MIT IT Charge Back Methodology

The Untapped Potential of IT Chargeback

Jeanne W. RossMIT Center for Information Systems Research

77 Massachusetts Avenue, E40-193Cambridge, MA 02139

USA1-617-253-9461 (phone)

1-617-253-4424 (fax)[email protected]

Michael R. VitaleCentre for the Management of Information Technology

Melbourne Business School200 Leicester Street

Carlton 3053 VictoriaAustralia

+61 3 9349 8184 (phone)+61 3 9349 8188 (fax)

[email protected]

Cynthia Mathis BeathCox School of Business

SMUPO Box 750333

Dallas, TX 75275-0333USA

1-214-768-2547 (phone)1-214-768-4099 (fax)

[email protected]

September 17, 1998Forthcoming, MIS Quarterly


ABSTRACT

The received wisdom on IT chargeback is that a chargeback system with certain key characteristics, such as usage-based charges, stable rates, understandable bills and so forth, will help firms make effective decisions on IT investment and use. Eccles’ model of transfer pricing provides a theoretical framework for this claim, and it also explains why chargeback systems can raise issues of fairness or create conflict between IT and its clients, as the IT literature has pointed out. Guided by Eccles’ model, we studied ten organizations’ chargeback systems and their impacts on business managers’ economic decisions and on evaluations of IT and business unit performance. Respondents in just four of the ten firms reported that chargeback had significantly influenced IT investment decisions. In addition, the business unit respondents at those same four firms offered more positive assessments of IT than their counterparts at other sites. We could not account for these differences in chargeback related outcomes by looking at differences in the chargeback characteristics that are most commonly described in the IT literature. What was different in these four firms was that chargeback was being used to foster communication between IT and the business units. This communication was generating a rich shared understanding for both parties of the costs and benefits of alternative IT investments and service offerings. The literature on partnership argues that complex IT investment decisions demand a strong IT-business partnership. Our analysis suggests that IT units in just four of the ten firms were tapping into the potential of chargeback to facilitate the development of a partnership with their business unit counterparts.

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INTRODUCTION

Compared with current IT-related challenges such as implementing enterprise resource planning systems and developing electronic commerce infrastructures, IT chargeback rarely emerges as a strategic IT management issue. In fact, even in fulfilling its relatively straightforward role of allocating IT costs for accounting purposes, chargeback has been a persistent source of consternation for IT managers. Much of the attention directed at chargeback arises from the perception that it could be far more than an aggravation for IT and business managers. Indeed, chargeback is widely believed to have the potential to encourage wise organizational decision-making on IT investment and use (Allen, 1987; Bergeron, 1986b; Nolan, 1977b). In addition, chargeback may have the potential to enhance IT-business unit partnerships (Brown and Ross, 1996; Henderson, 1990), although available evidence suggests that until now, chargeback systems have been more likely to worsen the relationship between the IT unit and its clients than to improve it (Nolan, 1977b; Olson and Ives, 1982).

Recently, two important trends have renewed managerial focus on IT chargeback systems. First, many organizations, even those that are otherwise decentralized, are expanding their central IT infrastructures to support global processes and knowledge sharing (Broadbent and Weill, 1997; Ross and Rockart, 1997). These infrastructure investments typically involve high fixed costs that must be shared across business units. But while opportunities to spend money on IT infrastructure are almost limitless, mechanisms for allocating infrastructure costs, a crucial step in assessing their value, are deficient (Lucas, 1993). Second, an external market for IT services has emerged as a viable alternative to internal IT provisioning (Venkatraman, 1997). Facing growing budget pressures, managers want to compare the relative costs of internal and external IT services (Lacity and Hirshheim, 1993). The pressure to expand IT infrastructure coupled with the need to minimize costs has heightened the demand for chargeback systems that can support effective IT investment decisions.

There is little evidence in the research literature as to the conditions under which chargeback can deliver on its potential to support effective decision making (Butler, 1992; Drury, 1982; King, 1988; McKell, Hansen, and Heitger, 1979). This lack of understanding regarding the best context for an effective chargeback system contributes to a sense that chargeback systems often generate more distraction than value in organizations.

This paper focuses on the potential of chargeback systems to become valuable managerial tools. Specifically it addresses the question:

What chargeback practices lead to effective managerial decisions on information technology investment and use?

The paper begins by describing prior research on transfer pricing and IT chargeback systems and then develops a conceptual model of IT chargeback systems and their outcomes. This is followed by a brief description of our research methodology. Subsequent sections detail the outcomes associated with the chargeback systems in the firms we studied and relate these outcomes to chargeback system characteristics. In the discussion section, we turn to the literature on partnership to help explain why only four of the ten companies in our study were able to identify important positive outcomes from their chargeback practices. Based on these findings we suggest some ways that organizations can exploit the potential of chargeback to improve investment decisions by building stronger IT-business unit relationships.

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A MODEL OF IT CHARGEBACK

IT chargeback is an example of transfer pricing—a familiar concept in most decentralized organizations. Transfer prices act as coordinating devices for managing interdependencies among individual business units (Abdel-khalik and Lusk, 1974). As a coordinating mechanism, transfer pricing has two recognized objectives. First, it should motivate managers to make sound economic decisions that optimize resource allocation within the firm. A well-designed transfer pricing system will help both buyers and sellers in internal exchanges to make decisions that maximize firm performance. Second, transfer pricing should support performance assessment of business units and their managers (Kaplan, 1982).1

Eccles (1985) developed a model that identifies the design decisions that determine how well a transfer pricing system will meet these two goals. According to Eccles, goals for firm performance and performance evaluation are achieved not due to the transferred charges themselves, but due to certain organizational policies that shape and constrain internal exchanges and due to the administrative processes associated with the calculation and communication of charges.

Because IT charges are, in effect, transfer prices, Eccles’ model is a useful starting point for understanding the impacts of chargeback. Like other transfer pricing schemes, IT chargeback is expected to influence economic decisions (Allen, 1987; Bergeron, 1986a; Dewan, 1996; Drury, 1982; McKell, Hansen and Heitger, 1979; Mendelson, 1985; Smidt, 1968). Similarly, as with transfer pricing, the impacts of chargeback have been found to differ depending on a firm’s chargeback policies and administrative practices (Bergeron, 1986a; 1986b; McKell, Hansen and Heitger, 1979; Nolan, 1977a; Olson and Ives, 1982).

Chargeback Outcomes

Relying on Eccles’ (1985) transfer pricing model, we derived a model of IT chargeback that guided the current research. In this model chargeback has two key outcomes: an economic impact and an impact on performance evaluations (see Figure 1). The economic impact results from the influence of charges on both business unit and IT unit decisions regarding investment in and use of IT, that is, regarding the supply of and demand for IT products and services (Allen, 1987; Choudhury, Sircar, and Venkata, 1986; Nolan, 1977b; Olson and Ives, 1982). The performance evaluation impact is more complex. For one thing, IT charges generally have a direct impact on a business unit’s financial performance and thus on a business unit manager’s performance assessment. This can lead to concerns about the fairness of charges, particularly when managers feel they do not have control over those charges (Hufnagel and Birnberg, 1989; 1994). In addition, the IT charges themselves may lead business unit managers to draw conclusions about the competence of the IT unit (Nolan, 1977b; Olson and Ives, 1982). Thus, IT chargeback can influence both the performance evaluations of business unit managers and those managers’ assessments of the value of IT services.

Chargeback Policies

Strategic Context: Eccles points out that chargeback outcomes are shaped by various firm-level policies that create the context for charging. These policies, which Eccles argues derive from choices about firm strategy and structure, are, at most firms, not under the control of the IT unit. The transfer pricing (Eccles, 1985) and IT chargeback literatures (Bergeron, 1986a; 1986b; Olson and Ives, 1982) identify three policy areas as particularly important: IT sourcing, IT cost recovery, and accountability for IT charges.

1 However, Zimmerman (1979) notes that in complex organizations, managerial decisions that maximize individual business unit performance are often different from decisions that maximize firm-wide performance.

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Sourcing Policy: Firms that offer IT services internally must determine whether to require that all business units purchase those services from the internal unit, or to allow business units to buy services from external providers. A policy of mandated internal sourcing retains the “profits” from the purchase of IT services within the firm — in essence, the firm decides to vertically integrate rather than to allow external sourcing. A policy of allowing external sourcing grants profits to an external party, presumably, in exchange for better or cheaper services (Eccles, 1985). A disadvantage of mandated internal sourcing is that it may limit business managers’ sense of control over their IT expenditures, which is apparently tied to their perceptions of the fairness of a chargeback system (Hufnagel and Birnberg, 1989; 1994). In a laboratory environment, Hufnagel and Birnberg (1994) found that the lack of alternative sourcing choices led to perceptions of unfairness even when the prices charged were below market rates.

Cost Recovery Policy: A firm has several alternatives for pricing IT services. Policies can mandate that prices will be based on cost (such as standard or actual variable cost, standard or actual full cost, full cost plus mark-up, etc.), on market prices (such as competitor’s price, company’s list price, bid price, etc.), or on some dual-pricing basis, in which different prices are recorded for the selling and the buying units. A firm’s pricing policy (which, to avoid confusion with other aspects of chargeback, we refer to as their cost recovery policy) will be strongly influenced by its decision as to whether or not IT services will be sold externally. Structuring the IT unit as a profit center has been advocated from time to time (Allen, 1987), but it appears that most firms simply require many of their service units to fully recover most, if not all, of their costs (Miller and Buckman, 1987).

Policy on Accountability for IT Charges: A third policy that could influence chargeback outcomes is one that establishes the locus of accountability for IT charges within the buying business units. IT charges can influence managerial behavior only if they are the responsibility of individuals who are in a position to make IT investment and usage decisions (Bergeron, 1986a; 1986b; Olson and Ives, 1982). The ability of business managers to use chargeback data to make appropriate IT investment and usage decisions is dependent on their level in the organization and on their individual awareness of the capabilities of IT (McKinnon and Kallman, 1987; Nolan, 1979). Business managers who understand information technology should be more capable of predicting their IT charges and understanding the value that has been received from the services consumed; they should also be better at planning, directing, and controlling information technology resources (Bergeron, 1986b; Nolan, 1977a). However, while increased IT sophistication may be expected to yield better IT investment decisions, it can also make business managers more critical of IT service costs and quality (Olson and Ives, 1982).

Chargeback Administrative Practices

In addition to setting policies, firms make and implement decisions about administrative practices for IT chargeback. In particular, chargeback requires processes for establishing rates and for communicating charges, and both of these can influence chargeback outcomes.

Rate-setting Processes: Much of the research on chargeback has focused on the construction of rates. User charges that vary according to the amount of resource consumed have been found to increase the self-reported use of chargeback information (Bergeron, 1986a). In theory, variable rates make it possible for business unit managers to control their overall IT charges by changing their resource consumption. For example, they may run fewer reports, reduce storage requirements, or switch to off-peak processing times. Service level agreements (SLAs), which have become increasingly popular in recent years, are claimed to be one mechanism for providing business units with control over their IT charges (Singleton, McLean, and Altman, 1988).

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But many IT infrastructure costs are in reality fixed over the medium to long term. If the rates used to allocate these fixed or step costs are not closely related to the factors that will allow a step decrease (usually) to be taken, then business unit efforts to reduce their consumption of those IT resources may simply result in the re-distribution of the same (fixed) costs in the guise of a new higher rate. Needless to say, business managers find this frustrating (see for example, Nolan, 1977b; Cooper and Kaplan, 1991). So, while the literature consistently advocates setting rates that respond to changes in use, it is not clear whether or how IT infrastructure costs respond effectively to changes in use.

Processes for Communicating Charges. Communication about charges should enhance the ability of individuals who manage IT costs within business units to understand both their charges and the business value they receive from the services for which they are being charged (Nolan, 1977b). This notion has drawn attention to the content and presentation of chargeback statements. One way to make IT charges more understandable is to price services according to business outputs such as invoices printed, bills paid, and orders processed rather than according to IT outputs such as storage, processing, and printing (McKinnon and Kallman, 1987; Nolan, 1977b). Another approach to communicating charges is to rely on IT account managers or relationship managers to help educate business unit managers on IT services and charges (Brown and Sambamurthy, 1997), presumably improving the business unit managers’ ability to comprehend and use chargeback information.

These important IT chargeback policies and practices are shown in the model in Figure 1, which guided the research reported in this paper. The research is intended to identify the relationships between chargeback policies and practices and three outcomes: (1) business unit IT investment and usage decisions, (2) performance evaluations of business unit managers, and (3) business unit assessments of IT performance. As described above, several earlier studies have examined parts of this model of chargeback system design and outcomes, but none has examined the impact of the full set of policies and practices on both economic and performance outcomes. Moreover, many of these studies relied on IT-based informants to assess the impacts of chargeback. The study reported here differs from earlier research in two important ways. First, it focused explicitly on the sets of policies and practices that constitute a firm’s chargeback process. Second, it systematically acquired information on a key set of chargeback outcomes from individuals who received chargeback statements. The methodology used to explore the relationships between the chargeback process and chargeback outcomes is explained in the next section.

METHODOLOGY

This research investigated the impacts of chargeback at ten firms, which were selected in a two-phase study. In the first phase of the research (February to August 1995), we conducted telephone interviews with twenty-two firms, in each case with the person responsible for chargeback design and administration. The firms were already known to the research team, on the basis of their involvement in other research projects, as progressive and reflective in their management of IT. Thus, the research sample is intentionally biased toward companies anticipated to have effective chargeback systems. All but one of the firms a very large Australian retailer are U.S.-based, Fortune 500-sized companies whose names regularly appear in the lists of top IT-using companies in U.S. periodicals such as CIO Magazine, Information Week, and Computerworld. We intentionally included firms that differed from one another in their IT management structure and in the number of business units served by the core IT unit.

The initial interviews lasted approximately one hour, and the interviewer later wrote a detailed summary, often relying on a tape recording of the interview in addition to notes. The interviews elicited information on the objectives of the firm’s chargeback system as well as on chargeback policy and related administrative practices. We learned whether internal sourcing and full-cost recovery were mandated,

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how rates were established and communicated to clients, how charges were determined, and to whom the charges were sent. We also requested, and generally received, copies of supporting documentation, such as written chargeback policies, lists of service rates, sample bills, and so forth.

Like earlier researchers (Nolan 1977a, Olson and Ives 1982), we felt that it was critically important to get the views of the recipients of chargeback information in order to understand the true impacts of chargeback. Ten of the participants from the first phase of the research were willing to introduce us to chargeback statement recipients in their firms.2 Between September 1995 and January 1996, we conducted hour-long telephone interviews with twenty-two chargeback statement recipients at these ten firms to learn how IT charges influenced their economic decisions, performance evaluations, and attitudes toward IT services. As a first step in analyzing our data, we re-contacted respondents where necessary to resolve differences in factual information between the two sets of interviews. Next, we applied our framework as a way of understanding each firm’s situation. Finally, we compared the cases to each other, looking for patterns that would help us understand the different systems and outcomes across the firms.

The ten sample companies in the second phase were all headquartered in the U.S. and included seven global manufacturing firms, a retail firm, a financial services firm, and a telecommunications firm (see Table 1). All firms were multi-divisional, and all had annual revenues in excess of US $5 billion. Three respondents described their IT units as highly centralized, and in these three firms chargeback covered both applications development and infrastructure services. The other seven firms had federal IT structures, in which applications development was located within business units. In these firms chargeback included only charges from the central unit providing infrastructure services. These services varied by firm but typically included mainframe processing, help desk, telecommunications management, application support, distributed systems management, IT consulting, database management, and IT procurement. In the following discussion of chargeback, we focus on the provisioning of and charging for IT infrastructure services. We use the term “core IT unit” to refer to the central IT unit responsible for providing these infrastructure services.

FINDINGS

In order to understand how IT chargeback might contribute to positive outcomes for a firm, we asked each of the recipients of chargeback statements to discuss the impacts of their chargeback statements, which we related to chargeback policies and administrative practices that had been described to us by the chargeback administrator in the firm. Relying on the model in Figure 1, we report first on the outcomes they described. We then relate these outcomes to the firms’ chargeback policies and to their administrative practices.

Chargeback Outcomes

The chargeback recipients described how chargeback impacted economic decisions, what impact IT charges had on their performance evaluations, and how they assessed the value of IT services in light of their charges. Table 2 summarizes these findings, which are explained below.

2 Because we wanted to understand the impacts of different chargeback systems on business units, this paper discusses only the ten firms that participated in both phases of the research. The chargeback systems at these firms did not differ noticeably from those of the twelve firms that participated in only the first phase, with the exception of two firms in the first phase that had elected not to charge business units for IT-related expenses.

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Economic Decisions: All of the respondents stated that chargeback had some impact on their IT investment or usage behaviors. The specific behaviors they described fell into three different categories: (1) reducing resource consumption, (2) relocating responsibility for providing infrastructure services, and (3) making better IT infrastructure investments.

The most common outcome—one that was evident in every firm studied—was reduced resource consumption. Both IT and business unit managers credited usage-based charges with helping business units to identify less expensive ways of accomplishing their objectives. Specific actions included switching batch processing to off-peak times, fixing software bugs that caused processing inefficiencies, changing querying patterns to do more analysis off-line, reducing print requests, de-installing systems, deleting redundant data, and reducing the number of workstations purchased.

Several respondents said that chargeback impacted not only resource consumption patterns but individual mindsets about IT resource consumption. For example, one business unit manager noted that, on average, employees at his high-tech firm owned two computers and had tended to act as if access to computing capabilities was a “divine right.” He credited chargeback with correcting that assumption. One chargeback manager observed:

As soon as we started charging per logical unit [i.e., on the basis of network connections, with telephones and desktop computers being logical units], all of a sudden people got rid of all their logical units, or as many as they could. A lot of things like that happened. Once we attached a price tag to it, everyone started thinking, “How much do we really need this? How much value is this really adding?” (IT Accountant, Firm 9)

While efforts to reduce resource consumption may have resulted in lower firm-wide IT costs through immediate savings or deferred capital investments, decisions to relocate responsibility for providing IT services appeared to reduce a particular business unit’s charges while maintaining or even increasing total firm costs. In Firm 8, for example, some business units took on responsibility for their own help desk support to avoid using the central service; the firm’s cost of providing the central service, however, remained the same. At other firms, relocating responsibility involved subverting standard policies. One chargeback manager provided an example:

According to policy, all desktop procurement should be done by corporate IT, except for laboratory equipment. If the businesses buy through corporate IT, they will have an infrastructure allocation charge. So, of course, many people call their desktop equipment, “laboratory equipment.” Then it appears cheaper to them because they only have annual depreciation and maintenance charges. This reduces their charges, but it doesn’t save the company anything. (Corporate IT Finance Director, Firm 4)

Business unit respondents at just four of the ten firms (Firms 3, 5, 6, and 10) reported that the existence of chargeback influenced their IT investments. Chargeback influenced investment decisions in two ways. First, anticipation of future charges influenced decisions about the design of new systems. For example, a business unit IT manager at Firm 5 noted that in the process of designing new systems, his unit worked closely with core IT to determine the relative costs of alternative platforms being considered. Second, chargeback influenced investments by stimulating discussions among core IT and business unit managers about the need for specific infrastructure services. At firm 3, for example, discussions about the relative cost of alternative service levels led to changes in one business unit’s stated requirements for telecommunications support, which allowed core IT to reduce its costs and subsequently reduce its charges to the business unit.

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In summary, respondents at all ten firms indicated that IT chargeback influenced how they used IT on a day to day basis. However, only four of the firms reported that chargeback had an impact on major IT investment decisions.

Performance Evaluation of Business Units: All of the business unit respondents stated that their performance evaluations depended, at least in part, on their business unit’s bottom line performance, and that IT charges were part of that bottom line. And while some respondents expressed concern that IT represented a growing proportion of their business unit budgets, all indicated that the impact of IT charges on their performance evaluation was very small, both because IT was a small part of their total expenditures and because the truly discretionary part of IT was almost negligible.

Perhaps because IT charges had such a minimal impact on their performance evaluations, the fairness of their chargeback systems appears not to have been an issue for our respondents. When asked whether their chargeback systems were fair, all the business unit respondents said they were. (They defined “fairness” as meaning that their units were charged accurately and fairly relative to the other business units in the firm.) Respondents at firms 2 and 7 said that they had believed at one time they were paying for systems they did not use, but both were satisfied with the outcomes of the appeal process.

Business Unit Assessments of the Value of IT Services: We asked chargeback recipients to assess the value received from their IT expenditures. In most cases, they struggled with the question a bit because of the difficulty of assessing IT value. Nevertheless, we were able to divide their assessments of the value of IT into two categories: “questionable” and “good.” The six firms whose business unit respondents indicated that the value from core IT services was questionable expressed concerns that core IT might not be efficient and effective in its spending. As one business unit respondent explained:

I consider myself pro-IS and I understand my charges, partly as a result of sitting on the committee that helps determine how they are bundled. Still, I feel that IS spends money on some things that no one wants and spends more money than necessary on things we do want. Their stewardship over costs, while not bad, is not as good as it could be. (Financial Analyst, Firm 4)

In general, the business unit managers in the six “questionable” value firms indicated that while their core IT unit seemed to be competent technically, it was not strategically aligned with the business. As a result, when asked if they received good value for their IT expenditures, these respondents most often answered that they were not sure—what they got was of good quality but seemed expensive. This attitude held even though IT charges had been declining in four of the six firms. The business unit managers suspected that they were paying for high quality but unnecessary services and service levels:

I’m frustrated that they [IT] don’t have the same priorities that I do. For instance, if I want a new system, I’ll give them an amount I’m prepared to spend, but instead of giving me the best system they can for the price I can pay, they insist that I need to spend more for the system they think I need. (Business Unit Controller, Firm 2)

In contrast, respondents at the four firms who said they received “good” value from IT (Firms 3, 5, 6, and 10) characterized core IT as business-focused. They saw the core IT unit as being responsive to business unit needs. One business unit respondent explained how they jointly managed IT costs:

We have fairly significant dial-up connectivity charges. This capability is important for people who are not based in [firm] offices. We asked [the core unit] how we could reduce these charges. After studying the expenses, they changed equipment and made

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suggestions as to how we could do tasks differently. These changes have resulted in significant cost savings. (Business Unit IT Manager, Firm 5)

These business managers were the same ones who, as noted earlier, said that chargeback influenced their IT investment decisions. Thus, we observed a consistency between the outcomes of chargeback on IT investment decisions and business unit assessment of the value of core IT services. Our analysis of chargeback policies and administrative processes thus focused on identifying the differences between the four focal firms, that is, the four that were experiencing desired outcomes from chargeback, and the other six firms.

Chargeback Policies

To determine whether or not the outcome differences could be explained by differences in firm policies that shape chargeback, we categorized the sample firms based on the firm (and IT) strategy and structure. Firms 1–3 (Centralized) have highly integrated business units and centralized IT units. Firms 4–7 (Integrated) have federal IT units that serve a small number of integrated or closely related business units. For example, the six business units in Firm 7 all produce related computer hardware and software products, while five of Firm 6’s business units produce products that are complementary to the products of its sixth unit, which is responsible for over half of the firm’s revenues. Firms 8–10 (Diversified) have federal IT structures supporting more diverse business units. The number of business units supported by these IT units is larger than in most of the other firms. Table 3 shows the three categories and each firm’s chargeback policies. As can be seen from Table 3, neither firm nor IT strategy nor structure helps us to understand the outcome differences among our ten firms. As it happens, at least one firm of each type falls into the “positive outcomes” set.

Sourcing Policies: As would be expected from members of firms that emphasize inter-relatedness among business units, IT respondents from Centralized and Integrated firms (1-7) reported that their firms mandated internal sourcing of IT resources. Business unit respondents at these firms did not see mandated internal sourcing as unfair. All three Diversified firms (8-10) permitted the business units to opt for external sourcing of IT services, although chargeback managers in these three firms commented that external sourcing was allowed rather than encouraged. A business unit respondent from Firm 10 noted that although he had the flexibility to purchase IT services externally, he much preferred not to do so. Since there was so little real external sourcing among these firms, variations in sourcing policy could not account for any differences in outcomes among them.

Cost Recovery Policies: In general, all ten firms attempted to set the price of each IT service equal to the total cost of providing that service so that the total amount charged out to business units would be equal to the IT unit’s total costs. Because there was virtually no variation in the firms’ policies on cost recovery, we were not able to detect any impact of cost recovery policies on chargeback outcomes.

Policies on Accountability: With the exception of firms 1, 4, and to a lesser extent 7, the firms in this study had located responsibility for managing IT costs at the strategic business unit level. Several IT chargeback managers noted that this policy allowed business unit managers to focus on the strategic impacts of their IT-related decisions. At five of the firms (5, 6, 8, 9 and 10), the individual responsible for IT charges was the head of the business unit’s IT group (these firms all had federal structures for IT as a whole). At another two firms (1 and 3), account managers worked with the person responsible for managing IT to help him or her better understand the charges and the services received. Thus, at seven of the ten firms, the person responsible for IT costs was knowledgeable about and accountable for IT charges. Since these seven firms include the four firms seeing positive outcomes from chargeback, we conclude that accountability policies may provide a necessary condition for the differences in chargeback outcomes we observed.

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More significantly, the accountable managers at the four focal firms (Firms 3, 5, 6, and 10) shared an important characteristic — they all believed that the responsibility for IT cost management and infrastructure investment should be shared by the IT and business units. One business unit manager explained his view of the need for mutual responsibility as follows:

The thing you really need to do is, as best you can, get joint measures, where you both have some skin in the game. And so we’ve done some things to try to make sure we understand what the other is doing, and so we’re getting much closer over time, rather than getting farther apart. (Business Unit IT Director, Firm 10)

In contrast, a business unit manager at Firm 1 described a “distinct responsibilities” perspective:

What we need is a service level agreement where it is clear that the IS customer—my business unit—is responsible specifically for managing its appetite, while IS is responsible for managing its costs. (Business Unit Finance Director, Firm 1)

In summary, firm-level policies related to chargeback may provide a partial explanation as to why four of the firms studied appear to generate more positive outcomes from their IT chargeback systems than the other six. In order for charges to affect investment decisions, it may be a prerequisite that the high-level business managers who receive the charges be accountable for them. It may also be necessary for them to believe that the responsibility for making effective IT investment decisions is one they share with the IT unit.

Next we consider the ten firms’ chargeback administrative practices to determine whether additional explanations for the outcome differences we observed can be identified.

Chargeback Administrative Practices

In order to explore the administrative processes used at the ten firms, we asked our IT respondents about the information and process used to compute rates, the mechanisms for communicating rates and charges to users, and the variability of charges allowed by the cost recovery policy. Key findings are shown in Table 4 and described below.

Rate-setting Processes: All of the chargeback managers noted that use-sensitive rates made IT charges more variable from the perspective of the business units. All of the firms used standard rates and usage-based charges for at least some IT services, although Firm 3 charged on the basis of estimated, rather than actual, usage, and Firm 8 applied an allocation based on the prior year’s usage. Firm 8 specifically avoided charging on the basis of current use because IT management thought that approach misrepresented costs:

We want businesses to focus on managing the business, not on managing staff units. We want them to recognize that IS costs are essentially fixed year to year, not variable by usage. The idea is to stop people from doing variance analysis each month on their usage versus budget. This is a worthless activity. Instead they should be focused on winning in the marketplace. (IT Chargeback Manager, Firm 8)

This approach to charging appeared to eliminate variance analysis but may have had some unintended negative consequences as well. In general, there was very little discussion of costs within Firm 8, and one business unit manager observed that his unit was “tired of paying for something we didn’t understand.”

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Overall, almost half of the business unit respondents observed that they liked usage-based charging, even though they recognized that to their firms, IT costs were largely fixed.

As noted earlier, all the firms had policies of full cost recovery, and so most of their rates attempted to approximate average cost. However, three firms reported that they occasionally used flexible pricing strategies, particularly when they were attempting to phase out old technologies or win support for new ones. In this way, they could rearrange rates to ease the cost burden on early adopters of new technologies.

As an example, divisions are not being charged for software and consulting needed to move towards open systems. This should help make that move cost neutral, and this encourages development and use of these very powerful technologies. (Division IT Manager, Firm 6)

Eight of the ten firms had some form of service level agreements or service choice options. In most cases, however, the service level agreements offered only a narrow range of alternatives and thus did not provide any significant control over the services or their costs:

The problem is that IS prepares a price list and then my department chooses what it wants. There are huge discussions among local IT staff that [the core IT unit] is inefficient. Nobody is asking what should be cut. In fact, the CIO believes the company can’t cut IS costs if people continue to demand the levels of functionality and service that [core] IS currently provides. (Business Unit Finance Director, Firm 7)

Overall, while we observed some variation among the firms in how they set rates or packaged services, these differences did not help us understand differences in outcomes related to chargeback.

Communication Processes: All of the chargeback managers noted that communications about total charges and about the underlying services and their costs were very important. Initiatives among the ten sample firms included providing detailed information on monthly statements about the charges, giving access to written documentation that explained how charges were determined, and instituting complaint resolution processes for addressing business unit concerns about charges. At Firm 3 IT charges were expressed in terms of “prime billing units,” such as bills paid, orders processed, or shipments received. IT liaisons then explained to business unit finance managers how those key business activities translated into IT resource consumption. While, generally, none of the communication initiatives appeared to be related to the chargeback outcomes we sought to explain, the practice of expressing IT charges in business terms may facilitate mutual understanding over the longer term.

Characterizing the Four Focal Firms

Although, individually, rate-setting and communication processes appeared not to influence chargeback outcomes, a package of practices associated with rate-setting and communication processes did distinguish the four focal firms. Table 5 summarizes the practices that distinguished the four focal firms and the other six. It is important to note that while each of these administrative practices is in place in one or two of the other six firms, the four focal firms use the distinguishing practices more intensively.

Understanding costs: The four firms with positive chargeback outcomes tended to have a firm grasp on their IT costs. Two of the four (Firms 5 and 10) had analyzed their costs in a way that allowed them to identify the drivers of those costs, so they knew the impact that various business unit activities or behaviors had on their costs. As noted earlier, many IT costs follow a step function, meaning they are fixed within some range of consumption levels. Average costing treats these costs as if they were strictly

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variable, which is adequate for billing purposes but is not helpful in explaining how total costs might respond to changes in business activity or in business demand for IT services. Understanding cost drivers helps the core IT unit identify what business behaviors will cause their infrastructure costs to take a step up or down.

In contrast, of the six “questionable” value firms, three (Firms 2, 4 and 7) had only sketchy cost information, to the point that occasionally they would have trouble associating system usage to a particular business unit. The accuracy of charges from those core IT units was regularly debated.

The other two of the four focal firms (Firms 3 and 6) had learned about their costs in a more indirect way. These firms had established committees of business unit representatives to help decide which services should be offered by the core IT unit and at what rates. (Two of the six other firms, 4 and 7, were involving business unit managers in rate and service decisions, too.) These committee discussions, our respondents indicated, forced IT managers to more thoroughly analyze their costs. Through dialogue between the business unit and IT managers, both sides came to understand how demand for IT services drove IT costs.

We conclude that an important but often overlooked aspect of rate setting for IT chargeback is the process by which IT units come to understand the nature of their costs. It is particularly important for the IT unit to see how their costs are affected by business unit actions, business process changes, and business activity changes, not just how costs are affected by changes in the technology factors markets.

Communicating benchmarks or other metrics: IT managers at the four focal firms (and at firms 1 and 8, too) said they believed that communicating cost benchmarks or other performance metrics that could be used to evaluate IT operations increased their credibility with internal clients. As many respondents noted, it is difficult to assess the value received from many infrastructure services. Benchmarking and metrics are a way for IT units to give their business partners an arms-length evaluation of their cost management skills, and, more generally, their technical competence. In addition, benchmarks and metrics provide opportunities for continuous improvement within the core IT unit. Continuous improvement, our respondents noted, was also important to IT credibility.

Negotiation: A notable difference between the four firms at which chargeback information was used for investment decisions and the other six firms was the frequency with which respondents in the four firms mentioned negotiation incidents. For example, at the four focal firms, some business unit managers reported challenging their charges, and the IT managers, in response, challenged business unit managers to carefully consider their priorities. One business unit manager described the interaction this way:

When we see a significant unexpected amount for any component of the IS charge, we go back and challenge it. “Why are your costs going up so much when our units aren’t going up?” or “We hear you’re saving money someplace, why aren’t our charges going down?” So the IS manager knows he will have to explain those charges until we understand them or find a way to reduce them. (Business Unit Planning Manager, Firm 3)

Business respondents credited negotiation events with giving them a deeper understanding as to why the IT expense that led to the charge had been incurred. Through dialog and negotiation, they developed a sense, for at least some charges, as to what corporate and business unit decisions were driving the IT costs they were paying. Business managers who regularly engaged in these exchanges with core IT sensed that they were able to influence IT spending. One business unit manager explained it this way:

My sense is that charges are reasonable and fair. This stems from three things: First, I understand them. Second, the current allocation methods are rationally developed. And

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third, [core IT] communicates with us regularly about our costs. I have no real authority in the budget process, but I have influence. (Business Unit IT Controller, Firm 6)

While the respondents at the four focal firms said they wielded influence with the core IT unit, they, like their counterparts at the other six firms, indicated that they had relatively little direct control over what IT spent. They suggested, however, that having control over IT spending was less important than feeling that IT spending was under control, albeit by someone else. Chargeback recipients at Firm 5, for example, felt they had no control over their IT rates and little control over their IT usage, but they believed that they received excellent value from their IT dollar. This belief was attributed, in part, to the fact that new systems design projects involved extensive negotiation between the business unit and core IT about the level of support required for each design alternative and the cost of that support. In addition, core IT would recommend migrating old systems to new platforms when it appeared effective to do so.

The negotiations at the four firms might have been contentious, but most respondents would likely concur with the business manager at Firm 10 who described the presence of a “constructive tension” between core IT and his business unit. He explained:

To be really honest, do I think they are really at a world-class level, where I really feel the services are commensurate with the charges? I’d have to say no, but we’re getting there. They’re getting better, and we’re trying like hell to help them get better. (Division IS Director, Firm 10)

Overall, the four firms whose business unit respondents said they received good value from IT shared several characteristics. First, the business unit managers were sophisticated customers responsible for millions of dollars of IT spending, who placed consistent demands on core IT for strategically important services and low costs. Their focus was on strategic expenditures, not minor expenses, and these business unit managers expected their business priorities to influence the decisions of their suppliers, the core IT groups. Most importantly, they perceived their roles to include joint responsibility with IT for managing IT costs. And both the business unit managers and their core IT counterparts used chargeback as a tool in what amounted to an educational process in which they were both continuously learning how IT added value to the business. Finally, the IT unit worked hard to understand its costs and the connection between their costs and business use of IT services, and they communicated this knowledge to the business units.

DISCUSSION

This study explored three potential outcomes of chargeback: (1) business unit IT investment and usage decisions, (2) performance evaluations of business unit managers, and (3) business unit assessments of IT performance. It is potentially limited by its small sample size and geographic scope (U.S. only). In addition, in our sample selection, we were not looking for typical or average users, but rather firms we thought were likely to be doing something interesting with chargeback. Consequently, the variation in both policies and practices among our firms and their chargeback outcomes was not as broad as we might have found in a random sample. Despite these limitations, we provide preliminary evidence that firms can use chargeback to enhance partnership and subsequently rely on that partnership to make their chargeback systems effective in influencing IT investment decisions.

The findings support earlier research indicating that charges will influence economic decisions (Allen, 1987; Bergeron, 1986b; Nolan, 1977b), and that chargeback can influence managerial attitudes toward IT (Nolan; 1977b; Olson and Ives, 1982). But most of the business decisions that chargeback influenced at the ten firms were tactical in nature. The business units worked to reduce their consumption of IT resources, even though most respondents said that their level of IT consumption would have little or no

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impact on corporate evaluation of business unit performance. This would suggest that chargeback was not a strategic issue for most firms.

In some cases, however, chargeback appeared to have strategic impacts. In particular, while some chargeback recipients were frustrated with the core IT unit and its spending on IT services, others described a partnership relationship in which IT and business units were jointly accountable for managing IT costs in the firm (Henderson, 1990). As partners, IT and business unit managers had distinct but complementary responsibilities in which IT was focused on the supply of IT services and business units were focused on the demand, but both were concerned about the effects of the interdependence between supply and demand decisions. Regular negotiations over IT service offerings helped reveal and resolve conflicts arising from this interdependence. Positive chargeback outcomes were evident in firms in which the chargeback system had stimulated knowledge sharing, the further enrichment of their mutual understanding, mutual monitoring, and perhaps some relationship-specific investments. These are all factors that contribute to strong IT-business unit partnerships (c.f., Kern, 1997).

Respondents who reported that their chargeback systems fostered strong IT-business unit partnerships indicated that chargeback influenced not only tactical IT use decisions but also IT investment decisions. Partnership is important to IT investment decisions because IT investments are complex. Effective decisions require solid understanding of both business needs and technical capabilities (Davenport, Hammer, and Metsisto 1989; Rockart, 1988; Zmud and Sambamurthy, 1992). This means that technical and business experts must share their knowledge, which may be difficult if they have very different perspectives and cultures. On the other hand, the mutual education needed to make IT investment decisions should be facilitated by a cooperative relationship, one facilitated by mutual trust and shared goals (Nelson and Cooprider, 1996; Ross, Beath, Goodhue, 1996; Scott and Gable, 1997).

For similar reasons, partnership is important to assessments of IT value. Chargeback’s rate-setting and communication processes provide opportunities to build mutual understanding, to express commitment to mutual objectives, and to generate trust by demonstrating concern for business unit needs and the business effects of IT charges. Through their exchanges with IT over rates and charges, business unit managers can develop a competence with IT that may lead to positive evaluations of IT unit performance (Cooprider and Victor, 1993). Moreover, these exchanges also help IT develop additional business knowledge, which may also contribute to positive evaluations by their clients.

It is possible that partnership is so key to effective managerial decision making on IT investment and to assessments of IT value that the impacts of partnership overwhelm the direct impacts of the chargeback system on IT investment decisions. Thus, the designers of a chargeback system should not focus exclusively on motivating wise investment decisions or on demonstrating IT competence through a credible chargeback statement. Rather, chargeback should be used to facilitate a partnership relationship through administrative processes that help IT understand its own costs and pursue continuous improvement in those costs. It should further provide opportunities to educate business units about IT while teaching the IT unit about the business. This is the (largely) untapped potential of IT chargeback.

Implications for Practice

In this study, the firms that reported positive outcomes from chargeback had developed a number of conditions conducive to IT-business unit partnering. First, the IT unit had a good understanding of IT costs. This is important for establishing the credibility of the IT unit in its interactions with business partners. Second, the business unit manager accountable for IT charges was typically a high level executive with a good understanding of IT issues. This was valuable for establishing the credibility of the business unit in interactions with IT. Third, usage-based charging alerted business units to the need to focus on changes in their demand, which stimulated negotiations on rates and services. Finally, the IT unit

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created opportunities for influence through which business unit managers were engaged in frequent dialog with IT about services and their costs.

Understanding IT costs: Because IT charges often lead to changes in business-situated behavior that are intended to decrease a business unit’s IT costs, it is imperative that chargeback systems be guided by a clear understanding of what causes the firm’s IT costs to increase and decrease. Prices need not mirror cost several firms used flexible pricing to charge more than cost for some older technologies and less than cost for new technologies. However, without a detailed understanding of its cost structure and a plan for reducing costs if resource consumption drops, an IT unit risks finding itself locked into a “death spiral” of increasing costs and decreasing utilization. In order to facilitate understanding about the benefits of changes in demand, the IT units we studied were focusing on understanding their costs: analyzing cost drivers, finding ways to convert fixed costs to variable costs, benchmarking key processes, and looking for ways to cut costs. These efforts seemed far more important to user attitudes than specific mechanisms designed to increase business unit control over IT services and costs. Ultimately, an IT unit’s understanding of its costs coupled with an ability to identify technological alternatives appears to enhance its real and perceived competence. As noted elsewhere, a reputation for technical competence is the foundation on which IT credibility rests (Bashein and Markus, 1997).

Savvy business partner: The accountable business unit managers in firms with positive chargeback outcomes appeared to be knowledgeable about IT and savvy in making demands. The relationship between IT and the business units embodied a “constructive tension” in which business units pushed IT to keep service quality high and costs low, while IT pushed business units to question the importance of their infrastructure requests and to recognize the importance of leveraging IT across business units. It is not clear whether sophisticated business partners made core IT more effective or whether an effective IT unit made their business partners more savvy. It is likely that they reinforced one another and that either could be the starting point.

Charges that vary with use: Usage based rates helped business unit managers understand the relationship between business unit behaviors and their IT costs. They also alerted business unit managers to their ability to control some of their costs while triggering discussions about other costs over which they appeared to have less control. As both IT and business unit managers observed, many IT costs are not variable, and usage-based charging could be misleading if mindlessly applied. But in general our respondents did not seem to be led astray by usage costs or logical unit costs that make fixed costs appear variable. And they did not believe their rates should be based on marginal costs or market prices. Usage or logical unit charges seem to make sense for IT services.

Opportunities for influence: Through liaison roles, committees that discuss rate setting and infrastructure services, and regular negotiations over system designs or service offerings, IT units can create opportunities for influence (Anderson and Narus, 1990; Festinger, 1957). In the firms we studied, these opportunities focused on developing two-way communication. Whereas some firms were using chargeback primarily to educate managers about IT costs, firms that had established an IT business partnership used chargeback to promote mutual understanding of IT costs and capabilities and business unit needs. If business managers conceptualize the problem of managing IT costs as a responsibility they share with core IT, it seems likely that they would be willing to work with IT managers to reduce costs. The literature on joint decision making would argue that their active participation in decisions that impact IT costs would both increase their understanding of IT costs and increase their satisfaction with the level of IT costs thus attained (c.f., Locke and Schweiger, 1979).

In emphasizing the importance of the IT-business unit partnership, the findings from this study shed new light on why some IT management initiatives intended to bolster IT unit effectiveness may have less

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impact than expected. Two mechanisms that are proposed regularly are to treat IT as a profit center (Venkatraman, 1997) and to use service level agreements (Singleton, McLean and Altman, 1988).

Enthusiasts of the profit center concept claim that this arrangement can boost IT efficiency and enhance IT and business unit communication about services and costs (Allen, 1987). The profit center, however, is not a partnership tool, because it makes the IT unit’s primary concern its bottom line results. This turns business units into customers, rather than partners, of the IT unit. In addition, it either allows business units to reject services that might be desirable as part of firm-wide infrastructure or makes them feel hostage to services and rates that they assume have been selected to increase the IT unit’s profits. If the IT unit is not well-versed in business unit priorities or business unit managers are not sophisticated in their understanding of the value of IT infrastructure, market-based mechanisms such as profit centers can lead to poor choices and poor relationships.

Service level agreements would seem to have the potential to facilitate IT-business unit partnerships (Ross, 1997), but in this study SLAs usually offered business managers only a few choices from a limited menu of services. This arrangement did not lead to effective communication about firm-wide infrastructure needs. The business managers who described an environment of negotiation did not cite SLAs as an element in those negotiations, even though most did have some choice of services and service levels. To be effective as a partnership tool, SLAs would need to foster dialog and negotiation about needed services and their costs, rather than simply laying out performance goals and penalties if these goals are not achieved.

Implications for Research

The findings of this study appear to support some of the findings from previous research on chargeback (Allen, 1987; Bergeron, 1986b; Nolan, 1977b; Nolan; 1977b; Olson and Ives, 1982) and to contradict others (Bergeron, 1986b; Hufnagel and Birnberg, 1994). The contradictions we found had to do with managers’ desire to have “control” over IT spending. In our sample, some managers were engaged in a relationship with IT in which control had been traded for joint ownership of plans and results and a joint obligation to capture the business outcomes from a given technology investment. But while our study makes it clear that this factor cannot be ignored in future studies of chargeback, we could not determine what gave rise to this “partnering” relationship. Future research on chargeback could be directed at exploring whether chargeback policies and practices can create receptivity on the part of business unit managers to partnering with IT. This future research could seek to explain whether pre-existing conditions must be present in order for chargeback to promote partnership or whether the chargeback process itself can elicit partnership tendencies. It would be useful, for example, to explore how new chargeback policies or administrative processes influence, or are influenced by, the quality or nature of IS-business unit relationships.

A second area for future research to consider is partnership in the context of other IT management control policies and practices, such as IT structural designs, planning practices, the roles of steering committees, project justification practices, performance measurement practices, and so on. In what way do these other management control systems rely on or benefit from a partnership relationship between IT and its clients? If planning and budgeting systems stimulate dialog and negotiation, do they also stimulate or leverage partnership? Just as this research has drawn on basic work in transfer pricing (Eccles, 1985), future research might be based on frameworks or research on management control systems (for example Kirsch, 1996; Simons, 1994).

A third possible direction for future research is to explore what role IT management policies and practices such as chargeback play in what Soh and Markus (1995) call the “IT Conversion Process.” They use this term to describe the processes, including resource allocation processes as well as development and

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implementation processes, by which IT investments are transformed into useful IT assets. As several authors have argued, these processes are a shared responsibility of business and IT management (Broadbent and Weill, 1997; Davenport, Hammer, and Metsisto, 1989; Rockart, 1988), and thus the presence or absence of partnership may make a difference to the outcomes. But research to date does not tell us why partnership is important to the IT conversion process, whether there are situations in which partnership is not necessary, or whether IT management approaches can substitute for partnership. Building strong IT-business partnerships may require that both sides of the relationship make largerelationship-specific investments over long periods of time. Knowing more about limits to the effectiveness of partnerships would help guide managers willing to make those investments but anxious to invest wisely.

Finally, the finding that chargeback impacts the IT-business unit relationship has implications for IT outsourcing arrangements. It has been shown that the design and administration of charges in an outsourcing relationship influences the outcomes of those relationships (Lacity, Willcocks, and Feeny, 1995). Future research might apply the model developed in this study to examine charging practices and their impacts on IT outsourcing relationships.

CONCLUSIONThis research explored the policies and administrative practices associated with IT chargeback and outcomes in ten firms across a spectrum of industries with varying organizational structures and strategies. Among these firms, four reported greater satisfaction with the outcomes of chargeback than the other six, and made greater use of chargeback information in making decisions about IT investments. These four “focal” firms differed from the others not so much in the design of their chargeback systems, but in the design of the administrative practices for charging and the use of chargeback information. In addition, business managers in the four focal firms were more knowledgeable about IT, IT managers had a better understanding of their costs, and both business and IT managers had a shared understanding of the role of IT within their organizations. This research shows how important a control and coordination mechanism such as chargeback can be to the development of the IT-business unit relationship, and hence to the appropriate use of information technology in a firm. While a mechanism such as chargeback may masquerade as an operating tool, it has the potential for strategic impacts.

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Table 1: Profile of Sample Firms

Com-pany

ManagersInterviewed Industry

Business Unit Structure

ITgovernance structure

Central IT budget as % of total IT

IT budget as % of revenue

1 1 chargeback4 business unit

Manufacturing 3 related business units; one dominant

Centralized 100% 6%


Telecommuni-cations 10+ related business units in a highly centralized firm

Centralized 100% 6%


Retail 11 related business units; 2 dominant

Centralized 100% 2%


Manufacturing 3 major business units Federal NA 6%

5 1 chargeback 2 business unit

Insurance 3 related business units Federal 40–50% 10%


Manufacturing 6 somewhat related business units; 1 dominant

Federal 50% 3%


Manufacturing 6 related business units Federal 70% 7%


Manufacturing 24 independent business units

Federal NA 3%


Manufacturing 16 major independent business units plus a number of smaller units

Federal 15% 6%


Manufacturing 9 diverse business units Federal 33–50% 3%

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Table 2: Chargeback Outcomes

Company Economic DecisionsBusiness Unit Performance Impacts

Business Unit Assessment of Value-added by IT services

1 Reduce resource consumption

Relocate infrastructure responsibilities

Small impact on bottom line

Questionable



Small impact on bottom line & managers’ bonuses

Questionable



Negotiate infrastructure investments


Good

4 Reduce resource consumption Small impact on bottom line and bonuses

Questionable





Good





Good




Questionable




Questionable



Negligible Questionable





Good

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Table 3: Categorization of Firms by Chargeback Policies

Company Structural Category Cost Recovery Policy Sourcing Policy Chargeback Recipient1 Centralized Total cost Mandated Internal 100 finance managers (with IT

account manager)

2 Centralized Total cost Mandated Internal 10 finance managers

3 Centralized Total cost Mandated Internal 11 finance managers (with IT account manager)

4 Integrated Total cost Mandated Internal 5000 (primarily finance) managers

5 Integrated Total cost Mandated Internal 5 IT managers

6 Integrated Total cost Mandated Internal 6 IT managers

7 Integrated Total cost Mandated Internal 50 finance managers

8 Diversified Total cost External Allowed 24 IT managers



Note: Shading indicates the four “focal” firms.

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Table 4: Chargeback Administrative Processes

CompanyApproach to Charging(rate setting)

Cost information underlyingrates Presentation of Charges

Other Communication Mechanisms

1 Usage-based charges; allocations; service choice options

Traced to services

Detail on charges Benchmarking

2 Usage-based charges Sketchy Written descriptions

Detail on charges

Complaint resolution

3 Allocation based on estimated usage; some service level agreements

Traced to systems

Charges expressed in terms of prime business units

Internal metricsCommittee input on ratesRegular negotiation

4 Usage-based charges;

allocations; service choice options

Sketchy Written descriptions

Detail on charges

Complaint resolutionCommittee input on rates

5 Usage-based charges; flexible pricing; some service level agreements

Drivers known Written descriptions

Detail on charges

Benchmarking Regular negotiation

6 Usage-based charges;

allocations; flexible pricing

Traced to services

Written descriptions

Detail on charges

Committee input on services & rates Benchmarking Regular negotiations

7 Usage-based charges; flexible pricing; service choice options

Sketchy Written descriptions Committee input on rates

8 Allocation based on prior year usage; some service level agreements

Traced to services

None Annual meetings to discuss charges;Benchmarking

9 Usage-based charges Traced to services

Written descriptions None

10 Usage-based charges; some service level agreements

Drivers known None Benchmarking

Regular negotiation


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Table 5: Discriminators Between Focal Firms and Others

Company Chargeback RecipientCost information underlying rates

Other Communication Mechanisms

3 11 finance managers (with IT account manager)

Traced to systems Internal metricsCommittee input on ratesRegular negotiation

5 5 IT managers Drivers known Benchmarking Regular negotiation

6 6 IT managers Traced to services Committee input on services & rates Benchmarking Regular negotiations

10 9 IT managers Drivers known Benchmarking

Regular negotiation

1 100 finance managers (with IT account manager)

Traced to services Benchmarking

2 10 finance managers Sketchy Complaint resolution

4 5000 (primarily) finance managers Sketchy Complaint resolutionCommittee input on rates

7 50 finance managers Sketchy Committee input on rates

8 24 IT managers Traced to services Annual meetings to discuss charges;Benchmarking

9 16 IT managers Traced to services None


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MIT IT Charge Back Methodology

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