Charging back IT spending to business units has long been an approach to minimising costs. So it came as a surprise to The Corporate IT Forum (Tif), when it found that one of its subscriber companies had trebled IT spending since it started this approach to IT financing.
And when the user group proposed a workshop on the topic for its members, which include many FTSE 500 organisations, it was also surprised at the flood of interest. Subsequently, Tif held three workshops to help its subscriber companies employ the process more effectively.
The workshops revealed that although business leaders see the approach as a way to drive down IT costs, there are other advantages. "Subscribers thought it was not just about cost, it was about improving your capability as a business and being more in tune with IT," said Sean Pond, director of services for Tif.
"On the IT side, a lot of subscribers say it creates a closer partnership with the business if there is transparency on costs. If the business puts a value on services that are delivered, then they take on board the ownership of the IT project. If you get it right, you start to get more IT investment. One business trebled IT investment after it introduced the model."
Paul Butler, IT services director at Rolls-Royce, reiterated this. "By charging back IT you are trying to highlight to business managers what IT is valuable to them and what is not - to make them more aware of the consequences of their own IT consumption in a simple, transparent way."
Charging back IT is a way to lower wasteful consumption of IT, Butler said. "It is about giving business managers the information to make sound decisions. Charging back is also about trying to change the perception of IT from being just an overhead or a cost centre, to being perceived as a valuable contributor to the business.
"If people buy, they are buying because they believe what they purchase has value, otherwise they would not be buying it. And that has an important impact on how IT as a whole is valued."
The popularity of IT outsourcing has also influenced decisions on internal billing, Butler said. "Because outsourcers bill, their cost is very clear and, therefore, often more 'valuable' than an internal service which is perceived as being 'free'."
Charging back for internal IT services is a way to help business units to understand their value, he said.
Pond said this helped ensure business backing for IT projects. "It ensures usage, so that people make use of the functionality they want. Individual things may seem expensive to business users, but they add up across the business and managers come to understand that."
Something as simple as charging for helpdesk calls could reduce the number of forgotten passwords or make the business invest in more training, he said.
It could also help prevent business units from losing interest in longer-term IT projects. "If it is not on their budget then IT can spend a lot of money on something and business walks away and says, 'This is not what we asked for'. Just like at home, if you pay for something, you make sure it is what you want and you get value for it," said Pond.
However, businesses considering the approach must be careful to avoid a few pitfalls, according to Pond.
First, introducing an IT charge-back system should be driven by the board, and not solely by the finance or IT department. Second, the IT department must be capable of measuring usage of its systems.
"IT has to be able to deliver reliable data that it understands and that the business units understand and trusts - if not then do not even start, because it can end up in a terrible mess," said Pond.
Last there is the question of what level of detail in IT usage should be measured. Too little is useless too much and the IT department will spend most of its time collecting data. "One business went through their top 15 applications which represented 80% of the cost, and this was the right level for them," Pond said.
"The business needs a level of detail it understands and IT needs to be able to drill down into the detail."
Andrew Mellors, head of IT business management at BAE Systems said, "You have to get to the point first that you are able to articulate your costs and give people an understanding of them before you move it onto their profit and loss account.
"In the share services part of BAE we aim to make continual cost and value improvements, which means that we need to understand the granularity of our costs. Our business mentality means that charging back the cost of IT has been the next logical step. To others it could be more of a jump."
Although it could seem like an accounting trick, charging back IT services to business units can get to the heart of an age-old business IT problem: how to ensure the business benefits from IT investment.
Pond said it hands the levers of control back to the business so it can drive value from IT investment and become more engaged with IT as a whole. This can create a culture in which business can become more involved in steering future IT strategy, he said.
Charging back IT services to business units: best practice
● Ensure that the introduction of an IT charge-back system is directed by the board
● Don't allow either IT or finance to lead it alone
● Ensure the IT department is capable of producing reliable and trustworthy information on IT usage
● Don't supply the business with data so detailed it cannot understand its purpose
● Help business units understand how they can control IT costs through their behaviour
● Be careful with cross-border charge-back in international businesses
Source: Sean Pond, director of services, Corporate IT Forum
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