Showback or Chargeback Like a Pro 2019 ITFM Week, Chicago Todays - - PowerPoint PPT Presentation

Showback or Chargeback Like a Pro

2019 ITFM Week, Chicago

Today’s Presenter

Rob Mischianti Chief Evangelist

Focus on value

Enable transparency

Provide a positive customer experience

Executive Summary

• Key Outcomes:
• Demonstrate the Value of IT (IT spend is not clearly aligned with

business outcomes)

• Drive Cost Optimization (the business consumes IT like it's free)
• Enable Informed Decision-making (Inaccurate or missing data

drives uninformed, emotional decisions)

• After this session, you’ll be able to:
• Understand and communicate the value of IT transparency
• Assemble the right people, tools, and processes for successful

showback or chargeback

• Limit complexity in your showback or chargeback processes
• Provide an ideal customer experience to cultivate trust and shared

accountability

• Utilize transparency to become a trusted advisor to the business

Transparency + Insight = Value

• Creating transparency and providing visibility
• Translating and delivering insight
• Teaching and educating stakeholders
• Value = Informed decisions = Optimized costs

Common Challenges & Business Outcomes

Common Challenges & Initiatives

Challenges Initiatives

• Uncontrolled run costs – need to shift to

innovation

• Rising IT costs – not clearly aligned with

business value

• Unplanned, unbudgeted spend
• IT has a poor reputation with the business
• Perpetual reactive mode
• Endless questions about costs
• Moving too slowly
• Manually translating between Finance & IT
• Inaccurate data
• Uninformed, emotional decisions
• Time wasted on ad-hoc analysis
• Business consumes IT like it's free
• Comparisons to cloud vendors
• Pressure to do more with less
• Cost Optimization
• Cost Transparency
• Digital Transformation
• Service Transformation
• Hybrid IT
• Multi-Cloud
• DevOps
• Agile
• Benchmarking
• ITFM Process Automation
• Challenges – Common challenges for IT & IT Finance
• Initiatives – Business & IT initiatives supported by ITFM

Start with Desired Business Outcomes

Cost Transparency

• Elevate IT by partnering with the business
• Demonstrate IT value in a common language the business understands
• Optimize costs by improving management of IT usage and consumption
• Enable informed decision-making by delivering tailored insights
• Shift run-to-change by redirecting optimization savings toward future digital

business innovation

• Provide a deep understanding of infrastructure usage and costs
• Get deeper visibility into consolidated cloud costs (inside and outside IT)
• Better align resources to business priorities
• Enable application rationalization
• Promote shared accountability of IT costs

A Value Focused Approach

How IT Dollars are Spent: Optimize & Maximize

Cap to Opex Transition

Cap (20-30%) Opex (70-80%)

Revenue Impact Projects Risk Mitigation Projects

Optimization IT Budget

Opex spend is generally focused on run the business (RTB) activities, so the ITFM focus is to: Optimize Cap spend is generally focused on grow and transform the (GTB) activities, so the ITFM focus is: Maximize “Most CEOs and CFOs do not understand IT

• perating expenses and believe, on average,

that 20% of the IT operating budget is wasted money” – Gartner 2018

Maximize (Cap) Optimize (Op)

Visibility into Key Spend Viewpoints

GL ACCOUNTS SERVICES CONSUMERS & APPLICATIONS BUSINESS CAPABILITIES

▪ GL & AP Data ▪ Cost Center / Account ▪ Compute, Servers, Storage, AD, Desktops, Laptops, etc. ▪ Consumers (100%) ▪ Application or End User ▪ Apps grouped and allocated to business services ▪ Business Service Metrics

Multi-Dimensional Views of Transparency

View Services Consumer Application Business Capability

Allocates GL costs to IT Service Allocates service costs to consumers based on usage Allocates Service costs to Applications based on usage Total Application costs are grouped and allocated to Business Services.

Example

• Compute power
• Servers
• Storage
• Application Development
• Desktop/Laptop
• End User
• Business Partner
• Cost Center
• Department
• On premises
• Hosting Applications
• Cloud Hosting
• Storage
• Marketing
• Sales
• Billing

Answers

• How much are we spending to

deliver each service?

• What items and services are in

my IT bill?

• What are our unit costs and how

do they compare?

• What costs and services are

included in the unit rate?

• Which business partners

consume IT resources? (% and $)

• Why is my IT bill going up?
• What do I get for my IT

expenditure?

• How do my expenses compare to
• ther business partners?
• How/where can I impact my

budget and corporate profits?

• What is the total cost of my

applications?

• How much are we spending

internally vs hosted?

• What are the technology costs

associated with enabling my Business Capabilities ?

Stakeholder

 Executives  Business Partners  IT  IT  Executives  CIO  IT  Executives  CIO  IT  Executives  CIO  Business Partners

The Value/Payoff (the data provided enables):

• Understand the cost of services

and components

• Understand and drive down unit

rates

• Benchmark against third-parties

and peers

• Insight into which business

partners benefit from IT

• Transparent view of consumption

rates

• Helps show value
• Application Rationalization

exercises

• Business Service Metrics
• Align new investments more

directly to business functions

Stakeholder Value Matrix

Stakeholder Planning Services View Consumer View Application TCO Business Capabilities View CIO

• Drive down unit

rates

• Benchmarking
• Demonstrates

value of IT

• Aligns IT spend

to business value CFO

• Faster and more

detailed analysis

• Better control

Business Leader

• Understands

value of IT

• Gains control of

consumption

• Aligns IT spend

to business value Service Owner

• Drive down unit

rates

• Benchmarking

Application Owner

• Application

rationalization

Keys to Success

Keys to Success

• Define Your Mission
• Drive Business Outcomes
• Align with CIO Initiatives
• Engage ITFM Stakeholders
• CIO
• CFO
• Service/Product Owners
• Application Owners
• Business Leaders
• Corporate FP&A
• Provide Insights: Offer relevant, actionable analysis; go beyond

basic transparency; marry data with context and narrative

Build the Foundation

Build the Foundation

• Executive Support
• Quality Staff
• Analysts +
• Critical thinkers
• Data and process expertise
• Advanced communication skills
• Engage leadership (in the business & IT)
• Be analysts and educators…
• Quality Process, Policy, Tools, and Data

Modernize IT Finance

Automate ITFM Processes: Transition IT Finance team from processing data to analyzing results. Establish Strong IT Planning Process Know spend changes in real-

• time. Align spend to

business value and initiatives.

IT Finance Plan Automate Measure Optimize Analyze

Measure, Allocate, Optimize Gain detail transparency into how all of your IT services are being consumed by applications, projects, and end users. Analyze Results Leverage analytics, dashboards, and detail content to improve value and enable decision making.

How to Modernize IT Financial Management

Measuring & Communicating Success

• Measuring success – Stakeholder feedback and use cases
• Communicating success – Promote your program

The Transparency Journey

3 Phases of Transparency

Black Hole Challenge Phase Enabled Decision Making

Challenge Phase:

• Educate – Be prepared to educate your consumer on the insights the data

provides.

• Defend - Be prepared to defend your model – this will require accuracy & detail.

• Superior Level of Detail
• Thorough Answers
• Rapid Response

Answer Questions & Gain Trust

Building and Managing Cost Models

Key Capabilities

• Create multi-dimensional views
• Include budget, actuals, and forecast
• Trace forward and backward

Key Challenges

• Iterate – Limit initial scope: define and refine, address data

gaps over time

• Limit Complexity
• Service Catalog Size – Cost & measure
• Avoid Precision Traps
• “Directionally Correct”

Tiered & Layered Model

Tiered Model and Allocation Methodologies

Run IT like a business

IT pricing Flat rate tiered negotiated IT domain cost allocation High-level allocation – hybrid chargeback - showback Subscription fee Measured/ resource usage Direct cost

Challenge of external market comparison Challenge of choice Challenge of fairness Challenge of accountability Operational service levels Service contract Governance Service level

• bjectives

Cost Model: Budget, Actuals, Forecast

Budget Service Costing Cost of Services (Forecast) Actuals Forecast Cost of Services (Budget) Cost of Services (Actuals)

Building and Managing Cost Models: Managing Complexity

What Drives Complexity?

• Precision traps
• Technical accuracy
• Financial accuracy
• Granularity
• Different audiences/different perspectives
• Data availability & quality

The Sweet Spot

Simplicity Complexity

Cost Modeling Outcomes

Tangible Outcomes & Use Cases

• What-if Analysis
• Define Value & Costs
• Valuable Benchmarking
• Empowered Accountability
• Multi-dimensional Views

Building and Managing Cost Models: Service Catalog Impact

ITSM & ITFM

ITSM IT Service Management ITFM IT Financial Management

ITFM Focus:

• Service Costing & TCO
• Transparency
• Enable Cost Allocation,

Chargeback or Showback

• Benchmarking
• Application Rationalization

ITSM Focus:

• Service Strategy
• Service Design
• Service Transition
• Service Operation
• Continual Service

Improvement

IT Service Catalog

IT & Finance Collaboration Required

• Price & Measure - Remember that for every IT Service you

define, you will need to be able to map costs to it and choose a reasonable metric to develop rates and bill consumers

• Verify Finance can allocate costs or assign rate
• Verify IT can measure the consumption of the service
• Both are needed in order to produce Cost of Service, Set

Rates, and Bill Consumers

Service Catalogs & Models: Real World Examples

Client 1 Client 2 Client 3 Client 4 IT Spend $ $100M $385M $190M $400M Model Type Decentralized Centralized Centralized Centralized # of Services 76 50 100 450 # of Budget Lines <2,000 <2,000 <1,000 1,800 Steps in Cost Model ~100 ~25 ~50 ~100 General Methodology Double Step Down Layered Layered Layered Business Functions

• Budget Collection
• Demand Forecast
• Service Costing
• Rate Setting
• Invoice
• Actual Service

Cost/True-Up

• Budget Collection
• Service Costing
• Rate Setting
• Invoice
• Actual Service

Cost/True-Up

• Invoice
• Actual Service

Cost/True-Up

• Budget Collection
• Demand Forecast
• Service Costing
• Rate Setting
• Invoice
• Actual Service Cost/

True-up

Use Case

Use Case

Use Case

Executing Showback or Chargeback

Avoid data transformation responsibilities COTS or Home Grown or Manual (Excel) Calculations, Reporting Invoicing Data Source Management Adjustments, True-ups Operation

Bill of IT (IT Chargeback/Showback)

ITFM Data Sources

ITFM

GL AP Payroll FA

Procurement

Contracts

ITSM CMDB

Usage & Config

PPM BI

Mainframe Midrange Server Storage Time Tracking (Labor) Application Directory Security Asset Management HR Other

Showback vs. Chargeback

Detail Required Bill of IT Cost Allocation Showback Chargeback Accuracy Effort Required Project Cost Less More Less More Low High <0.1% 1.5%

Service Catalog

Salads

• Create salad offerings
• Can have higher prices for

special toppings or protein

Salad Bar >

• Charge out individual

salads depending on the ingredients

• Users know they can

reduce their price based on toppings

< Menu

Service Catalog

Servers are often broken out separately due to higher acquisition and maintenance costs. They can also require higher rates of data center power.

Servers

• Avoid going to extreme of treating

all servers equally

• Group similar assets into services
• Allow for cost components to be

layered in based on the type of asset

Asset-level >

• Allocate D&A, power, labor to

individual assets

• Assets are charged to

consumers

• Effectively, each asset is

treated like a separate service

< Services

Service Catalog

Tableau

• Bundle common or non-material software packages into End User Services
• r a Desktop/Laptop service
• Avoid long, itemized bills

Software-level >

• Charge out individual

software packages that are highly specialized or material in cost

• Educate users on how to

return unused licenses and reduce their bill

< Services

Service vs. Cost Component

Chipotle and Qdoba both understand the cost of guacamole but have different strategies

Guacamole

• Qdoba includes guacamole in the

price of main dishes

• Their customers did not want to be

“nickel and dimed”

• Looking to increase repeat

customers

Service >

• Chipotle charges separately for

guacamole

• They remind customers before

adding guacamole, so they are not surprised at the register

< Cost Component

Service vs. Cost Component

Network - WAN

• Layer into the service cost of compute

platforms if there is no distinct lever for consumer

• Can use dynamic spread, port or device

counts, or bandwidth by platform

Service >

• Charge network based on port

counts or traffic analysis

• Requires defendable usage data,

which is often difficult to collect

< Cost Component

53

Service vs. Cost Component

Labor Services

• Layer in the cost of

management overhead and infrastructure support into Services

Services >

• Application development and maintenance are generally allocated to

consumers

• Generally requires time-tracking data to be defendable
• Complexity around number of labor rates

Cost Component >

54

Dynamic Spread vs. Metrics

Restaurant

• Weight the cost of the

restaurant to dishes based on the cost of ingredients

• Simple math

Metrics >

• Restaurant Owner can use an estimate of space required to store and

prepare each dish

• Requires analysis and consideration of desired outcome

Dynamic Spread >

Dynamic Spread vs. Metrics

Power usage or rack units are commonly used to allocate facility costs to IT Services.

Data Center

• Weight the cost of the data center

to services based on their total service cost

• Simple and avoids cumbersome or

frequent data refreshes

Metrics >

• Expose a lever the Service Owner

can use to manage the cost of service

• Can be more defendable

depending on data quality

< Dynamic Spread

% of Use

Percent of use ties billing directly to the GL and is where companies often start.

• Rates require monthly due diligence to ensure

expenses are mapped accurately

• One-time expenses or credits will cause the

rate to spike or potentially be negative

• Fluctuating rates are difficult for the consumer

to understand and predict

• Focus is on total spend by service instead of

driving the unit cost down

• Billing reports will tie to GL without a true-up
• Billing

reports contain a more accurate reflection of costs

Rates

Setting rates annually allows consumers to focus

• n what they can control – usage.
• If billing reports need to tie to GL, manage
• ver/under recovery through true-ups
• Must have proper analytics in place to charge
• ver/under (eg: rate vs volume variances)
• Rates need to be monitored for accuracy
• Simpler

to calculate and predictable for consumers

• Consumers can focus on their lever to reduce

costs, which is their consumption

• f

IT Services

• IT can operate like a business and set rate

reduction targets

• Can set a price higher or lower than the rate

calculated in the cost model to drive different behaviors (e.g. incent the use

• f

newer technology)

Direct

Establishing direct services can improve transparency but can also increase complexity quickly.

• Can drive complexity for both Finance and IT

partners

• Increases overall number of Services to

manage

• Consumer may not understand fluctuations in

cost

• Reducing usage may not immediately impact

cost

• Highly specialized hardware or software is

segregated and will not increase rates for the

• ther consumers
• Can drive specific behaviors by creating a

separate lever

Rate vs. % of Use

Burritos

• Restaurant Owner sets a price

per burrito or type of burrito

• Owner must consider

fluctuating produce prices

• Price includes an assumed

amount of spoilage

• Monitor cost of ingredients,

labor, and overhead expenses to see if burrito price needs to be adjusted

Fixed Rate >

60

Rate vs. % of Use

Mainframe

• Consumer can reduce

bill by using less CPU Seconds or MIPS

• Service Owner can

benchmark rate internally

% of Use >

• Consumer may react to variability in cost each month if usage is flat
• Service Owner will need to understand and explain spikes in payments,
• ne-time events

Fixed Rate >

61

Rate vs. Direct

Seafood

• Consumers expect a

certain price based on historical visits

• Restaurant Owner

assumes risk of sudden cost increases

Direct >

(Market Price)

• Routinely change the price based on cost of ingredients, typically

reserved for expensive dishes

• Consumers know upfront that the prices will vary over time
• Restaurant Owner will include markup for preparation and overhead

Fixed Rate >

62

Rate vs. Direct

Data Appliance

• Maintain fewer services

and allocation methodologies by including in server rates

• Specialized infrastructure

may increase rates broadly

Direct >

• Able to expose additional cost driver and influence behavior
• Consumers may ask for more services to be created, increasing

complexity

Fixed Rate >

Takeaways

There’s no silver bullet for IT transparency Consider user behavior, materiality, and other factors before deciding

• n an allocation

strategy Allocations can evolve

• ver time as your ITFM

program matures

Pros Cons Requirements

Options – Type

Chargeback – Move dollars to consuming cost centers

• Financial Transparency
• Shared Service Consumers such as

Corporate, Finance, HR determine how to allocate expenses to line of business

• More consumer accountability
• Complexity
• Potentially “less” accurate allocations to line
• f business
• Additional journal entries and expense

system processing

• Manage Under/Over recovery

periodically

• Determine how to allocate Under/Over

recovery to line of business (less complex if it can go to a Corporate LOB)

• Must be able to explain cause of

Under/Over recovery

• Determine whether or not to true up

Chargeback – Adjust Business Allocations

• n Providing

IT Cost Centers to reflect usage

• Financial Transparency
• Accurate allocations to line of

business based on usage

• More consumer accountability
• Complex
• IT responsible for line of business allocations
• Additional journal entries and expense

system processing

• Manage Under/Over recovery

periodically

• Determine how to allocate Under/Over

recovery to line of business (less complex if it can go to a Corporate LOB)

• Must be able to explain cause of

Under/Over recovery

• Determine whether or not to true up

Showback – reporting

• nly
• Financial Transparency
• Can be a stepping stone to

chargeback, allowing customers to become familiarized with IT costs and services prior to actually charging that way

• Less Consumer Accountability since show-

back is reference only

• Less of a connection between what

customers are being charged for IT and what they are consuming

• Review Under/Over recovery

periodically

Pros Cons Requirements

Options – Fixed versus Variable Chargeback

Fixed Rate Variable Consumption

• Consumers more Accountable

for usage

• Will generate Over/Under recovery
• Since there is a Fixed Cost component to services, a

decrease in consumption is not directly correlated to a decrease in expense

• Manage Over Under

Fixed Allocation based on Budgeted Consumption

• Will result in 100% recovery
• Less direct accountability for usage

Fixed Allocation based on Actual Consumption

• Will result in 100% recovery
• Less direct accountability for usage
• A consumer’s percentage can change solely based
• n another consumer’s actions
• Dollar fluctuations more difficult to explain

Options – Cost True Up

Periodic True Up

• Will result in 100% recovery

and charges to lines of business

• Additional Monthly, Quarterly, or Annual calculations

and processing

• Manage Over Under

No True Up

• Less processing and

complexity

• Less accurate allocation of total IT cost to Lines of

Business

• Manage Over Under

Value of Transparency

• Aligns IT spend to business value
• Enables the CIO to transition from defending the budget to gaining

support for new initiatives

• Elevates IT from a cost center to a business partner by developing

trust

• Provides several dimensions of TCO (service, consumer, application,

business capability), with each dimension providing insights to key stakeholders.

• Empowers practitioners to fully analyze, communicate, and justify the

cost of services they deliver to the overall organization

Stay Focused on Value and Outcomes

• Do you enable impactful decision

making?

• Has it improved your relationship with the

consumer?

• Do consumers value IT?

Words of Wisdom

Stay Aligned with Value – Success of your program will be based on the value you provide to your stakeholders. The more aligned with value you are, the more support you will get. Educate & Enable – Educate and enable everyone on the IT Finance mission and what you produce. Expose your roadmap and explain your impact. Constant Proactive Improvement - Make incremental improvements – stay aligned with value – with value you gain support to take the next step – technology and innovation never stop and neither does change for IT Finance. Answer the Questions, Gain Trust – be fast, be accurate, be detailed, be insightful – these are all key to becoming a trusted partner. Be Friendly – be nice – be the confident, calming influence in the process – diffuse stressful conversation with facts, analysis, transparency, and insights.