Definition

IT chargeback system

Part of the Storage management glossary:

IT chargeback is an accounting strategy that applies the costs of IT services, hardware or software to the business unit in which they are used. This system contrasts with traditional IT accounting models in which a centralized department bears all of the IT costs in an organization and those costs are treated simply as corporate overhead. 

IT chargeback systems are sometimes called "responsibility accounting" because this sort of accounting demonstrates which departments or individuals are responsible for significant expenses. Such systems are intended to shift responsibility to users and encourage them to treat IT services as they would any other utility, which in turn encourages moderate use. 

Reporting systems that leverage IT chargeback can help administrators to clearly see what factors are driving costs and to budget accordingly. Such a system provides end users with more transparency into which business decisions are creating expenses and helps management identify how to achieve greater profitability. The cost of legacy systems, redundancies or expensive proprietary technologies also become clear, providing IT staff with an effective rationale for upgrades that are intended to improve utilization or reduce energy use and administration time. 

Since chargeback depends on a variety of IT metrics to provide equitable distribution of costs, a balance must always be struck between the precision of the system and the difficulty of collecting the necessary data. Complex IT chargeback systems can depend upon detailed line item accounting for each IT-related expense, including which business unit incurred it and whether it was for software, hardware or services. Since single line item expenditures can sometimes be substantial and can be shared by multiple business units (a mainframe purchase, for example), usage data from the IT department is also needed to help split out these costs in an equitable manner. 

Simple IT chargeback systems are little more than straight allocations of IT costs based on readily available information, such as user counts, application counts, or even subjective estimation. 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. 

This shift turns internal IT systems into service providers that may be managed independently of the organization at large. An IT chargeback system provides useful metrics that can be compared against the costs of outsourcing such services to a third party. IT administrators and CIOs, for instance, could compare the effectiveness of internal departments at provisioning networks, providing storage capacity, making network data transfers or maintaining Web application uptime. There are other uses for the system as well. A CIO could take the results of a past quarter's IT chargeback to a CEO and use those numbers to assess whether the revenue created by taking advantage of business opportunities justifies the expense.

Despite such advantages, however, some CIOs find the internal politics associated with implementing and maintaining IT chargeback systems to be daunting, especially when combined with administrative costs and substantial accounting challenges. Nevertheless, IT chargeback systems have attracted considerable interest as energy costs and usage have soared in recent years. Increased adoption of private cloud infrastructures, software-as-a-service (SaaS) and on-demand service-oriented architectures (SOA) at many enterprises could make measuring usage and allocating costs easier than ever before as IT services are treated as a utility.

Learn more about IT:

Scott Feuless explains how to use an IT chargeback system to demonstrate virtualization benefits.

Mark Denne wrote about workable models for IT chargeback for CIO.com.

IT chargeback is a fundamental part of cloud computing.

This was last updated in February 2011
Contributor(s): Contributor: Scott Feuless
Posted by: Margaret Rouse

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