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3 Bill of IT Execution Strategies for Showback or Chargeback

Sep 19, 2019 | By Wil Cleaveland

Bill of IT Cost Optimization IT Cost Transparency Service Cost Modeling Showback & Chargeback

There are three core phases necessary to launch a new showback or chargeback and deliver it as a bill of IT.

First, the organization must consider the tactical and strategic differences between showback and chargeback, then decide which to pursue (See this post for a deeper explanation of showback vs. chargeback). Next, every service to be included in the bill of IT needs to be defined, cataloged, and accurately costed – a process you can learn more about in our eBook, A Practitioner’s Guide to Cost Modeling. Lastly, the organization must evaluate its goals and needs to select a bill of IT execution strategy.

The bill of IT execution strategy governs two key processes:

  1. How actuals flow through the cost model and out to the bill of IT
  2. How monthly variance is managed and allocated across consumers

Although there’s room for customization, most execution strategies fall into three major categories:

  1. Percentage of Use
  2. Fixed Rate – Option A (with Under/Over)
  3. Fixed Rate – Option B (without Under/Over)

Let’s dive into each strategy to understand its mechanics, key benefits, and potential drawbacks.

*Note: If your organization is not pursuing a chargeback in the foreseeable future – or if there’s no need for the bill of IT to tie back to the GL on a regular basis – then the inclusion of over/under or true-up processes is optional.

Percentage of Use

The first, most basic way to structure the bill of IT is by allocating to consumers based on their individual responsibility for total service costs. The two main advantages of this strategy are its simplicity and the fact that it results in 100% of incurred costs being allocated monthly.

It works like this:

  1. Run monthly actuals through the cost model to find:
    • Current effective rates.
    • Total cost of each service.
  2. Calculate each consumer’s usage as a percentage of the total service cost.
  3. Charge or report on that percentage and show the full breakdown in each consumer’s bill of IT.

For example, let’s say there’s one service with three consumers in a given month. Using cost model actuals and consumption data, we find the first consumer holds responsibility for 25% of the monthly total, the second 15%, and the third 60%.

In the bill of IT, each consumer will see actual consumption, the total cost for the service in question, and the percentage of that total tied to usage (what would be billed in a chargeback scenario).

Key Benefits

Potential Drawbacks

Fixed Rate – Option A (with Under/Over)

For organizations wishing to bill on actual consumption more accurately than Percentage of Use will allow, while still allocating 100% of service costs monthly, a Fixed Rate with Under/Over strategy is the ideal choice.

Here’s a step-by-step summary of the process:

  1. Create fixed annual rates by running the full year budget through the cost model.
  2. Run actuals through the cost model monthly to obtain true cost of service for the month.
  3. Determine each consumer’s service cost obligation using monthly usage data and fixed annual rates.
  4. Calculate the under/over recovery amount (Actual monthly cost of service – (Fixed Annual Rate * Actual Service Consumption))
  5. Populate the bill of IT and include a separate line item charge or credit for the under/over (This can be spread across consumers using a basic percentage, usage by service, or any other agreed upon metric).

Key Benefits

Potential Drawbacks

Fixed Rate – Option B (without Under/Over)

In situations where 100% of costs don’t need to be allocated to consumers monthly – maybe because the bill of IT is being delivered as a showback only, or in an attempt to reduce the administrative burden of a chargeback – organizations often utilize the same core Fixed Rate strategy but without an under/over charge in the bill of IT.

Instead of using a monthly under/over like Option A, Option B monitors monthly effective rates, adjusts them when needed, and uses periodical true-ups to reconciled back to the GL.

In other words, Option A and Option B are essentially two sides of the same methodological coin for Fixed Rate. The only difference is how each option manages variance between plan and actuals.

Neither option is right or wrong. But there are some important trade-offs between the two.

Keeping in mind what we’ve already discussed about Option A, let’s investigate the benefits and drawbacks of Option B.

Key Benefits

Potential Drawbacks

Building a Showback or Chargeback Model from Scratch

For additional guidance on showback or chargeback, download a copy of our new eBook: “How to Produce an Effective Bill of IT Using Showback or Chargeback.”

Inside, we detail everything you need to know about launching a new showback or chargeback — from start to finish. You’ll also learn the important strategic differences between the two, and what those differences mean for the bill of IT.

Download your copy of the eBook instantly here. 

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