Understanding IT Chargebacks for Forecasts and Budgets

Allocating costs across departments is one of the most difficult tasks assigned to IT managers and directors. No matter how you slice and dice it, someone will think their department has been overcharged. You can’t please everybody, but you can create an equitable process that treats each department fairly and attempts to represent real-world usage and dependencies into the mix.

Responsibility Accounting 101

It seems like an odd name but it’s appropriate for the task. IT chargebacks, also known as “responsibility accounting,” indicate the business functions or people responsible for large technology expenses. When departments know the systems they use hit their budget and actual line items, they make wiser decisions on requests for new products and services.

The Power of Allocations

When your reporting systems use IT chargebacks, decision-makers can immediately see what’s driving costs, which simplifies budgeting. Choose a system that gives your company a clear view of how business decisions drive expenses; this is critical to reduce expenses when needed to attain greater profitability. Help your IT team and users see the real cost of:

• Maintaining legacy systems

• Redundant systems used for the same tasks

• Expensive proprietary systems

This information gives administrators a clearer rationale for approving upgrades that can increase productivity or reduce maintenance costs.

The Fine Balance Between Accuracy and Time-Consuming Data Collection

In order to accurately allocate expenses, it’s important to collect IT metrics needed to fairly distribute costs. This can become time-consuming. You need to strike a balance between precision and the effort needed to accurately portray usage by department.

Many financial and IT expense analysts depend on line item accounting to accurately portray the costs associated with each line of business. This incorporates which business unit incurred the expense of hardware, software, and technology services. These expenses must be spread out among all the business units utilizing the line item, such as a mainframe or new servers to house software used by multiple departments.

IT Chargeback Example

The simplest chargebacks allocate actual costs based on the information you have available. This could be user counts per department, application user counts or a more subjective estimation driver.

Here is an example:

Four servers used to house budgeting software costs $40,000. The budgeting software is used by three departments with the following number of users:

Finance: 10 users

IT: 5 users

Sales: 15 users

The one-time cost of the hardware would be allocated as follows:

Finance: 10 users out of 30 total is 33.3%. 33.3% x $40,000 = $13,320

IT: 5 users out of 30 total is 16.7%. 16.7% x $40,000 = $6,680

Sales: 10 users out of 30 total is 50%. 50% x $40,000 = $20,000

There’s a tradeoff between the accuracy of the allocation and the time needed

At a lesser degree of complexity, an organization trades some of the effectiveness of IT chargeback for a smaller burden, in terms of time and money required to perform the chargeback.

IT chargebacks change the way your organization thinks about IT expenses. For instance, you can use the allocations to compare internal costs to the estimated cost to outsource various functions, such as network management, backup storage, provisioning and project work.

There’s another use for allocation metrics. Chargebacks can be used as a comparison point for the additional revenue opportunities created by the related IT system expenses. You have to feel pretty confident about your allocation process to use it for high-level decisions, such as hardware and software solutions. However, after a budget cycle or two, the extra work can really pay off.

Getting IT Allocations Approved Is Usually the Biggest Battle of Budget Season

Despite the advantages of chargebacks, office politics often get in the way of implementing IT responsibility accounting, especially if the systems needed to perform the allocations create additional expenses. However, increased migration to cloud infrastructures could make allocating IT costs simpler than ever. Most Software as a Service (SaaS) providers use a per-user cost model. This gives you an easy way to allocate out the departmental costs based directly on usage.

The best way to take advantage of telecom savings is to outsource telecom expense management to the experts.

About the Author: Brittany Peckham

Brittany grew up in Oregon, Wisconsin and graduated from the University of Wisconsin Business School with a Bachelor’s degree in Management and Human Resources with an emphasis in entrepreneurship. Brittany has been working with Valicom for many years creating content for the TEM industry to deliver the many benefits users and organizations can experience in utilizing TEM services. With a passion for social media marketing, Brittany enjoys applying creativity throughout various areas of her life while expressing creativity in everything she does and loves being consumed in projects, from start to finish.