Saturday, February 19, 2011

Chargeback for internal IT services- What are the options?

The use of chargeback to fund internally provided services is a basic part of management culture and tradition.  It provides a predicable revenue stream for your IT organization. Here are some key chargeback mechanisms that you may want to consider depending on your business organization needs
  • Transaction Based Pricing – In this model service consumers are charged based on number of business transactions.  This approach is very easy to understand from business perspective but it is difficult to correlate IT cost with business transactions as there may be several types of business transactions at any point of time.

  • Tiered Usage based pricing – Charges in this model are based on pre-established range of usage. Depending on your business organization needs, you can create multiple levels or tiers for example you can create a free usage level to make it easy for customers to give you’re offering a try and then create a set of tiers based on measurable parameters usage, transactions, service levels etc.If you are developing and hosting a new service and you already have business buy-in for this development, you may want to go with model similar to ones used by cell phone service providers in USA. You would charge a sign-up fee and a monthly fee and would then include a certain amount of free usage as part of the first tier, with additional and more costly tiers after that.

  • Subscription Pricing / Pay per use – Pricing is per unit of time and can include various services that may be independently priced. The charges are based on a contracted period of time and are factor of access, functionality and service levels. The development and operational cost of IT service is calculated and amortized across a subscription period and then divided between all the users of the service. It is recommended that IT organization should add an element of gross margin to create a pool to fund its research and future projects.For example:  In an organization let say Supplier address service is subscribed by Parts, Wiring, Flight, Distribution Control and Engine maintenance applications/ sub-units in an aerospace company and it costs $ 20K per month to provide such a service, the subscription charge (assuming a break-even business model) would be $4,000 per consumer per month.This model doesn’t provide usage monitoring or penalties and works on the assumption that all consumers will use the service at the same level on a constant basis, with no penalties for excessive consumption or peak time usage. Moreover, the model doesn’t provide any metrics by which the actual level of consumption can be measured, calculated and justified to skeptical consumers.

  • Access based pricing – If your Integration CoE is also responsible for developing business processes, you may want to opt for access based model where charges are based on the ability to access certain functions. You can charge a flat fee to your customers under this model.

  • Peak Level Pricing – This model is evolved version of Subscription pricing model where a mechanism to monitor and record the peak consumption is added. The service consumers are billed according to the peak use and not according to the average use.  The model gives a clear indication of when a consumer is overshooting the base level.  However if there are few peaks of usage than this model may seem unfair for peak consumers.

  • User based pricing model – The model works by tracking the authentication of individual users. The model works really well if single sign on is in place in your organization. There is a clear cost justification based on the authentication record. However this model completely ignore system load for example if a consumer application makes a heavy demand when they access the common service, the consumer is not charged for it.

  • Ticket based pricing: If your organization is one of those where QoS is critical. Going by the ticket based pricing model may be the right option and this model is most powerful in terms of cost justification. This method let’s IT control system load to a fine degree, helping to eliminate usage peaks and ensure business continuity.

  • Leave me a comment if you have implemented another mechanism in your organization apart from ones listed above!


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