT chargeback can be a cornerstone of practical, enterprise-wide efficiency efforts.

tax incentive government money thinkstock photos mr jub

Source: Thinkstock / MrJub

Charging internal consumers 

IT chargeback is a method of charging internal consumers (e.g., departments, functional units) for the IT services they actually used. Instead of bundling all IT costs under a single IT department cost center, a chargeback program allocates the various costs of delivering IT (e.g., services, hardware, software, maintenance) to the business units that consume them.

Many organizations already use some form of IT chargeback, but many don’t, instead treating IT as corporate overhead. Resistance to IT chargeback often comes from the perception that it requires too much effort. It’s true that time, administrative cost, and organizational maturity are needed to implement chargeback, however, the increased adoption of private and public cloud computing is causing organizations to re-evaluate their position.

For example, cloud computing has led some enterprises to ask their IT organizations to explain internal costs. Cloud options can shave a substantial amount from IT budgets, which pressures IT organizations to improve cost modeling to either fend off or justify a cloud transition. In some cases, IT is now viewed as more of a commodity—with market competition. In these circumstances, accountability and efficiency improvements can bring significant cost savings that make chargeback a more attractive path.

Chargeback vs unattributed accounting

In an IT chargeback accounting model, rather than treating IT costs as corporate overhead, individual cost centers are charged for their IT service based on use and activity. Those costs are then factored into each department’s business and operating expenses (opex).

Since chargeback allows consumers to see and understand their costs, it can drive organizational shifts in awareness, culture, and accountability, including:

  • Increased transparency due to accurate allocation of IT costs and usage.
  • Improved IT financial management, as groups become more aware and invested in the cost of their IT usage and business choices.
  • Increased awareness of the business value of IT to the organization.
  • Responsibility for controlling IT costs shifts to business units, which become accountable for their own use.
  • Alignment of IT operations and expenditures with the business, and integration with strategic planning and operations.

Chargeback tends to reduce overall resource consumption as business units stop hoarding surplus servers or other resources to avoid the cost of maintaining underutilized assets. At the same time, organizations experience increased internal customer satisfaction with IT as it becomes more closely aligned with the business units and they begin working together to analyze and improve efficiency.

Perhaps most importantly, IT chargeback drives cost control. As users become aware of the direct costs of their activities, they become more willing to improve their utilization, optimize their software and activities, and analyze cost data to make better spending decisions. IT chargeback identifies underutilized assets that can be reassigned or decommissioned. As a result, more space and power become available to other equipment and services, thus extending the life of existing infrastructure.

Chargeback methods

A range of approaches have been developed for implementing chargeback in an organization, as summarized below

 Service Based Pricing (SBP)  Charges for a specific measured unit of service
 Negotiated Flat Rate (NFR)  Charges based on a n egotiated and often projected usage of a service
 Tiered Flat Rate (TFR)  Charges based on providing access to a service, whether that service is being used or not (fliers or bands pricing)
 Measured Resource Usage (MRU)  Charges based on actual measured usage of specific resources (eg kWh consumed, network bandwidth consumed, and storage consumed)
 Direct Cost (DC)  Charges based on dedicated ownership of the resource (eg time and material based costing)
 Low-Level Allocation (LLA)  Charges based on simpler user metrics (eg user counts and server counts)
 High-Level Allocation (HLA)  Charges based on user size (eg number of employees and amount of revenue)

To implement chargeback successfully, an organization must choose the method that best fits its objectives and apply the method with rigor and consistency. Executive buy-in is critical. Without top-down leadership, chargeback initiatives often fail to take hold.

Cost measurement and reporting are essential for organizations to make efficient IT investment and operating decisions. To start, it’s important to know the infrastructure capital expense (capex) and opex costs.

  • Capex costs may include the following:
  • Facility construction or acquisition
  • Power and cooling infrastructure equipment: new, replacement, or upgrades
  • IT hardware: server, network, and storage hardware
  • Software licenses, including operating system and application software
  • Racks, cables: initial costs (i.e., items installed in the initial set up of the data room)

OpEx incorporates all the ongoing costs of running an IT facility. They are ultimately higher than CapEx in the long run, and include:

  • FTE/payroll
  • Utility expenses
  • Critical facility maintenance (e.g., critical power and cooling, fire and life safety, fuel systems)
  • Housekeeping and grounds (e.g., cleaning, landscaping, snow removal)
  • Disposal/recycling
  • Lease expenses
  • Hardware maintenance
  • Other facility fees such as insurance, legal, and accounting fees
  • Office charges (e.g., telephones, PCs, office supplies)
  • Depreciation of facility assets
  • General building maintenance (e.g., office area, roof, plumbing)
  • Network expenses (in some circumstances)

At a fundamental level, the goal is to identify resource consumption by consumer, for example the actual kilowatts per department. The closer the data can get to representing actual IT usage, the better. An organization that can compile this type of data for about 95 percent of its IT costs will usually find it sufficient for implementing a very effective chargeback program. It isn’t necessary for every dollar to be accounted for.

Another step in preparing an organization to adopt an IT chargeback methodology is defining service levels. End users need to know what they will be paying for.

IT chargeback drives efficient IT

By pursuing common goals and relying on transparent data, organizations that adopt the “follow the money” mindset of chargeback can achieve significant efficient IT outcomes. IT chargeback drives a holistic approach in which optimizing data center and IT resource consumption becomes the norm. A chargeback model also helps to propel organizational maturity, as it drives the need for more automation and integrated monitoring, for example the use of a DCIM system. To collect data and track resources and key performance indicators manually is too tedious and time consuming, so stakeholders have an incentive to improve automated tracking, which ultimately improves overall business performance and effectiveness.

IT chargeback is more than just an accounting methodology; it helps drive the process of optimizing business operations and efficiency, improving competitiveness and adding real value to support the enterprise mission.

IT chargeback do’s and don’ts 


  • Partner with the Finance department.
  • Inventory assets and determine who is using them.
  • Get the support of senior (C-suite) management; it will not succeed as a bottom-up initiative.
  • Focus on cash management as the goal, not finance issues (e.g., depreciation) or IT equipment (e.g., server models and UPS equipment specifications).
  • Build a dedicated team to develop the chargeback model.
  • Data is critical: show all the data, including data from the configuration management data base (CMDB), in monthly discussions.
  • Be transparent to show and add credibility.
  • Above all, communicate. People will need time to get used to the idea.


  • Don’t try to drive chargeback from the bottom up.
  • Simpler is better: don’t overcomplicate the model. Approximations can be sufficient.
  • Don’t move too quickly: start with showback (showing costs). Test it out first; then, move to chargeback.
  • To get a real return, get rid of the old hardware. Move quickly to remove old hardware when new items are purchased. The efficiency gains are worth it.
  • Don’t give teams too much budget—tradeoffs drive smarter decision making.

The most challenging roadblocks can turn out to be the business units themselves. Organizational changes might need to go to the second level within the business unit if it has functions and layers under them that should be separate.

Scott Killian is vice president of energy programs at the Uptime Institute

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