Chargeback vs. IT Governance

“Chargeback” is when you charge departments for service. For example, Facilities often charges for service calls and telecom often charges for “moves/add/changes” to install or remove phones and phone lines.

IT governance, on the other hand, includes when IT providers and consumers get together to talk about how to allocate IT resources. IT governance’s scope is much more than IT resource allocation, but at many institutions IT governance’s chief responsibility is to determine the IT project portfolio (and therefore where IT resources are allocated).

While chargeback and IT governance are not mutually exclusive, they do offer tools to solve the same problem: how to ensure IT supply can satisfy demand, and that IT is delivering services efficiently, both now and as demand changes. With chargeback, you rely on the University’s budgeting process for implicit governance (i.e. the departments with the most money can get the most IT service); with IT governance, you rely on IT governance committees and IT’s judgment in executing governance decisions.

Below I’ll highlight advantages and disadvantages of both chargeback and IT governance, and then make some general recommendations about when to use chargeback.

Chargeback’s advantages and disadvantages

Chargeback for IT service can create virtuous cycles: it can make IT more customer-oriented (as it needs the customers’ money) and it can ensure IT service is relatively competitive. IT can also prevent IT from being asked to do expensive-but-not-very-useful things.

There are some limitations to chargeback. Chargeback in itself doesn’t guarantee that IT will listen to customers. It’s also difficult to compare IT services across providers to know whether the pricing is competitive: IT’s network costs may be much higher than your local DSL provider, but (hopefully) the level of service is higher.

Chargeback creates non-value-added (i.e. waste) activities to track and maintain charges.

Chargeback can lead people to a false belief that IT costs scale linearly as demand decreases or increases. I discussed this (incorrect) belief in the August EDUCAUSE ITIL CG demand management presentation. Trying to “smooth out” IT supply as demand changes becomes an IT management headache, especially if people are involved and you need to pay for another FTE but are only getting funded for 0.3 FTE. (Curiously, it is difficult to find 0.3 system administrators.)

IT governance’s advantages and disadvantages

IT governance can support a more nuanced and long-term understanding of IT resource needs. For example, IT may need to begin offering an expensive new service because, in a few years, the institution will increase its demand. Or, IT governance may approve hiring IT staff in an economic downturn as part of a five-year plan to roll out on-line learning services.

With IT governance, the IT governance groups set the course and the IT providers then make it happen. This leaves a good deal up to the IT department(s). If customers don’t feel a sense of confidence in IT, they may not be willing to leave the details up to the IT providers.

IT governance asks a lot of governance committee members. It assumes they are informed about campus’s IT needs and that they can represent campus fairly. IT governance may also depend on other IT management capabilities, such as project portfolio management or IT financial management, which may not be able to provide the information IT governance requires.

IT governance can also be slower to react: campus may no longer need a given IT service, but it may take governance groups a year or more before they talk about discontinuing that service and its associated resources.

When and how to use IT chargeback

Chargeback should not fund specific IT positions.

Chargeback and IT governance can work well together. Conceptually, chargeback can represent a portion of the IT budget and the IT department, on behalf of IT governance, can manage the rest.

Chargeback is best used for well-understood services when customers can control demand and/or customers have a realistic alternative.

There should be a service level agreement for the included IT services so customers know what they’re paying for. IT needs flexibility to support its personnel should customers drop service: if IT has a few months of notice it may be able to find another customer, for example, or IT governance might approve a pool of money to pay for staff positions that need to be reallocated to other services.

Chargeback also works well when customers are already considering third-party providers. Without chargeback, departments see the free-but-slow central IT department vs. the fast-but-expensive third-party providers. If chargeback will let central IT deliver a similar service level on a timeline agreeable to the customer, chargeback allows IT to compete against third-party providers and potentially save the overall institution money. (Note: this does not mean that central IT should provide all IT services: using third-party providers is particularly important for commodity IT services.)

Chargeback doesn’t work well when customers can’t control demand. For example, don’t charge departments based on where they are located: departments rarely have any control over where they’re located. This only creates grumpy customers.