Chargeback has been on my mind a lot in recent months. It’s an important part of shared services, Service Oriented Architecture, cloud computing, etc.
But IT suck at it, and it doesn’t work the way they do it.
I’m going to tell you why, and give you a solution.
IT as a Cost Centre
Inside a large company, you have different departments. They do different things. Some of them make the company money (like Sales) and some cost money (like IT).
The people that make the company money have all the power. And rightly so. Without them, the company goes bust, and you don’t need any of the other departments.
Except you need those other departments to help you make money. Someone has to build the products. Someone has to file tax returns. Someone has to write ad copy, and pay the employees, and make sure there’s enough printer paper.
And these days, you use computers for almost all of that.
IT doesn’t make sales, so they don’t make money, but you have to pay for the computers somehow.
What Is Chargeback?
Because IT costs more money than they make, they’re called a cost centre: they only cost money.
So are accounting and HR, but they don’t cost nearly as much as IT, so guess who gets all the attention?
Sales costs money, too, in salaries. But they make more money than they cost (you hope), so they’re a profit centre.
In order to pay for the stuff that costs money, you use the money made in your profit centres to pay for it. Simple.
You call it chargeback when you have internal accounting that keeps track of how much each of the departments owe IT for the computers they use. The other departments are ‘charged back’ for the amount of money IT had to spend. You’re pretending you’re buying IT from another little company inside your own.
This helps you track who are the biggest users of IT, and, theoretically, if the money you spent on a Sales IT project was worth it.
Pricing is Better
Chuck Hollis has an excellent blog post explaining a view I think is superior than pure chargeback.
Essentially, rather than thinking of yourself as just the internal IT department for a large company, I encourage the view that you’re an independant IT service provider that currently has the contract for your company’s business.
Why? I think a large reason for internal IT being so woeful in large companies is because they’re an entrenched monopoly with no incentive to compete. Except you do have competition: you might get outsourced. You might lose the contract.
Outsourcing happens when the Business (i.e., the profit centres) decide that they can get better value elsewhere. They decide not to renew your contract, or just cancel it outright, and take their business elsewhere. In most big companies, the business hates IT, and with good reason.
If you think about the IT department you’re running as your own little mini-outsourcing business, well, that changes the whole ballgame.
You need to know what your costs are, because if you don’t, you can’t set the right prices for your services, and you won’t be able to maintain your service level. And you’ll get outsourced.
You need to look after your customers (the business), because if you don’t, they’ll get fed up, and you’ll get outsourced.
Come budget time, you’ll know exactly how much money you need, and be able to clearly explain why, in terms business people understand. If they cut your budget, you can defend the drop in service.
You can chase new projects and demonstrate how useful your services are, and increase your budget. If you’re really clever, you can show how the new IT projects helped increase sales, and start becoming a profit enabler rather than a cost centre.
If nothing else, you’ll hone the business skills you’ll need to run a company not protected by a monopoly. As CEO, perhaps?
But there’s a problem with both the chargeback and pricing models for IT: It’s not their money.
Other People’s Money
Picture this: you’re travelling to a conference. There are two packages available:
- Return economy class airfare, 4 nights in a 3 1/2 star hotel. Cost: $1,250 or
- Return business class airfare, 4 nights in a 5 star hotel. Cost: $5,230
Which would you pick if you were paying for it yourself?
Now imagine the company is paying. Did you just upgrade? Of course you did. Most people would.
That’s the scenario for the businesses picking IT services. If you offer them choices, and the only difference is price, they’ll pick the most expensive one. Because it’s better, obviously. That’s why it costs more.
I’m important. My project is important. I want the best. I don’t want my database performance to be bad because IT gave me the cheap option.
Only the not-really-important projects have budget constraints. The important, must-get-done projects can always find more money if they want to. How many internal projects have you seen that were killed because they ran out of money?
If your company is run entirely by disciplined, self-sacrificing people who will do the right thing for the company, even if it makes things more difficult for themselves, I want to come and work for you.
Here on planet Earth, people don’t care about the costs because it’s not their money.
Time is Finite
So our attempts at setting up monetary incentives (like the good little capitalists that we are) have backfired. But maybe there are other incentives that could work?
It’s not quite true to say that the business doesn’t care about the cost. They care, but they care about other things more. Like having their project succeed.
If they buy a cheaper option, and the application runs poorly, they look bad. The new customer management system takes 5 hours to do end-of-month instead of 2. That’s what they’re worried about.
IT is often blithely indifferent to these concerns. IT gets huffy because the business doesn’t actually have any idea how many IOPS their database will need.
The business chooses the expensive option to make sure everything will be ok. It’s not their money, and it’s much easier than figuring out the required IOPS. That would take time, and time is money.
But hold on. If time and money are equivalent, why not charge them in time?
You can’t go and get more time if you’re running over budget. If you said your project was going to be finished by 2 October, you can get people to agree that 18 October is acceptable, but it still finished 16 days later than when you said it would.
Time Based Pricing
What if, along with the money, we also included time in the price? What if the business class option above meant you missed the first 3 days of the conference, including the keynote you really want to see?
What if the option we’d prefer the business to pick was available the fastest?
It’s not a new idea; retail companies do it all the time. “Sure, you can have that blender, but we’ll have to order it in. We have this other one in stock. It does cost a little more, but you can have it right now.”
Which blender do you think they want you to buy?
“Sure, you can have a dedicated server, but it’ll take 4 weeks to order and install. Or, you could have a virtual machine by tomorrow afternoon.”
How could you use time as a price?