Chargebacks for IT shared services
As technologies like mobility, social, cloud, and big data analytics continue to proliferate, chief information officers (CIOs) are coming under mounting pressure to prove how IT is contributing to the business.
These demands come not only from the board, but also from the IT department’s customers — the other teams, or lines of business (LOBs), that make up the organisations they serve.
The volume of these demands is increasing due to the emergence of viable alternatives to traditional in-house IT solutions, the most notable being the spread of cloud computing.
Such developments are increasingly forcing IT departments to compete with lean external providers for the attention of internal LoB customers.
The traditional IT business model — in which IT is positioned as a cost overhead supporting a captive customer base — is not sustainable under these circumstances.
Indeed, the new realities of business require IT to be managed as a full-fledged service operation inside the organisation that it supports.
Simply put, IT departments must fully embrace integrated services transformation if they are to accommodate an emerging technology environment that must be brokered, integrated, and orchestrated instead of just managed.
This is particularly true for IT shared services, a delivery model intended to offer common service capabilities across multiple “customer” business units within an enterprise.
Radical rethink
These services consist of clearly identifiable service-delivery units that can be benchmarked against what is available on the external market.
And because they are less entrenched within specific business units, they are at much greater risk of being put in competition against external service providers if they do not deliver the expected economies of scale and reuse.
All of this means that there must be a radical rethink of traditional financial systems utilised by IT departments, as these do not adequately capture the meaningful service-based value metrics that their LOB counterparts require.
One option increasingly being used within the IT financial management discipline is the introduction of chargebacks, whereby a price is applied to the IT services that are used by the various business units.
This system contrasts with traditional IT budgeting models where IT is treated as a corporate overhead cost to which a lump sum is allocated annually based on the operational and capital investment costs that have been forecast.
It is a system that makes a lot of sense given the new realities at play for IT departments and the myriad of external options their customers have to choose from, but it is also not without its detractors, particularly in relation to IT shared services chargebacks. Indeed, it is fair to say that IT shared services chargebacks has historically been a very contentious practice, for reasons that will soon become clear.
One approach that encountered resistance was shared services units that tried to charge back for both operational costs and a margin to account for the depreciation of assets and to nurture a working capital fund for innovation.
Challenge
In light of this, some business users accused them of funding the shared services empire instead of giving back the savings to the business units through lower prices. And in cases where chargebacks were applied based on the number of users instead of actual usage, certain business units complained that they were subsidising the margins of other lines of business.
Another challenge was that as they attempted to maximise the accuracy of their chargebacks, some shared services entities ended up applying sophisticated management practices whose administrative cost dwarfed the potential benefits of the chargebacks in the first place.
So, while the introduction of chargebacks complements the journey toward a more mature IT service and IT financial management practice, there are some clear pitfalls to avoid and best practices to bear in mind.
Shared services executives that want to maximise the benefits and minimise the challenges of chargebacks to improve overall IT financial management and IT service management practices have two key considerations to make.
They must first clearly define the strategic objectives they intend to pursue, and then follow this up by implementing an efficient accounting model that proves to the rest of the organisation that the IT shared services are priced appropriately. Chargebacks will be a blessing if the aim is to better manage the costs, risks, and value creation of the IT business and to establish a consumption-based business model that is effectively supported by a consumption-based accounting model. However, chargebacks will ultimately prove to be a curse if they are used — and viewed — as nothing more than a simple cost-recovery mechanism.