IT chargeback/showback and SaaS

In this post I’d like to approach the issue of whether and how Software as a Service (delivered of course through cloud technology – don’t let them tell you otherwise!) can assist an organization implement an IT chargeback / showback strategy. For those that haven’t heard the terms before, IT chargeback is the methodology or strategy that applies/allocates Information Technology costs on the business unit that is actually using an I.T. resource (be it software, hardware, professional IT services etc.) Chargeback can go as far as internal expense management where the business unit actually experiences cash outflow (or budget consumption) in order to implement an IT function. In other cases, there is no actual cash movement; all calculations are done on reporting level only in order to have a clear image of the costs incurred by each business unit to the organization, for planning and budgeting purposes. This is called “IT showback” where numbers are “shown” but are not actually “charged”.

But how can Software as a Service assist the organization implement IT chargeback/showback strategies? The answer is “in a number of ways”.

First of all, the very nature of SaaS is “pay as you go”, which means that SaaS costs increase as long as your needs grow. The “growing of needs” can be measured in many ways, depending on largely on the nature of the SaaS product under question and can be tracked down to who has that new requirement. A few examples are the following:

• Sales department is on-boarding new salespersons so it needs new seats for the CRM SaaS application that is using. Seats are the usual metric for business applications.
• Marketing department needs additional disk space for new digital material is has generated. Storage figures are the usual metric for large objects storage.
• Management needs new reports and dashboards to track the monthly business. Such needs are measured in hours devoted to Customer Support Requests by the vendor.

All of the above usually originate from a specific source (business unit) to cover the new needs of that unit. Therefore, the relevant cost can be easily attributed to the specific business unit (or “cost center”, to borrow the accounting term). Now, because the costs are clearly defined in any SaaS deal, we come to the conclusion that cost center accounting of this nature is facilitated by the “as-a-Service” costing model.

Another aspect that we need to factor in is the recurring costs that XaaS does not have. I’m referring to the yearly maintenance cost of a perpetual in-premise license. After initial installation, the customer is requested to pay a standard yearly fee for the maintenance and upgrade tasks of the software installed. This is usually a fixed number and does not follow the growth or shrinking of each business unit that uses the software. For example, if new users are hired in Sales Dept. then the yearly maintenance fee is not increased, if the license scheme initially offered is a “perpetual license” one (which is usually the case). So, even if there is an initial breakdown of such costs, done based on some metric (e.g. number of users per department) this breakdown may soon become obsolete.

One more point to make is that of additional works after the initiation of the XaaS project. The XaaS monthly fee does not include any additional works that the customer may ask. Therefore, whenever a business unit is asking for something new or additional (new functionality, additional disk space etc.) the new cost can be easily attributed to that specific cost center, since SaaS is not an “all-inclusive” deal. On the flipside, a yearly maintenance fee of an in-premise model may include some portion of such additional works. The vendor may for example offer a number of free working hours to resolve issues or implement additional requirements, per year. In these cases, the cost has already been prepaid and it is not easy to attribute this or that work to the corresponding business unit (since there is no actual invoice to forward).

The above show that the “as-a-Service” costing model (and the technology that comes with it – in my personal opinion a XaaS deal cannot work efficiently with in-premise software and hardware, although we have seen such deals) facilitate the IT chargeback/showback strategy of the organization. Of course, that is not to say that this fact should be a decisive factor when the “cloud vs in premise” question pops up; nor that IT chargeback cannot be implemented with traditional costing models. The point is that in this area, too, “cloud makes it easier”.