Devising equitable chargeback models

I have always thought that besides technology an equitable charge-back model is a equally important for a shared infrastructure --- which at some point is what cloud computing is based upon...

In many organizations, both large and small, the methodologies used in devising a charge-back model are overly simplistic and dated. New technologies and application development patterns either render these models inadequate for today or not reflective of how resources are actually used by applications or business units. Devising an equitable charge-back model can be the most complex of all challenges involved in adopting Virtual Enterprise. Charge-back models are complex for many reasons, one of which is the ability to arrive at a cost model that is agreeable to all business units, another being the complications of formulating the fixed and variable cost distribution of the underlying shared infrastructure. In some cases, this could even lead to obtaining a business analyst just for this task. Let's look at some charge-back considerations for ways to simplify the charge-back model.

Charge-back models

First, what exactly does "chargeback" mean? In consolidated environments, the IT custodial service employs a cost recovery mechanism that institutes a fee-for-service type of model. Chargeback enables IT to position their operations as value add services and uses the cost recovery mechanism to provide varying degrees of service levels at differentiating costs. To devise an effective chargeback model it is imperative that the IT organization have a complete understanding of their own cost structure, including a cost breakdown by components used as resources, a utility-like model to justify the billing costs associated with resource use. When it comes to employing chargeback models, there is no silver bullet that will address all the perceptions and user expectations from an IT services commodity model. There are several models prescribed and practiced in the industry today, and each will be a different cultural and operational fit for an organization. A few chargeback models are described below, but a hybrid model combining select features of more than one model is also an option.

• Standard subscription model

  The simplest of all models, this one involves dividing up the total operating costs of the IT organization by the total number of applications hosted by the environment. This type of cost recovery is simple to calculate, and due to the appeal of its simplicity, finds its way into many organizations. The year to year increase in IT costs due to growth and expansion is simply added to the subscribers’ costs. While this is a simple chargeback model, it is fundamentally flawed, as it promotes subsidy and unequal allocation of resources (with this model, a poorly performing application is subsidized by other applications) and de-emphasizes resource consumption and application footprints.

• Pay per use model

  This model is targeted for environments with LOBs of various sizes and, unlike the standard subscription model, emphasizes charging based on an application’s actual consumption of resources and SLA. For example, an LOB might pay more for shared services simply because its application requires a larger footprint, or because they desire a higher degree of preference, more dedicated resources, or a more demanding service policy. This model can be complicated in its approach, simply due to the framework around resource usage and monitoring, but it ensures fair and equitable cost recovery. The downside is that it might take longer to arrive at agreeable metrics and cost models associated with resource consumption.

• Premium pricing model

  The premium pricing model focuses on class of service and guaranteed availability of resources for business applications. As the name suggests, LOBs will incur a premium for preferential treatment of application requests and priority in resource allocation during times of contention to fully meet the service goals. This could also include a dedicated set of hardware nodes to host applications, so depending on the degree of isolation and separation from the shared services model, the cost can increase. Such models are often preferred by LOBs with mission critical and high revenue impact applications. This model will typically coexist with other baseline chargeback models, since not all applications or LOBs in an organization will require premium services.

• Sample hybrid model

  The hybrid model combines the advantages of multiple chargeback models to best suit an organization. For instance, a hybrid model could have a flat entry fee per application to cover the cost of the base infrastructure, and then pay for actual resources consumed. The flat fee can be characterized as a fixed expense to be hosted, and the additional costs for resource consumption can be linked to variable cost. This example combines the standard subscription model and the pay per use model into a utility-like billing service. Since there is no single chargeback model that will fit all environments, it is common to see several model types combined.

While there are advantages of using one chargeback model for an entire organization, there might also be value in introducing a catalog of chargeback models and offer a choice to LOBs. This type of flexibility enables an LOB to select the most suitable chargeback model for their needs, and avoids the challenge of getting all business units to agree on one model. However, multiple chargeback models only work if all models are comparable in fairness and value; all things being equal, the same application should have same operating cost under every model, but differing costs when varying volume, Quality of Service, chosen service policy, and so on.

Thoughts?

:)

Nitin