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October 5, 2020 by Tanya Aquino

IT Chargeback Systems: Why It’s Necessary for Businesses

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IT Chargeback Systems is a specially-developed accounting system for IT departments to allocate or bill the costs associated with each department or division’s IT resources usage. Traditionally, IT costs are not audited in the same way that other costs do. 

While every department uses IT resources, the expenses are paid for by a central department, typically from a Chief Technology Officer or Chief Information Officer’s budget. This means that IT costs are treated as overhead, a cost center that does not contribute directly to creating a product or service. In other words, IT is not considered as a money-generating need, but rather a creature comfort that allows people to work efficiently. 

Why IT Chargeback Systems are Necessary

The problem with this model is that overheads are supposed to be relatively stable expenses. However, as many of us in the IT industry know, IT expenses can blow up quickly. In particular, Internet bandwidth can increase depending on the usage, much of which is not strictly work-related!

Out of this problem comes the IT Chargeback system, which acts as a service provider for its internal customers (the other departments within your business). Instead of being provided a proverbial blank check for their IT use, individual departments and divisions are charged a monthly “bill” that accounts for their actual usage. This way, IT expenses are no longer overhead, but operating expenses (OpEx) that departments themselves need to pay directly from their budget. 

There are certain advantages to adopting chargeback for IT costs. 

Increased transparency of usage

With Chargeback, internal consumers can see their individualized costs and understand how those costs are audited. 

Improved financial management 

As individual departments become aware of their IT usage, they can also see how those costs can affect overall spending. 

Accountability for IT expenses 

The responsibility of controlling costs shift to the individual departments and business units as they are made aware of the price of the IT services that they request for. This makes them evaluate their own IT usage and determine whether those use-cases are truly necessary for their operations. 

Alignment of IT costs with business strategy 

It is no longer viewed as a mountain of overhead. Instead, IT costs are integrated into business strategy!

Despite its merits as a system, chargeback systems regularly receive pushback from organizations because it tends to introduce tension in organizations. This is particularly true with department heads who may not have the most comprehensive understanding of how IT charges are computed. The hefty costs may also discourage IT initiatives among departments if they do not fully understand how such costs can translate into gains. 

How to address the challenges associated with IT Chargeback systems

Much of the resistance to implementing chargeback systems are due to miscommunication and the lack of transparency. To decrease resistance from chargeback implementation, IT departments need to establish the following: 

Transparency 

Employees and department heads need to know how their IT cost usage is being computed. This means educating them about the costing model and how it arrives at specific figures. 

Controllability

It’s not enough to bill internal customers; it’s essential to give managers the means to control their billing. If a manager cannot limit spending, then they will feel powerless and feel resentment towards the costing model. 

Effectiveness

Costing models and the whole IT chargeback implementation are futile if they don’t help internal customers see its purpose. Chargeback systems should encourage the consumer to optimize their spending and make them think twice about going for the most expensive option just because it’s available. 

Conclusion 

IT Chargeback systems arise from a problem created by treating IT as overhead. This often leads to ballooning expenses that cannot be justified in the budget. With the popularity of IT as a service model, IT departments can be more forthcoming with their costing models to help other departments understand their IT expenditures’ real cost. 

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