Chargebacks vs. Allocations – Defining IT’s Relationship with the Business

Some IT departments prefer chargebacks, while others do not. My own preference is to allocate IT costs to the business units, based on some reasonable balance of simplicity and accuracy. General services could be allocated by headcount, COGs, or revenues, with each business unit taking their proportional share. Some easily identifiable items might be allocated more directly – maintenance costs for specialized engineering, warehouse management, or financial systems, for example, could be allocated more directly to those departments.

Firma Otte
What did I get for this project?

I’ve written before about my opinions in this area – the important strike against chargebacks is that they create a relationship between IT and the business that is confrontational, not collaborative – not the best way to bring value to my employer.

More reasons to consider annual allocations:

  • Increases IT and Business Agility: Specific projects can start and stop as requirements change, without having to renegotiate costs and resources. This would also help shift thinking from Projects to Programs – fluid collections of deliverables, with teams that can quickly flex when needed.
  • Shifts the conversation from Costs to Benefits: Instead of scrimping on component costs, business can focus on the benefits they are targeting.
  • Bolsters the Case for Integrated ERP: A reasonably complete allocation model will put all costs for siloed systems on the business areas that use them; typically, integrated ERP with common technology and less handoffs should streamline this overhead and reduce those costs.

But I know that change can be difficult; I would approach the challenge quantitatively and qualitatively:

  • How much overhead does this cost negotiation process add? – Make sure project teams record time spent on cost identification and justification, the calendar delays when individual projects are held up for review and approval, and the effort time required to charge the time back to the appropriate cost centers.
  • How much accuracy does all this chargeback process deliver? – Develop an allocation methodology, and retroactively compute IT allocations for the past 2-3 years; then, compare to the actual charges.
  • How fluid can a project list become when allowed to respond to demand? – Compare project pipelines between IT organizations of companies that allocate vs. charge back, and the changes over time.

Again, the best reason for allocations is that they shift the IT / Business relationship. When the focus is business outcomes, we are working as Partners, not as Vendor/Customers.

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James MacLennan

... is the Managing Partner at Maker Turtle LLC, a digital consultancy focused on creating value in ways that align with your strategy and drive engagement with employees, customers, and stakeholders. He is an active creator, providing thought leadership through on-line & print publications, and public speaking / keynotes.