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Understanding IT Chargeback and Showback

Updated: May 10

 IT chargeback refers to the strategy of quantifying and assigning the costs of IT services to the business units that use them. In simple words, it's an internal billing mechanism where the IT department charges other departments for the services they utilize, just like an external service provider would do. 

An IT chargeback system puts a price tag on all the IT infrastructure, software  and services used by each department, ensuring that they are bearing the costs proportionate to their usage. 
  • It facilitates better allocation of resources

  • It fosters an organization-wide understanding of the actual cost of IT

  • It helps departments plan their budgets better

  • It drives more efficient use of IT resources



Chargeback


Although one important point to note here is that cloud computing's ascendancy has significantly influenced the way businesses manage and allocate their IT resources. One of the biggest shifts brought about by the cloud transformation is the way it has decentralized IT-related purchases. Instead of a centrally-distributed IT supply strategy, cloud-led purchasing is often a more sprawling process.  This distributed approach spreads out the responsibility and allows departments to directly manage and address their needs.  Sometimes. this flexibility does come with proliferation of IT purchases by various departments  resulting in Shadow IT.


Shadow IT refers to the practice of departments within a company consuming IT solutions and systems without being under the purview of the enterprise umbrella  . It could involve a range of activities, such as the software as service applications (SaaS) that have been procured directly, hardware installations that bypass company-issued devices, or  cloud applications that sidestep enterprise controlled procurement. 


This  can bring about security vulnerabilities and inflate costs, as proper usage tracking and allocation becomes challenging.  In essence, shadow IT represents a struggle between a Business Unit or department's desire for independence and agility, and an enterprise's need for control, cost-efficiency, and security.


Due to this new decentralized approach which is taking shape across organizations, IT departments have leveraged alternative methods to improve resource allocation and cost management. One such method is 'Showback'. Introduced in 2010, Showback provides an analysis of IT costs to individual departments, enhancing transparency without enforcing actual cross-charging. Here, the focus is on driving conversations rather than on achieving strict accounting precision. Data from IT usage is  collected and then displayed in an easy to understand format so that the departments can fully comprehend their utilization and question their IT spending habits. 


The critical point is that it's not necessarily about reducing expenses, but about making informed decisions. By showcasing the implications of the IT resource usage, Showback helps in rethinking  IT strategies and budgets. 


To setup an IT Chargeback model, it is important to keep in mind that the ultimate aim is not only about reducing costs but also aiding departments in understanding their IT usage for strategic decision-making and efficient allocation of their money and resources. 


Step 1: Identify and Categorize Resources 

The first step involves identifying and categorizing all the resources used by individual departments. This could include anything from hardware and software to training and other services. Idea would be to think broadly and ensure all aspects of IT usage are accounted for. 


Step 2: Assign Costs and pricing Each Resource 

Next step involves assigning costs to each service provided. When it comes to pricing IT services, it's essential to start with a good understanding of expenses and cost drivers. This can incorporate everything from infrastructure, data transfer, to licensing and training costs. 


Step 3: Measure IT Resource Usage by department

To measure IT usage by department, a good tracking and recording system is absolutely essential. Authorized departmental users should be able to  monitor their  consumption data  via dashboards. The primary goal is to gather in-depth data on IT usage and present it in a transparent manner that is easily digestible for individual Business Unit stakeholders.  IT usage metrics and analytics taken from the cloud can also be incorporated into the consumption reports.


Step 4: Allocate Costs to Departments 

Finally, we need to calculate the total cost for each department based on their usage of IT resources. This is the chargeback – the total charge that each department will have to account for. There needs to be put in place a process to discuss these charges with the relevant department heads and appropriate personnel to ensure comprehension and acceptability. 


The ultimate goal is to make IT cost usage clearer and more understandable across the organization. This transparency can help drive more planned usage and greater efficiency. 


There are multiple tools available in the marketplace like Apptio, ServiceNow and Tangoe which can be used to identify the costs and formulate a clearly defined Chargeback or Showback mechanism within the organization.


Hope this article sheds some light on the ideas of cross-department billing for IT services and was helpful.

Chao for now,

Jai Prabakaran

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