IT chargeback and outsourcing

* How does IT chargeback affect outsourcing contracts?

Trends in IT management, such as ITIL and ITSM have pressed IT management to link more tightly to the business goals and run IT more like a business. IT managers have recently been encouraged to think like they are service providers to their organizations. One outcome of this is to have IT costs allocated to the business end users. They use the service, so they should pay for it directly as opposed to keeping IT costs as a corporate overhead cost. This is commonly referred to as IT chargeback, and it is becoming quite popular. So how does chargeback affect outsourcing?

I have seen three touch points where chargebacks and outsourcing come into contact.

First, outsourcers have always had the need to track component costs of shared services such as CPU cycles used or bytes of storage used, in order to track their internal costs to the profit and loss of each client account team. However, as outsourcers have begun to firm up service offerings in a more standardized fashion, they have started to think of packaged services and have to price accordingly. Let's say the service is a hosted e-mail system, the service provider might bill clients on number of mailboxes with a certain storage size limit. They might also report to clients how many mailboxes they have and give them utilization statistics on their storage usage. There is still a need for the more granular component cost elements to be tracked, but these are not passed through to the customer. They are necessary for the service provider to understand their own cost structure and are still relevant, but they are not the end billing unit to the customer.

Another recent trend has been enterprise IT asking outsourcers to pass cost data at a detail level to individual business entities within the client enterprise. As enterprise IT has adopted IT chargeback for their internal run IT infrastructure, they expect the same capability from their outsourcer. This is another order of magnitude in complexity for the outsourcer. Many older internal systems at outsourcing companies are not ready to handle this request. Even when the systems are in place, there is considerable effort involved. Outsourcers must define the organizational structure within the client company, determine the correct basis for allocation, and implement the reporting structure to effectively rebill the outsourcing services to individual business units within the client enterprise.

The most interesting interaction between IT chargeback and outsourcing may just be forming. What happens to the relationship between centralized enterprise IT and their internal business unit customers when the business managers can see a bill for IT services? Will they compare these costs more directly to outsourcers and services providers? Could IT chargeback actually raise the profile of internal costs to the point where outsourcing is actively considered?

I have had several IT managers at large companies tell me they think this may be one outcome of IT chargeback. I have not seen a specific significant example yet. But it does seem likely that business managers will consider the value they are getting from their internal IT function when they see the bill each month.

Copyright © 2006 IDG Communications, Inc.

The 10 most powerful companies in enterprise networking 2022