Chargeback Vs. Pricing

As we start to move to more pooled and cloud-like models for enterprise IT infrastructure, the age-old "chargeback" discussion is once again popular, but in an entirely new context.

Most people assume the chargeback discussion is all about how you pay for the cost of IT.  That's somewhat true.

Some people think that taxes are only to pay for the cost of government.  Other people see it as a way of encouraging good social policy.  Both are right to a certain degree.

Within IT, I believe it's becoming more attractive to think in terms of the latter, rather than the former.

Chargeback ... or Pricing?

Words matter to me.  Given my interest in economics, I tend to look at enterprise IT as the classic "closed economy".

For general IT infrastructure, there are many buyers with usually a single supplier, e.g. enterprise IT. 

The word "chargeback" implies you're just trying to cover your costs.  The word "pricing" means that you're sending signals to your market to achieve a certain outcome.

We're all familiar with pricing signals in our day-to-day lives: someone puts a good offer on the table, and we seriously consider it.  Or if something is priced unreasonably, we go searching for alternatives.

Simply put: pricing signals can be a very effective tool in encouraging us to change our consumption behavior.  And the sooner that IT organizations learn to think in terms of "pricing" vs. "chargeback", the sooner they can learn to wield this important tool.

IT And The Business

I think it's fair to say that many IT organizations can find themselves at odds with the business in many regards. What the business wants isn't always what IT can easily do.

Whether it's poor data management, or demanding dedicated servers, or dictating certain parts of the infrastructure -- there's a long list of things that we all wish that business users wouldn't do.

Some think that the answer is in setting policies, or educating business users, or sometimes simply throw up their hands in frustration and say "whatever".

The Potential Of Pricing Models To Change User Behavior

I would make the case that a well-thought-out pricing strategy is probably more effective.

Example #1: about 8 years ago, I did a project here at EMC that ended up filling about 300GB of file system space. 

The project completed, I moved on to other things, and never really gave much thought to cleaning up afterwards.  Not my problem, really.

About three years ago, I got an email that informed me I would be cross-charged $185/month for that file storage, including backup, etc.  I immediately took the time to find and delete the data.

I had no idea what the true costs were for our IT team to store and backup that data.  All I knew is that I didn't want to be cross-charged $185/month for no good reason.  Bad optics, don't you know?

Example #2: three years ago, I had to put up a social media platform internally.  At the time, our IT folks were trying to sell business users on the idea of using virtual machines and a standard build.

I was shown two prices: one for a traditional physical build that I could specify, and another one for a virtual build with IT's choice of tools. 

Needless to say, one was a very small fraction of the other.  The difference was surprising.  To this day, I have no idea whether or not I was looking at actual costs, or if I was being shown "special incentive pricing".   It didn't really matter.

Three Levels Of Pricing Strategy

I still meet IT organizations who let users pick out key aspects of servers, storage, software, etc.  IT goes and procures it, and sends them the bill for what they bought.

These IT people are usually very frustrated.  They live in a very inefficient world, and spend a lot of time on firefighting.  In one sense, they have given up the key tools they need to move IT strategy forward.

I meet a second class of IT organizations who've moved to service catalogs.  They've established price lists for various classes of services, based on underlying costs to provide.

Better, since you've gotten business users out of the specification business -- as well as shown them real costs of their choices -- but I think there's still there's room for improvement.

Lately, I've started to meet IT organizations who've gotten really smart about all of this, and established service catalogs and associated pricing that is more oriented to changing business behavior.

Virtual environments that use standard software builds are priced at a steep discount.  Physical environments that use customized software stacks are priced at an extreme premium above actual costs.

Unclassified becomes *more* expensive to store over time, unless the user classifies the information so IT can manage it more efficiently.

How IT prices things to its internal customers has only a casual relationship to what things actually cost.  They've figured out how to use pricing signals to accelerate change in user behavior.

For example, they've made it incredibly cheap and easy to use pooled virtualized environments -- perhaps far less than the actual costs involved.  And they've made it incredibly expensive and painful to specific physical servers and traditional IT management approaches. 

Other people with data management problems are doing similar things -- fail to classify and manage your data, and the price goes way, way up.

That's cool.

Getting There May Be Hard ... Or Easy

Now, if we step back a bit, there are a few embedded assumptions in all of this that are worth mentioning.

First, it assumes you've thought out what your desired end-states look like, and are willing to work to get there sooner than later.  Put differently, if the IT organization is locked in passionate debate on certain key points, you're not moving forward anytime soon.

Second, this assumes you've done the homework to assemble your service catalog and price list -- and done so with clear preference towards accelerating movement towards desired states, and away from legacy approaches. 

You make true internal costs a deep, dark secret, and never, ever share them with anyone :-)

Third, this assumes you've got enough budget and resource flexibility to stand up some of the newer stuff without having to immediately allocate costs back.

Fourth, this assumes you're willing to invest in a few "IT reps" who can make "customer calls", and talk people through the various alternatives.

Put it together, and you've got the elements of a progressive pricing strategy that accelerates changes in user behavior.

A Small Breakthrough In IT Thinking?

If you're in the business of selling stuff to people (be it a product or a service), you're well aware of the importance of price incentives as well as price disincentives. 

If all you do is expose your true costs to your customers, you've left an important strategic tool on the table to run your business.

As IT starts to think of itself as service provider to the business, I believe that an essential component is to learn to think in terms of pricing strategy -- largely independently of underlying costs.

Sure, at some point, the various puts and takes have to add up to paying for all of IT -- there's no free lunch at the end of the day.  Unlike the government, no deficit spending is allowed :-)

So, how are you pricing services to the business these days?

Comments

[Justin Warren]

Excellent post, Chuck. IT needs to start thinking of itself as a business and not just a cost centre.

I also recommend adding time as part of the cost, not just money. Project managers are often more concerned with deadlines than spending more of other people's money.

[John Merryman]

Hi Chuck

It seems that the good old ITSM/Chargeback interests are back in the picture now that the global economic freak-out appears to be waning. I agree with your points and would love to see a customer fully embrace the concept mentioned of 'price incentives as well as price disincentives' as mentioned.

Where chargeback is deployed, it's usually a negative incentive, but what about the positive incentives (like rewarding good/efficient behavior with extra bonuses to the data owners)?

Thanks,

John
www.technologyisdead.com

[Mike Riley]

Dear Lord - I agree with Chuck! I've absolutely seen internal pricing strategies used very effectively by customers. In one case in particular, I met with a CIO who challenged his IT organization to think of itself as a profit center vs. a cost center. On one level, it allowed (compelled?) the IT staff to look at alternatives for solving problems. On another level, it allowed the IT Director to talk about how they could help drive revenue revenue for the company vs. talking about constantly cutting costs. Pricing strategies vs. chargeback can definitely change the trajectory of an IT discussion.

[Andrew Chisholm]

IT can think it is what it likes but the fact remains, it is not a/the business. It is a support organisation within the business.

That the business has adequate feedback regarding the cost of its actions (your 300GB) is good, but the business (you) must take the decision about what action should be taken. That it took so long for you to find out what the result of your actions was simply shows that the IT department was letting the business down.

Businesses the world over are held back by IT departments that penny pinch at a technical level without consultation with the business, instead of having a discussion at the business level about investment levels and what IT can do for the business.

Pricing may be a useful tool but the business, not IT, should decide where and how it is used, and what behaviour is controlled/stimulated by it.

The Tax Man may implement pricing policies but the Government decides where pricing is used, e.g. drink, smoking, transport fuel, etc.

The IT department that is prices itself too high will end up outsourced unless it explains its actions to the business.

Andy

[Dolar]

Secured process transactions solution will overcome the multi-currency barrier and prevent chargeback risks by making customers feel as if they are shopping in their own country and in their own currency.