Getting to Chargeback in “As a Service” Models: Think Pizza

A recent industry conference featured session after session of presentations where people asked (appropriately or not, for the session) how they were supposed to do chargeback in the cloud.  After listening to the sessions and queries I concluded the question is better framed as “how do we execute chargeback in a shared service delivery framework like ITaaS, IaaS, PaaS or SaaS?”  The question itself hints at some of the challenges clients are facing but I have not seen a response that addresses either the overt problems or the subtleties under the covers.  The challenges are not insurmountable but one is just a bit more intractable than the rest.

Challenges:

Tools, methodology, measurement and cost allocation/financial parameters are all fundamental issues to resolve for which I believe there is a general approach we can frame up but with no “one size fits” solution.  The details associated with specific infrastructure like Storage or Compute requires expertise which I believe EMC Consulting brings to bear (things like rational or logical resource breakdowns and technical allocation or consumption metrics).  The subtleties here surround the blended costing necessary for service-oriented chargeback.  That aspect of chargeback demands a deeper look at what clients include with their as a service consumption model, whether Infrastructure, Platform or something else.

But the Problem is Already Solved Elsewhere:

Other service providers outside of IT have had this problem licked for decades.  Telco, media and even pizza delivery companies have it figured out so why can’t we use those lessons to guide IT?  The biggest roadblock is the inconvenient focus finance has on the zero-sum cost recovery approach.  IT should be looking to add business value just like other business units.  Why can’t we charge for that value and use that “income” stream to drive innovation directed at the bottom line?  Example: when I worked in IT for a toy manufacturer, I determined we had a huge demand from the marketing department for image processing services.  They spent $25K per year simply converting and duplicating image formats (this was in 1998).  The IT team was well versed with image processing, conversion and mass disc duplication.  We were able to “help out” (offer a service to) marketing and ultimately slashed their image processing costs to a dozen boxes of Thin Mints.  Think about that: we took costs from $25,000 down to $100 and some goodwill.  I thought then as I do now: If IT is unable to make a profit off the business value they deliver then they will never be incented to deliver value through the provision of services.  Finance needs to step out of the way and allow business to do business.  I want IT to run as a business, providing defined services that are priced with a fully burdened cost that includes “profit” IT can use to fund innovation and loss-leading services, like e-mail.

In the end, we stopped providing those value-added services at the toy company.  Why?  Because while we saved Marketing $25K per year, our budget was always slashed and compensation constantly under pressure; delivering measurably valuable services was not our core mission.  The same decision makers who cut IT budgets under such circumstances are often quick to complain that IT doesn’t deliver them any value.    Does anyone see the irony here?

The Solution:

To do “as a service” solutions right we need to have four factors addressed:

  1. Tools to capture the true costs of our assets, consumables, labor and other expenses without expending excessive horsepower
  2. A consumption model that allows for a blended cost per unit of service (a quanta, some arbitrary metric) and that is enabled through those finance tools (among the other tools IT leverages)
  3. A finance approach that allows for chargeback based on value, not on cost
  4. An IT department willing to break out of the mold and actually TRY for once to deliver more than just bits and blinking lights to the business

I believe the only part of the solution we cannot solve in IT is the third: finance.  That has to come from executive leadership.  Finance needs to get out of the way.

I do not believe the right way to charge back a service involves microscopic analysis of the component part costs.  The solution can be found in pizza.  I believe Dominos has it right: they charge you for an average amount of toppings, the convenience of delivery and consistency in quality on an SLA (remember the 30 minute guarantee?).  They don’t count grams of cheese or slices of pepperoni for every pie, they take some samples on occasion and roll with the averages, always seeking the target without overburdening the pursuit.  They charge the same to deliver next door or 4 miles away but they compensate their drivers based on those variable costs (mileage).  The stores are profitable and their customers (and the franchise brand owners in Detroit) are happy to allow them that profit.

Dominos is not typically recognized as an IT innovator, but the secret sauce is in that model.  It’s embarrassing they have the answer to the most important question in IT today, but IT’s not listening.

Peter

About Peter

Peter is a Geocacher, competitive cribbage player, surfer, amateur magician, golfer and star watcher (the astronomical kind). In his day job for Datalink, Peter is a Senior Manager with their Cloud Service Management Practice helping customers build, manage and improve their legacy IT and Private Cloud infrastructures through Automation, Orchestration and clean living. We're not so sure on the clean living.
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