How to Streamline IT Cost Allocations and Chargebacks

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IT services are expanding and expenses are skyrocketing. So, it’s increasingly important for companies to pay attention to shared costs. IT budgets shouldn’t pay for every last cloud, mobile, and telecom expense. Instead, subsets of those costs should be shared with their beneficiaries. IT cost allocations and chargebacks are the means for doing just that, but it’s easier said than done.

Developing and maintaining a strategy to hold departments and lines of business fiscally responsible for the services they use can be labor intensive. Any company trying to allocate IT costs manually will find that the complexity of combing through invoices with hundreds of line items can become debilitating.

Here’s Tangoe’s step-by-step guidance for simplifying cost allocations.

Step 1

Align with Financial Practices, Taking a Consistent Approach

One of the first rules of chargebacks is to align with any existing financial practices. IT leaders aiming to launch a cost allocation initiative shouldn’t develop their own chargeback mechanisms, but rather adhere to any existing cost allocation processes. IT Teams should handle cloud, mobile, and telecom chargebacks the same way their Finance Teams does. Collaboration is crucial.

First familiarize yourself with:

Cost centers associated with each department, line of business, or special innovation projects
Specific naming conventions, labels, or grouping structures and hierarchies used in cost allocation processes, particularly when an expense is allocated to a particular group
Business or financial rules used for cost allocation purposes – these should be taken as law, guiding internal compliance
Strategies and approaches used when allocating costs: Are charges distributed evenly across beneficiaries or are expenses allocated according to actual consumption?
Financial management systems used for budgeting and cost allocation – automating chargebacks will require integration with these systems

53% of IT and financial leaders find cloud chargebacks challenging and time consuming.

Step 2

Identify Shared Costs and Choose Your Allocation Strategy

Next, identify shared costs that have the potential for cost allocation:

List the IT services and describe the sub-set of costs that could be shared with internal organizations
Note the beneficiaries of each service or IT asset – they could be departments, teams, projects, or individual stakeholders
Make suggestions on how to approach each cost allocation – should charges be shared evenly or based on individual consumption habits? Consider good faith and equality – how should costs be allocated so they are spread fairly across the business?
Consider any exception rules – are there instances when your cost allocation approach should not apply? Defining these along with guidelines for judgement calls can help clarify gray areas.

Which Cost Allocation Strategy Should You Use?

While there’s no right or wrong answer here, it’s important for IT and Finance leaders to agree on the strategies used. Sometimes fixed allocations are chosen simply for their simplicity over variable allocations. Variable allocations can mean creating more rules and remember that charging based on consumption means you’ll need deep insight into resource usage with reports tallying the amount of usage across every department or team.

See how to use FinOps solutions to do chargebacks right.

66% of the C-suite cite tracing spend and chargebacks of particular concern.

Step 3

Use Best Practices in Uniformity, Automation, Visibility

Best practices in chargeback execution entail three basic rules.

1 Uniformity:

Chargebacks and financial budgets must operate hand-in-glove, managed uniformly using the same metadata and the same financial rules. Every budget should reflect IT chargebacks. Uniformity is how you maintain and protect chargeback financial compliance, ensuring all costs are accurately assigned.

Buyer Beware!

Be wary of FinOps platforms and IT financial management systems that don’t allow you to customize your budgeting and chargeback parameters based on your specific rules and needs.

You should be able to:

Define budgeting and chargeback rules
Set spending limits and get alerts when expenses cross your set thresholds
Allocate funds according to your existing financial practices, allocation strategies, and priorities
Generate General Ledger and Accounts Payable files to sync with your company’s financial systems

2 Automation through Integration:

Financial management systems and IT systems, including FinOps software, should be able to exchange information. Afterall, you’ll want to be able to see the impact of chargebacks on the IT budget as well as other departmental budgets. When all the key information is managed in separate systems without any unified management strategy, this becomes unnecessarily complicated. Moreover, integration allows chargebacks to be fully automated, applying business rules to the cost data at every invoice cycle. Explore how Tangoe automates chargebacks.

The FinOps Foundation stresses financial integration as a prerequisite for success: “Chargeback requires IT Finance Integration to allocate spend to the appropriate cost centers and budgets.”

See how one firm charges multi-cloud expenses back to 500 departments.

3 Visibility:

Chargebacks are a key strategy behind measuring tech ROI and controlling IT expenditures, but they are essentially useless when key stakeholders don’t have a clear view into the charges passed down them. Visibility plays an essential role in increasing awareness and cost consciousness. Those fostering a culture of cost accountability will want to focus on their financial reporting capabilities.

Consider the following:

Can you slice and dice chargebacks by cost center, department, person, or timeframe?
Can you compare budgets to actual expenses (including chargebacks), highlighting deviations or budget-to-actual variances?
Can you compare last year’s chargebacks and budgets to this year’s to see how things have changed over time?
Do you have the flexibility to see your chargebacks and budgets from different viewpoints, creating multiple versions? For instance, showing overall spending, service, usage, and chargebacks at a high level but also granular slices of data to dig into the details? This helps target areas of overspending to guide where more chargebacks might be warranted.