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Friday, 20 May 2022 17:44

Creating clarity on costs and value of rising IT spend

By Ben Allard, APAC vice president, Apptio
Ben Allard, Vice President and General Manager for Asia-Pacific at Apptio Ben Allard, Vice President and General Manager for Asia-Pacific at Apptio

GUEST OPINION: As technology and cloud spend continues to climb across Australia and New Zealand, IT chargeback is a financial management tactic that continuously aligns these investments to business value, and IT services to stakeholders’ needs.

It creates a pathway to influence behaviour by leveraging data to enable continuous cost optimisation for informed consumption and shared accountability of IT purchasing. In simple terms, it’s a trigger for evolving technology funding models for today’s economic and operational demands.

In years past, business units had next to no visibility into how much they’re spending on technology, nor what they received in return. Without data insights, stakeholders are unaware of how to control their costs through consumption choices.

This is a problematic predicament for organisations in the technology subscriptions era. Cloud spend is showing no signs of slowing, and with software-as-a-service (SaaS) so easily accessible, spend can come from just about anywhere.

It’s therefore critical for companies to make use of the data they’ve been collecting to build a technology chargeback model focused on delivering value to business stakeholders, and subsequently bolstering relationships with those parties.

We work with a global bank which reshaped IT and business relationships through its use of value-based chargeback, allowing it to shift 20 per cent from IT’s annual budget to innovation and improved the bank’s efficiency ratio.

A data-driven model provides a clear view for business stakeholders to spend how they wish on services they want without falling into rabbit-holes. Here are five core elements to establish this model to reshape the relationship between the broader organisation and IT.

1: Clearly cost each IT service

It’s imperative IT departments communicate value of investments in terms business units will understand, underscored by clear rates per service. This provides the business with a direct correlation between its change in consumption and impact to IT cost.

IT doesn’t need to get into a value conversation with internal customers. “Value” is subjective, and corporate IT should leave its stakeholders to determine how they should or shouldn’t use IT to deliver business goals.

In one example, a retailer which over rotated on its use of technology to collect data at point of sale later realised it had a negative impact on the customer experience in store.

Should IT offer up choices and articulate trade-offs? Definitely. Should IT deliver edicts on the specific services stakeholders should use? Probably not.

Like any other resource they need to pay for, business users bestow value by deciding the baskets to put their eggs into. Through a chargeback model, the discussions focus on supply and demand, not the variables of subjective value.

2: Dodge institutional turbulence

A legacy cost-recovery system is tolerated through familiarity; after all, cost recovery was used since the proliferation of technology in business. A new IT chargeback model doesn’t receive the same courtesy.

It’s the IT department’s responsibility to explain why a new chargeback model is more effective than the cost recovery it’s replacing. The progressive benefits need to be absolute in the eyes of internal customers if tech teams want to avoid resistance.

For example, if the marketing team has the same $1 million shared IT services bill every year, the sticker shock of the first year will be met with acceptance by the third. Familiarity is lost, and confusion reigns if, in year four, a chargeback system is rolled out with different allocations.

3: Build incremental confidence

Change is hard, and trust is earned. That’s why implementing a fresh framework shouldn’t necessarily become an overnight rip and replace.

IT teams can build buy-in for a new chargeback model by temporarily running old cost recovery methods in tandem with the new approach. That could mean a soft launch for a small group of stakeholders to demonstrate comparative outcomes, followed by a broader live date once benefits are proven.

This becomes an invaluable way to reduce the risk of end-of-year surprises and resulting friction – whether there’s surplus budget, or spend has exceeded allocations.

Cost-based billing removes uncertainty because stakeholders are billed per monthly actuals, but it means those bills are “seasonally lumpy.” Cost-based billing codifies unpredictability for business units with variable consumption patterns.

Budget-based chargeback models, layered with IT context, deliver predictable bills. There will always be some reconciliation between plan and actuals, but that’s minimised by tracking cost recovery throughout the year.

A hybrid billing model may be the best tactic to build confidence in your chargeback model. For example, leveraging cost-based billing for services that have flat actual spend throughout the year, and budget-based billing for services that vary by business cycles.

4: Generate crucial buy-in

Corporate IT is not the only game in town. Anything as a Service (XaaS) compels in-house service offerings to be compared fairly with external ones. When customers see these comparisons to be unfair, they rake up their own shadow IT spend to minimise interactions with the new chargeback system.

Unfairness is amplified if new charges are dramatically different from the old. Higher service unit rates could imply a newly coined profit centre; lower ones would call into question all the ‘excess’ charges from the past.

IT teams must fully understand the composition of bills so that they can be the voice of authority in the face of internal queries.

5: Socialise bills early and often

Socialising those bills helps build trust in the new system and provides visibility into levers stakeholders can pull to control spend.

Successful implementation of a new chargeback system is dependent on giving business stakeholders room to understand and validate changes to their monthly work. Early access to what that looks like allows relevant business stakeholders to advocate for the solution through implementation. Business consumers can also explore statement details and gather facts on their own.

Similarly, while organisations lean on multi-year strategies, it’s important to create the ability to revisit and change these priorities, including the budgets they require, to be agile in their response to changing conditions. For example, monthly or quarterly planning foster the ability for business units to collaborate regularly and directly with IT personnel to overcome unexpected challenges and achieve new objectives.

The internal stakeholders IT teams serve need time and space to become comfortable with change. A chargeback model capitalises on available data to embed effective financial management into their plans.

Now that any business unit can acquire new software and services with nothing but a credit card, a lack of visibility is a recipe for disaster; cost accumulate at astounding rates with no baseline for the value it’s actually returning to the business. This inevitably triggers unnecessary waste. When applied, the five concepts above have a significant impact on business performance.

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