IT Chargebacks and Showbacks Help Companies Increase Transparency

You hear it all the time at meetings: There’s no such thing as a free lunch. Well, that cliché holds true for CPU cycles, too. Yet unfortunately, when it comes to the latter — and a wide range of other IT resources — most line-of-business managers often have little reason to think otherwise.

The reason is often cultural; it’s been a long-standing tradition in many organizations to fund the IT department directly from the overall operating budget to provide services to departments and offices across the organization.

Business managers lobby IT administrators for new services, including the underlying hardware and software that support the resources, but they often don’t directly pay for what they use on a daily basis.

The result is that in addition to having only a vague idea about actual IT costs, business managers may routinely ask for more processing power, system redundancy and storage capacity than they actually need.

The cloud computing model can change that through the use of a chargeback or showback program. Chargebacks take a formal approach to IT expenses. Managers of business units receive regular bills for the IT resources their organizations consume.

The bills are created using metering programs, which closely monitor and report usage rates. With showback policies, the metering system still sends usage reports to managers, but the purpose is informational rather than transactional. With a showback program, department heads aren’t required to open their organization’s checkbooks, but they are expected to keep IT requests in line with cost realities.

“My university takes a full chargeback approach, but showback can also be an important tool to help organizations assess costs and see where money is being spent,” says Robert Plankers, a technology consultant and a virtualization architect at a large midwestern university. “Both are valid because nothing speaks more directly to an organization than the pocketbook.”

Cloud computing shines a spotlight on both of these strategies in part because of the pay-as-you-go nature of how IT services are delivered. But cloud experts warn that implementing chargeback or showback policies comes with inherent challenges, some technical, others cultural.

To provide greater cost transparency for IT resources and get people throughout an organization to understand the true costs of IT capabilities, CIOs need to carefully consider expense reporting as an essential component in the cloud rollout process, not a casual afterthought.

Raising Awareness of IT Costs

If an organization wants to initiate chargeback, then appropriate metering and tracking software will be part of an internal private cloud’s deployment requirements. This process also serves to increase awareness within separate departments of the costs associated with delivering IT services.

“In many cases, a CIO may ask a business manager how important an application is, and the answer of course will almost always be, ‘very important,’” says John Humphreys, vice president of sales and marketing at Egenera, a maker of cloud management software.

“And then the user will say, ‘We absolutely need high availability for this application.’ But because many line-of-business managers have never been exposed to the full costs of IT, they have a tendency to use whatever is available. But when they see the actual costs, people will make decisions not just on selecting resources but according to the cost that will be incurred.”

In an era of tight budgets and closely watched expenses, users themselves may be the ones asking for greater IT cost transparency. But some organizations may not be ready for this level of financial scrutiny when they initially launch a private cloud.

“It depends on how the organization — from the CEO on down — looks at IT,” says Anil Desai, an independent IT consultant who specializes in cloud computing and virtualization technology. “Some look at the IT department as a cost center and basically just as an enabler of resources rather than a strategic part of the organization. They may say, ‘Just send me a bill like I get for my electricity consumption’ because they look at IT resources like something at a facilities level.”

Showbacks can start to change attitudes, Desai adds. “It’s a way of demonstrating that the entire organization is responsible for what’s being spent on IT resources, and that everybody should responsible for cutting costs where they can,” he says.

If a business manager sees an opportunity to get by with fewer resources, points out Desai, they can have a more informed discussion with the IT department. Together, the business and IT sides of an organization can both help improve the bottom line.

The showbacks also allow IT a view into the actual work of the teams in an organization, which creates the opportunity for the IT staff to provide more efficient and responsive services.

Calculating the Cost of IT

IT service catalogs can help facilitate both chargeback and showback efforts.

The IT department creates these digital compendia of available, cloud delivered services so users can select processing power, storage capacity, a specific application or other resource to fill a particular need. Mature service catalogs not only provide a clear description of what’s being offered, including performance guarantees, they specify the costs of the resources.

Some catalog solutions also come with pricing and billing components built in.

“A best practice is for organizations to associate a cost with all the pieces of infrastructure — physical servers, virtual servers, storage resources, networking equipment, applications,” Humphreys says. “What would it cost to acquire them and then to manage everything? Associate all the expenses and then present that to the end user.”

But even with software help, cost estimates can be difficult to gauge. This may require IT departments to bone up on IT costs — not from a line-item budgetary level, but in terms of divvying up incremental expenses to users, something that may not have been a requirement in the past. It’s a challenge because dividing up expenses within shared resource cloud environments can be a major undertaking.

“The biggest practical hurdle is just knowing your costs,” Humphreys says. “A lot of organizations have a hard time articulating what all of these IT resources cost them and associating it with particular pieces of infrastructure or software. Some organizations have never had to account for it at such a granular level.”

Multiple users dynamically access the same servers or software packages, and each service request encompasses a wide mix of ancillary components, including networks, memory, database access and storage capacity. For this reason, some organizations opt for cost ranges and estimates rather than trying to determine expenses to the penny.

A third contributor to complexity is service-level agreements. If a user complains that performance or other types of service thresholds are not being met, it’s up to the line-of-business unit and the IT team to resolve the issue and agree on whether a price penalty is appropriate. Without well-defined SLAs in place for a full range of IT resources, it may be difficult for the two groups to reach agreement.

Experts warn that organizations face one final challenge to ensuring chargeback and showback success: inertia.

“In the traditional model for IT, the application owners may feel like they own each piece of equipment that’s been dedicated to their projects; they’re affectionately known as server huggers,” says Edward Newman, senior director of cloud and IT transformation for EMC’s global services unit. “Some folks say, ‘Look, I have 1,000 servers supporting my apps; see how important the apps are to the organization?’ So it takes a mindset change to move them from a dedicated environment where they know each of the servers that house their applications to a shared environment.”