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RPC Solutions, LLC
Become More Accountable & Competitive
with Cloud Providers
Building a Best Practice
Chargeback Model
Financial World of Information Technology
Conferences
July 18-22, 2011, San Antonio, TX
Jason Byrd
© Copyright RPC Solutions, LLC 2011
Have You Heard This Before??
• Our IT services are too high and we can
do better by providing them themselves
or—at a minimum—get a better deal
from the external marketplace.
• Gmail is free. Why do we have to pay
for our internal corporate email?
• I have no idea what is all this IT stuff I
am paying for!
• We want to pay our fair share and not
subsidize the smaller business units,
pay the for overhead or extravagant
services for the bigger business units!
• We can’t accurately budget for IT costs
each year!
© Copyright RPC Solutions, LLC 2011
Cloud Computing Driving Organizations to Chargeback
Many organizations have been using an IT chargeback
model for the “historical” technologies procured and
delivered by the IT organization.
…While other IT organizations have avoided the use of
chargeback altogether and continued using a classic
corporate funding model.
However, with the industry-wide emergence of cloud
computing, all types of IT organizations will need to
evaluate best practice elements of chargeback as they
begin introducing cloud computing solutions into their
environment.
© Copyright RPC Solutions, LLC 2011
Gartner’s 10 Most Important Technologies
1. Cloud computing
2. Advanced analytics
3. Client computing
4. IT for green
5. Reshaping the data
center
6. Social computing
7. Security
8. Flash memory
9. Virtualization
10. Mobile applications Source: Gartner, “Technologies You Can’t Afford to Ignore”, October 20, 2009
“…Using cloud resources does not eliminate the costs
of IT solutions, but does re-arrange some and reduce
others. In addition, consuming cloud services
enterprises will increasingly act as cloud providers and
deliver application, information or business process
services to customers and business partners.”
- Gartner
© Copyright RPC Solutions, LLC 2011
Five Critical Success Factors for IT Transformation
1. Aligning to the Right IT Strategic Business Target
2. Ensuring the Integrity of Architecture for Process and Other Assets
3. Interweaving Structure and Governance in IT Management and the
IS Organization
4. Executing Skill Development and Realignment
5. Managing IT Sourcing Strategy and Execution
“The emergence of SaaS and cloud computing—in parallel with the
growing role of outsourcing—is one of the main drivers of the evolution
up to and beyond 2013. And the great variations on cloud services will
have a deep impact on the business and on IT organizations, if they
are smart enough to take the lead in this new area.”
Source: Gartner, “IT Organization Transitions: Critical Success Factor Choices and Road Maps to 2013”, November 13, 2009
© Copyright RPC Solutions, LLC 2011
The Cloud “Stack”
SaaS – Software as a Service
(Applications like Salesforce.com)
PaaS – Platform as a Service
(Development platform like
Force.com and Microsoft Azure)
IaaS – Infrastructure as a Service
(Hardware/Network like Rackspace)
Infrastructure as a
Service (IaaS)
Platform as a Service
(PaaS)
Software as a Service
(SaaS)
© Copyright RPC Solutions, LLC 2011
Cloud Computing Examples
Infrastructure as a
Service (IaaS)
Platform as a Service
(PaaS)
Software as a Service
(SaaS)
Source: Tim O’Reilly & IBM 7
Over 200 Other Cloud Providers!
CloudBurst Websphere CloudBurst
EC2
© Copyright RPC Solutions, LLC 2011
IT Organizations are Emulating the Cloud Providers
Internal IT organizations are being driven to
emulate what cloud Providers are offering:
- Leveraging virtualization
- Pooling of resources
- Delivering IT services via dynamic provisioning & a self-
service portal
- Have appropriate Chargeback mechanisms and pricing.
But it’s not just the technology and services of the
cloud that are being emulated….
© Copyright RPC Solutions, LLC 2011
Applying the “Free Market” to IT
- Milton Friedman, Professor of Economics at the University of Chicago
and 1976 Nobel prize winner, offered comments that could apply to IT
chargeback and pricing for today’s technology-dependent enterprises….
“Price works so well, so efficiently, that we are not aware of it most of the time…. If
an exchange between two parties is voluntary, it will not take place unless both
believe they will benefit from it.” —Milton Friedman
“When government — in pursuit of good intentions — tries to rearrange the
economy, legislate morality or help special interests, the costs come in inefficiency,
lack of innovation, and loss of freedom.” —Milton Friedman
The largest impediment is that an IT organization is not a “free market.”
Explicit effort and governance are required to maintain the semblance of laissez-faire.
The greatest is risk that the required people, processes and technologies may create the very governmental bureaucracy that Friedman feared when he also cautiously noted…
Chargeback can be an effective tool, but it must be integrated properly and aligned with corporate finance, governance and culture.
© Copyright RPC Solutions, LLC 2011
Key Definitions and Differences
An IT funding model is the mechanism through which IT
enabled initiatives and their ongoing costs are purchased. It
should consider both the initial procurement and the ultimate
financial reporting.
Chargeback is any funding model where a cost center—in
our case the IT—passes its costs to the internal customers
and/or benefactors of the technologies. There are other
funding models that do not use chargeback, the most
common of which is straight corporate funding.
The chargeback model is the compilation of individual
chargeback methods used for individual IT costs/services.
Cost allocation is a general term for a type of chargeback
method, where the total IT costs are fully and exactly
distributed to customers the end of the fiscal cycle, using
drivers that are typically outside of the customers’ direct
control throughout the year.
© Copyright RPC Solutions, LLC 2011
Benefit Themes for Chargeback
Why is your
organization
considering a
chargeback model?
There are four
general areas of
benefit to be
achieved….
Behavior Modification
Cost Accounting
Enable an Internal IT “P&L”
Governance and Communication
© Copyright RPC Solutions, LLC 2011
Two Dimensions of IT Costs
Price Layers
• Technology Refresh
• Market Adjustment & Profit
• Risk Contingency
• Strategy, Admin & Overhead
• Variable Costs
• Fixed Costs
Chart of Accounts
• Hardware
• Software
• Service/Cloud Providers
• Indirect Labor
• Direct labor
• Overhead
• Licenses
Decomposing IT costs
into these categories
will often create new
discussions….
© Copyright RPC Solutions, LLC 2011
Decomposing the Financial Layers
A number of highly political questions inherent in the
financial layers of IT costs can undermine the effectiveness
of chargeback reform if not addressed adequately in
advance….
- Are capital assets depreciated beyond or before the end of their
effective lives, and is the depreciation linear or exponential?
- How is a business unit charged for access to an IT system already
fully paid for by another business unit?
- Are IT overhead costs readily separated from service delivery costs?
- Is the IT delivery organization’s service levels generally agreed to be
appropriate?
- Can all IT costs be extracted and reported in terms of the services to
which they relate?
© Copyright RPC Solutions, LLC 2011
Four Behavioral Drivers for Chargeback Methods
Each behavioral driver has its “equal and
opposing force”
Simplicity
• Is the method easy to understand, and is what I’m paying for clear?
Fairness
• Does the method allocate costs equitably to whomever uses the service?
Predictability
• Does the method allow me to forecast my costs?
Controllability
• Does the method allow me to control my costs?
© Copyright RPC Solutions, LLC 2011
Highest
Complexity,
Sophistication
& Cost
Lowest
Complexity,
Sophistication
& Cost
MBP Market-based prices
HLA High-level allocation of specific IT costs
DC Direct cost
MRU Measured resource usage
TFR Tiered flat rate
NFR Negotiated flat rate
Per measured unit of service
Based on projected service usage
Based on service accessibility whether used or not
Based on measured consumption of IT resources
Based on dedicated resource ownership
Based on user size (e.g., employees, revenues)
IT Chargeback Methods
© Copyright RPC Solutions, LLC 2011
Methods Correlate to Each Driver
Highest
Complexity, Sophistication
& Cost
Lowest
Complexity, Sophistication
& Cost
MBP
HLA
DC
MRU
TFR
NFR
Simplicity Fairness Predictability Controllability
1 4 1 2
1 4 2 2
2 2 3 1
1 4 1 4
3 3 1 3
4 0 3 1
© Copyright RPC Solutions, LLC 2011
Four Foundational IT Funding Models
BU BUBU
Corp
IS BU BUBU
Corp
IS
BU BUBU
Corp
IS BU BUBU
Corp
IS
Corporate
Funding
IS
Funding
BU
Funding
Venture
Pool
Funding
Benefit
Chargeback Source: Gartner, “Expanding Your IT Funding Options”, August, 2003
© Copyright RPC Solutions, LLC 2011
Define Services and
Service Levels
Continuous
Improvement
Current Situation
Assessment
Define Chargeback
Approach and
Levels
Develop Processes
and Define Support
Organization
Calculate
Projected Rate
Structure
Design Implement Assess
Asses the current
practice in:
• Funding Model
• Rate Setting
• Chargeback and,
• Cost Accounting
Methods
…for each IT
service
Take a Project Approach to Chargeback
Based on:
• Prior and/or
projected
volumes
• New
Chargeback
model
© Copyright RPC Solutions, LLC 2011
Chargeback Project Elements and Pricing Estimates
Determine Business Drivers
Determine IT Strategy
Determine IT Governance Model
Determine Current Funding/Chargeback Model
Design Funding Model
Design Service Catalog
Determine Cost Pools
Develop Chargeback Methods
Define Service Level Agreements
Project Aggregate Volume/Costs
Develop Rates
Project Business Unit Volume
Build Budget-Neutral Normalization
Design Data Collection & Billing Automation Tools
Design Organizational Support Structure
As
se
ss
Desig
n
Imp
lem
en
t
(client specific)
(client specific)
(client specific)
Time/Effort
© Copyright RPC Solutions, LLC 2011
Chargeback Considerations for Cloud
Computing
- Servers can be delivered in minutes or days, and consequently demand has
doubled post-virtualization; chargeback can be a way to ensure that good business
decisions are being made.
- Chargeback may not be politically viable for your organization; even so, still build
the capability to estimate costs and measure real resource usage in order to report
business unit usage of IT resources.
- Choose a provider that allows you to tag cloud assets with metadata, and that can
generate automated billing and utilization reports.
- Ensure that the pricing model matches the nature of your application.
- Try to mirror the pricing the cloud providers charge. Every cloud provider has a
different way of pricing, but some common current pricing models are per-instance
charge, capacity pool charge, and resource charge.
- Most providers also levy a separate charge for bandwidth to the Internet, metered
either as a charge for bytes transferred or for megabits per second at the ninety-
fifth percentile.
- Keep it simple and relatively static initially for customers.
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