To charge or not to charge?

The pressure to expand IT infrastructure coupled with the need to minimise costs has heightened the demand for chargeback systems. If done well, a chargeback mechanism allows IT costs to scale up or down based on demand and usage, say analysts. But how can an organisation devise an effective chargeback plan given the range of variables associated with it? Also, doesn’t the theory of chargeback challenge the raison d’être of the firm – they exist to limit thetransaction costs that one would otherwise incur while dealing with a range of outside service providers (Ronald Harry Coase, The Nature of the Firm, 1937)?

Sanchit Vir Gogia
Founder & Group CEO, Greyhound Knowledge Group

An organisation has six options to meet the IT requirements: having a physical environment, virtualisation, IT service management, outsourcing, public cloud and private cloud (onsite or using third party database). All these have different value and cost parameters. Depending on the requirements, an organisation should take a call on the right mix.

For instance, for a company that’s high on consumption of SAP applications, it makes sense to opt for public cloud. As opposed to this, companies in the banking and financial services industry with the right IT talent can build a private cloud to meet its requirements.

As organisations consolidate their server infrastructure and move ahead in their journey toward cloud, they will face hurdles in virtualisation. While many have tried various tools to charge back and track virtual machine costs in a sophisticated way, most companies have failed to account for the consumption.

Here are a few things organisations must consider before implementing IT chargeback:

User accountability is not a matter of choice anymore. Companies must determine who is using what. This is simpler when you own the physical environment. On the other hand, things are complicated once you switch to virtualisation. When a single piece of hardware hosts multiple applications, managing the resource tracking system becomes challenging. Earlier physical servers had one application and it was easier to track usage. With this technique becoming obsolete, the new technology world is about virtualising storage. And so accountability calls for best practices.

Justifying costs is critical in making the right choices. Consider this: Setting up a server will cost a few thousand dollars. This can be purchased from Amazon at a lower price. In this scenario, how can one continue to justify internal IT infrastructure when similar resources are accessible from a public cloud provider at much less price?

There’s no silver bullet. As business conditions evolve, so do price models. The cost per virtual machine today will not be the same as the cost a few years down the line. Organisations must take this into account when devising or implementing a business strategy on IT chargeback.

IT chargeback can help big companies with various business units in forecasting pricing and outcome. Chargeback is also a powerful tool for chief information officers and it will be effective only when IT teams start behaving like external service providers and follow the best practices in the business. While doing so, their key result areas must include the service satisfaction levels of other business units.

Last but not the least, it is crucial to create visibility for the IT service catalogue and encourage its usage in the different business units. A higher consumption will lead to increased reports for different business units which in turn will help in assessing the cost impact for the entire value chain. This will benchmark IT consumption.

To read more, click here: Business Standard – The Strategist

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