Managing Information Technology

Chapter 13 • Leading the Information Systems Function 541

Chargeback systems and service level agreements
are examples of management practices typically used to
help ensure that business unit expectations for delivery
of an IT service (e.g., the response time for displaying
an online application screen) are aligned with the orga-
nizational costs of providing a specific service. Both of
these practices are discussed here. Metrics associated
with the use of these practices are also being used to
evaluate an IS department’s performance in IT service
delivery.

Chargeback Systems

Chargeback systemsplace IT service spending controls in
the hands of the business managers who use the services.
Instead of a vague annual negotiation process of capital
expenditure approvals and cost allocations, the IS leader
and senior business managers agree on prices for IT serv-
ices that allow the IS department to effectively manage IS
department costs.
Transfer prices can be developed for a broad and
comprehensive range of IS department activities, including
charges for:

• IT personnel (time spent and rate for specific
  skills)


• Computer usage (or computer cycles used)


• Disk file space (data storage costs based on type of
  storage unit)


• Number of transactions processed


• Amount of computer main memory used (per unit of
  time)


• Number of users of an application

Charges might be cost-based (to recover all costs)
or market-based (to be comparable to market alterna-
tives). A combination of clearly identifiable direct costs,

plus an allocation of other overhead costs (space, admin-

istrative staff, etc.), might also be used. One of the

challenges here is that many IT costs are joint costs, not

easily attributed to one single unit—such as the cost to

store and maintain a shared database or to place an order

fulfillment process on the Internet. Further, some costs

are essentially fixed, such as systems software costs,

and all of the components of a data center are complex.

Thus, calculating data processing costs, and having the

capability to reduce expenditures as processing demands

vary, can be difficult to accomplish.

If implemented well, a chargeback system is a way

for business managers to better understand IT costs and

to adapt their usage of IT services to take advantage of

the agreed-upon price of a service. For example, dis-

counts for overnight processing might cause a business

manager to rely less on online reporting in real time.

Other potential benefits associated with chargeback

systems are summarized in Figure 13.4.

However, if chargeback systems are not imple-

mented well, they can be a source of tension between the

IS organization and business managers. The structure for

determining the IS service charges needs to be jointly

developed and clearly understood. As summarized in

Figure 13.5, successful chargeback systems have

charges that are understandable, promptly reported, con-

trollable by the business manager, and consistent with

the organization’s IS role and goals. Once implemented,

it’s important to periodically evaluate the chargeback

formulas to ensure that the desired results are being

achieved.

Service Level Agreements (SLAs)

Another practice for managing the delivery of IT services

is to develop formal service level agreementsfor individ-

ual business units. Similar to an agreement that would be

• Assigning costs to those who consume and benefit from IT.


• Controlling wasteful use of IT resources by encouraging users to compare the benefits with the costs and eliminate unprof-
  itable use.


• Overcoming erroneous perceptions that IT costs may be unnecessarily high.


• Providing incentives by subsidizing the price of certain services or innovative uses of technologies.


• Changing the IS department’s budgeting process to be more business driven, thus rewarding the IS organization for
  improved service and greater efficiency rather than technological change for its own sake.


• Encouraging line managers to be knowledgeable consumers of IS because they must directly pay for such
  support.

FIGURE 13.4 Potential Benefits from Chargeback Systems