Private clouds are forcing IT to question who pays for what.
Organizations moving their IT infrastructure to private clouds are encountering demands from end users to pay only for the resources they use -- as cloud vendors suggest. This is affecting IT funding and forcing IT to adopt new chargeback methods.
Traditionally, IT has split the amortized costs of its infrastructure across all groups within the company that use its resources. In a private cloud network, how do you do this so you can make sure that IT stays viable? It’s a problem confronting many CIOs.
For years, IT simply amortized datacenter floor space, software, and equipment costs over time -- and added to this the charges of salaries and benefits for staff to come up with an annual dollar figure for funding IT. Funding came out of corporate revenue, cash on hand, or reserves, depending on the enterprise’s financial picture.
Later, accounting systems got fancier so that these IT costs could be assigned to the lines of business that brought in the revenue. However, a fair accounting of IT resources remained elusive. In one case, I remember a CIO telling me that his company booked all of its IT costs to its mainframe, because it was the only system that had cost tracking on it! Consequently, all of the non-mainframe resources the company was using appeared to be “free,” while the mainframe seemed to be very expensive.
“Sticks and glue” solutions like these won’t work with private clouds. Business users are going to push for “pay-per-use” chargebacks for IT services, thanks to competing vendors in the open marketplace that adhere to this model.
Here are some steps can IT take to adjust its funding mechanisms to fit today’s pay-per-use trend:
1. Revisit the tracking of IT expenses. Most datacenters still track IT resources as “fixed” entities -- whether these resources are pieces of hardware, application software packages, or the software needed to operate and manage IT infrastructure. Today, however, new IT infrastructure management software can automatically track workloads across all of these resources and arrive at more accurate cost figures for what a given line of business or enterprise area is using. For example, if Accounting wants you to run its general ledger, payables, and receivables, infrastructure software with automation can analyze all of these applications and track the consumption of IT resources (e.g., CPU, storage, networks, etc.) required to run these systems. The infrastructure software can also consolidate all resource usage during a given period as a “per use” chargeback to Accounting. Of course, IT has to set up the process by assigning a dollar value to each consumable resource so it can be calculated into the workload.
2. Identify fixed costs. Every business has fixed costs, and business end users know this. They also know that a commercial cloud services provider is going to factor in some of its fixed costs into pricing. Likewise, it is fair for IT to factor in the costs of its support staff and facilities. Fixed costs can be amortized and computed proportionally into the monthly pay-per-use charges for IT services./
3. Isolate the “extra” service items and let business areas pay for them à la carte. When the organization goes to a cloud services provider and asks for additional training and implementation, the items are billed separately. IT should have a similar model that adds these costs onto its baseline pay-per use-fees.
4. Factor in some profit. Even if you are an internal IT organization, it is smart to set aside some extra dollars for IT prototype and R&D work that can bring technology advantages to the business. Commercial technology companies typically reserve 15 percent of revenues for technology reinvestment. Best-in-class IT executives also find ways to fund some R&D, because it can deliver a competitive edge to the company. However, to do this, the CIO must first achieve buy-in with key enterprise executives on how much to “upcharge” services to fund the R&D.
Well, as I said below, I work for a vendor and so the parameters of our process may be different than for a typical CIO. I suspect that the process, which is a combination of activity and asset based costing, factored over anticipated number of users, would be essentially the same. We calculate cost of infrastructure to host a service, add the cost of people to support it, cost of software development and maintenance ... And a bunch of other costs. Add a margin (very reasonable, of course).Then we predict how many customers we will get, and set the price. Finally, we see what the competition is up to, to see if the market will bear our proposed price.
Going "private" with the process, infrastructure could be owned or hosted, people costs would be different, but in the end there's a cost per user. Business users might well question the prices, unless it can be established that the process is analogous to the way that the business sets its prices to external customers. I'm not sure, though, that anything will ever make business users really happy with IT prices unless the relationship between business and IT is really trusting. Failing that it might come down to "pay", "don't use the service" or "go elsewhere" ... Which comes back to my point that IT needs to embrace the market ...
You've said a mouthful, Mr. Rowlands. Actually, several. That whole "cost center" thing should have gone out with the Hollerith cards and punch-tapes. IT is no longer a support mechanism. In many cases, it IS the business. It's the phones, the workstations, and even occasionally, the product. It's a cost of doing business, and should be treated as such. The clever CIO will have a good handle on his costs, and try to assure they're always cheaper than outside services. That way, the "rogue" or "shadow" IT infrastructure won't get a chance to get started, because nobody will be able to make a business case for external services if they always cost more than (and don't work as well as) internal services. The way that modern IT has become pervasive throughout businesses, there is no "profit center" that does not make use of IT services. Perhaps it's time the Biz School grads got the clue that corporate IT is the ultimate profit center.
I was there when a lot of "traditional" IT Chargeback systems were implemented, and saw many implementations crumble under the weight of the challenges of detailed log collection and management, resource allocation, and the impossibility of bridging the "understanding" gap between business and IT.
In the Cloud era, the proposition gets to be more interesting. I now work for a vendor selling (amongst others) cloud-based capabilities. We have to figure prices for our services that allow us to be profitable and competitive. I have come to think that if enterprises want to play the IT chargeback game, they should follow the same process. Figure out what IT resources are needed to support IT and business services, and charge accordingly. Don't get sucked into the log processing / allocation trap.
I know there's a "gotcha". A priced services scheme implies a profit center mentality. And that opens the option of business uinits seeking to source services externally. In practise, it's happening anyway. Corporate IT has to compete ... so time to embrace the market.
As a dinosaur, I still prefer runing IT as an overhead -- but that's hard to get away with. So be it, run IT like a business. But don't get mired in the futility of trying to run as a cost center and assign costs "fairly"
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