Chargeback vs. showback: Which method is best for you?

IT shops looking to recover costs should consider a chargeback or showback model. But these strategies are rife with political and technical hurdles.

While nice on paper, chargeback and showback present complicated challenges for virtualization- and cloud-based...

data centers. To successfully implement these concepts, organizations must carefully evaluate their company-wide and IT objectives.

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Readers respond to practice and philosophy of IT chargeback

The IT chargeback system in a virtual data center

First, you need to determine if you are looking to simply report on resource consumption or potentially charge tenants for their resource utilization. If you sell hosting services, the answer is obvious: You need chargeback. But even within the corporate environment, more IT departments are looking to become profit centers, and must evaluate whether they need full-fledged chargeback, or simply showback.

Where showback is used purely to track utilization without billing, chargeback is used to bill tenants for resource consumption.  And each model has its own considerations and challenges.

Deploying a showback model
Showback is the simpler methodology. However, you still need to have an end goal for the resource tracking. Is the goal to simply show utilization in a monetary format, regardless of whether it is a positive or negative? If so, then your job is pretty straightforward: Just assign a price to units of allocation, and then bill on consumption. The actual amount charged per unit is variable and bares little effect, because no bills are actually sent. Some people use showback to assign everyone a virtual budget and track how they use it.

On the other hand, you may be tasked with developing a zero-dollar budget, using showback as a way to track usage. When working toward a zero-dollar budget, the goal is to break even in each tracking period. This is usually accomplished by taking your expenses for a period and developing a per-unit cost that will recover the spent amount. In this scenario, the billing unit is not as important as the usage metrics.

Regardless of whether a zero-dollar budget is used or not, showback is helpful in tracking how resources are consumed within an organization. For instance, if one business unit consumes considerably more resources than another, that information may indicate either that one is abusing services or that the other is not fully leveraging the available services.

The first challenge of chargeback: Fairness
Unlike showback, chargeback can be extremely difficult to implement. One trap that ensnares many chargeback policies is the formation of large committees that bog down plans in never-ending meetings and endless feedback loops. The fact is, technologies have changed much faster than most cost-recovery efforts can keep up with.

Today, it is very likely that some groups are grossly overpaying for services, while others may be charged only a fraction of the true cost for the services they consume. The former will not be happy when they realize how much they should have paid, and the latter will cry foul and envision the sky is falling when they realize how much their services may cost in the future.

In this situation, all that you can do is develop the most accurate and fair accounting practices for the larger organization, and then deal with the possible need to subsidize some services for groups based on their unique needs. Of course, that will either mean that everyone else’s costs go up to cover the subsidies or that the company will absorb those costs.

How much profit is enough?
The second challenge of chargeback may arise when you determine how much profit to make from the services. I think that many organizations seeking to implement a zero-cost budget through showback may actually need to investigate a chargeback strategy and actually maintain low profit margins. This strategy enables IT to stay ahead of demand.

For instance, if you are running 20 virtual servers per host, you would need 40 virtual servers to recover the costs of those two hosts. If you have 41 virtual servers, however, you would need to recover the costs of a third host . That 41st virtual server would cause per-virtual server costs to jump dramatically. Not only that, but the money needed to procure and provision the third host would not come in until after you created and billed for the 41st virtual server.

By increasing billing rates by 25%, you’d recover the costs of the first two hosts by the 30th virtual server. Virtual servers 31 through 40 would be profit, which would build up funds to cover the cost to procure and implement the third host in time for the request for virtual server 41.

Of course, when using an example with just two hosts, the numbers are exaggerated. The larger the environment, the smaller the rate increase needed to fund future resources or temporarily absorb the affect of underutilized resources.  (Please note that when you use chargeback to fund reserves, it is critical that you have a reliable method to measure resource consumption over time and accurately predict future utilization patterns.)

Which method is best for your organization?
There are just a few thoughts to keep in mind as you investigate chargeback and showback practices for your organization. For one, there is much more to chargeback than generating a bill. Be careful to fully define all of your company’s goals before you develop a strategy.

Many chargeback projects are dying on the vine as organizations become overwhelmed with developing the many layers that encompass a mature strategy. You may choose to begin with showback to start collecting data and evaluating how your organization is truly consuming resources. From there, you can move from just showing numbers to actually generating revenue. 

Do not let your organization get caught in the trap of trying to match the rates of large ISPs or cloud-service providers. Operating on venture capital funding, some of these service providers have the luxury of deferring profits for several years. But that is something few organizations can afford.

If you artificially lower rates to compete with these service providers, you will lose money, and your chargeback strategy will be little more than a shell game of hiding costs. Build a model that is fair and accurate, then evaluate it regularly and ensure that it meets your organization’s strategic needs. Subsidize costs if you need to, accurately and responsibly build excess capacity and be transparent with your practices. If you cannot defend your chargeback practices, don’t put them in place.

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