US insurance company Nationwide Insurance is using VMware's ITBM tool to manage all the costs associated with running IT services for the business.
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Nationwide Insurance now offers internal IT users a service catalogue, with pricing, to support the IT department in setting costs to company departments against the services it provides.
Chargeback requires an understanding of more than just software and hardware costs, to include all the component costs of delivering a particular IT system.
IT controller William Miller at Nationwide Insurance said the process of switching to chargeback at the insurer has involved IT financial management to align IT costs with IT drivers.
The process allows the IT team to assess the value of any IT service and technology investment.
The IT department as services provider
Speaking at VMworld Europe 2012, Miller said the IT department had established a $1.2bn chargeback mechanism, with a shared service providing IT-related services throughout.
Nationwide Insurance's entire IT budget is accounted for through a general ledger. “We recover 100% of IT expenses through internal chargeback,” Miller said.
The IT department provides Nationwide insurance with 220 service offerings and 500,000 transactions per month.
Analyst Gartner helped Nationwide Insurance's IT department develop a methodology to put a cost against every IT service and map these services against business functions. This has allowed Nationwide Insurance to address common IT issues, such as the growth in email storage.
“Up until 2008 our storage costs were $600,000 per month for email. The propagation of data was too much,” said Miller.
Cutting business costs with IT pricing
Rather than set an email limit, which would put a fixed minimum cost for email storage, Miller said Nationwide Insurance put in place a policy to delete emails older than 90 days. This saved the company archiving costs.
Mainframe efficiency was another example Miller presented at VMworld Europe 2012. Nationwide Insurance spent $2m buying a zIIP (integrated information processor) engine for its zSeries IBM mainframe. This allowed it to offload certain mainframe workloads, which reduced its mainframe software licensing by $250 per hour.
Changing costs this way required IT to change how it was run, to understand the cost of individual services. IT needed to become a business service, which is how Nationwide Insurance positioned the IT department and the services it offered, according to Miller.
The company knows the cost of every IT service. Departments, business units and users can pick from a service catalogue to decide which services they need. Pricing is important and IT services need to be comparably priced against industry averages.
As companies move towards consolidated IT infrastructure and virtual servers, networks and storage, businesses are having to change the way they pay for IT systems. Rather than buy a physical server, storage and network capacity to run business applications, departments are now being charged to use the IT service.
“The business wants to know what to invest in next. But for too long IT has been considered a black-box cost centre,” Miller said.
IT business provider hones competitive edge
In 2008, when the financial crisis hit, companies reined in their IT spending. But smart companies understood IT as an investment, said Miller. It was these companies that continued to spend in IT during the downturn, to maintain a competitive edge and grow their businesses.
Miller said such investment is only possible if the organisation understands exactly what budget is going on IT and the business outcome resulting from that expenditure.
Nationwide Insurance used VMware's ITBM tool to support the chargeback mechanism. The product helps IT to effectively becomes a service broker, sourcing and providing services in a systematic way.
ITBM is VMware's product to help IT departments manage cost, according to Mahipal Lunia, group product manager at VMware.
"IT needs to figure out what services are offered, the cost of these services and what the business actually gets in terms of quality,” said Lunia.