Pricing is the key signalling mechanism between participants: not only between consumers and suppliers, but between suppliers competing for those consumers.
Through price signalling, marketplaces can often achieve a healthy equilibrium: the right kinds of goods and services are produced, and in the right amount.
Price signalling between competitors is perhaps the major driver of innovation in competitive markets -- you either have to invest in cost-reducing existing propositions, or innovate to create new ones for your customers to consider.
And, to this day, no one has come up with a better economic optimization mechanism.
What's the tie-in to enterprise IT?
As more enterprise IT groups strive to compete for their internal customers, they are forced to price their services against alternatives. And, as a result, they gain the benefit of a powerful signalling mechanism that -- ultimately -- is more powerful than any "requirements planning process" could ever be.
Chargeback Is Only The Starting Point
The question of chargeback comes up often with our customers. I think the topic is a valid one, but the motivations might be improved.
While there's nothing wrong with being paid for your services (and recovering costs), I think these folks should look beyond the obvious and consider the strategic implications.
Yes, chargeback can be a cost recovery mechanism, but I think that misses the point: pricing is the single most powerful bi-directional communication mechanism between supplier and consumer.
Pricing communicates from supplier to consumer what their choices might be -- and the implications of those choices.
And, more importantly, pricing communicates from consumer to supplier what they value -- and what they are willing to pay for. Even if no "real money" ends up changing hands, any form of pricing enables particpants to make prioritized choices.
A Simple Example
Let's take something everyone might be familiar with: car insurance. In the United States, car insurance is an incredibly competitive market -- plenty of suppliers. And, if you drive without insurance, well -- bad things will eventually happen, so most rational people wisely decide to purchase car insurance.
Contact any car insurance company, and you'll quickly be overwhelmed with the options available. You either need to educate yourself on what the terms and concepts mean, or you need to have an insurance agent patiently explain to you what the various options mean -- and the tradeoffs inherent in your choices.
The point is simple: you need to be an informed consumer, otherwise you'll likely make a suboptimal choice. And there is no shortcut.
The key tradeoffs you'll be facing are around how much risk you're willing to assume, and how much you'd like to have the insurance company assume. Early in my working career (e.g. when I had no money), I preferred a low deductible because the economic consequences of an accident would be severe. Later in life, I'm going for a higher deductible -- I'm willing to assume more risk in exchange for paying less.
The key point: it's my choice, and not the insurance company's. They might suggest what I might need, but I decide, not them.
Not to mention, it's a variable model. If my circumstances change (e.g. buying a new car), I can easily change my consumption level with minimal hassle.
Going deeper, the car insurance company knows a fair bit about me: my driving habits, economic situation, and so on. They're smart enough to price risk intelligently. And I, of course, can invest a bit of time to compare offers across different providers: price matters, but it's not the only consideration.
The magic here is the rich communication that's happening between the parties. I express my preferences, and make a purchasing decision. And a boatload of rich information is communicated: how much risk I'm willing to assume, how I feel about the competitiveness of the provider, and so on.
Over many customers (and potential alternative providers), the existence of price signals enable an optimized market equilibrium.
Supply and demand are balanced -- and consumption is rationalized.
Back To Enterprise IT
It's rather obvious, but needs to be stated: pricing is rarely equal to costing.
Understanding your costs to deliver a unit of service are essential, but pricing is used to signal value propositions, and ultimately drive desired behavior. And it's sometimes the case that you price your offering below cost.
Want to keep people from using external IaaS for smaller projects? Offer up a "free" internal service that's easy to consume.
No, you won't be covering your immediate costs with this approach (obviously), but you *will* be capturing workloads that might turn into paying engagements, not to mention protecting the enterprise from the risks associated with that sort of behavior. That's exactly how EMC IT thought about their internal "Cloud 9" IaaS service -- free for 30 days.
More importantly, exposing multiple similar choices (good, better, best -- or -- gold, silver, bronze) with varying prices forces people to choose: they express an informed preference. And the expression of that preference (or reluctance to select one of the choices!) provides powerful feedback to the organization providing the services.
Also in the "obvious but needs to be stated" category -- this rich communication happens whether or not any real money changes hands. As consumers, we know how to behave when presented choices -- even if they are somewhat artificial choices -- indeed, this behavior has become a staple of academic research.
Indeed, at present within EMC IT, most of the actual money changes hands between business units and finance -- and not between individual IT consumers and IT. Prices and alternatives are exposed, choices are discussed and made -- but the majority of funds transfer happens at an aggregated level.
Back To Our Car Insurance Company
Imagine if I picked up the phone to call an insurance company, and they said "gee, to insure your cars we'd need to have you pre-commit a bunch of money so that we can hire some staff so we can build you an insurance offer".
It'd be a very short conversation, I'm sure. But this is precisely the experience many business users have when they approach a traditional IT organization: we don't have it, but we can build it for you on an extended time-and-materials basis.
A good car insurance agent will tailor a "custom package" for me, largely based on pre-existing capabilities. Not to mention they'll ask me about home insurance, life insurance, et. al. A good IT analyst should be able to tailor a "project package" for me, largely based on pre-existing services. That's how it's working here inside EMC IT, anyway.
Back To Price Signalling And Service Catalogs
Almost as if they were creating an artifact chiseled in stone.
I argue they're perhaps thinking about things the wrong way: the real question should be what are the organizational functions that implement the processes that monitor existing service consumption, watch for new service opportunities, and morph the service portfolio over time?
Car insurance companies don't have static, idealized offers -- few companies do: they change all the time. That's what "competing for the business" is all about.
Yes, probe your customers about their needs and desires. Yes, benchmark yourselves against competitive external alternatives -- but the ultimate validation in any competitive marketplace is what people are willing to pay for, and what they're not.
Going A Bit Deeper
We did get some good feedback on our internal "ITaaS" strategy model that we're using.
Many of the newer functions are around establishing and pricing service offerings -- and adjusting the mix based on feedback.
We offered up a methodology we're using internally to arrive at service unit costing, creating "prices" for those services based on desired behavioral outcomes, and managing the fund transfers between finance and business units.
We took our best work and published a white paper targeted at finance professionals who need to understand this issues, and help support a change in approach.
While we don't think our internal EMC IT approach is the ultimate answer for every IT situation, I've found that this line of thinking sparks all sorts of creative discussions with IT leaders :)
Many IT practitioners don't give too much thought to the topic of how IT is paid for. In reality, the answer to this strategic question will ultimately affect the type and nature of IT consumed by the business: for the better or for the worse.
My argument is simple: optimized outcomes for rationalized IT consumption will be impossible without some form of price signalling mechanisms around variable IT services.
Centralized economic planning doesn't exactly have a stellar track record throughout history :)
The Frustrating Paradox
Yes, they even will provide pointed and valuable feedback to us vendors when we're out of line :)
Obviously, it's a well developed skill. You have to think -- how hard would it be for them to sit on the other side of the table, and present their wares (and their prices) to the internal consumers of their services? To sell their unique value-add much as we vendors have to do each and every day?
But it gets even more frustrating ...
So often, the IT organizations I meet who are struggling with these issues are firmly embedded within larger organizations that are quite proficient at "competing for the business". These companies have the skill to understand customer requirements, assess the competitive alternatives, package and price services effectively, communicate their value propositions, etc. It's in their corporate DNA.
They have obviously have people who are quite good at this stuff.
They just don't work in the IT group.