Can cross charging deliver enough of a return to be justified?
In case there was any doubt, the days of the bottomless IT budget are most definitely over. Recent research undertaken by Snow highlighted that the primary driver behind SAM nowadays is clearly cost avoidance, through better-informed software license procurement. Apart from achieving hard cash savings through being able to better negotiate license agreements with vendors and re-harvesting licenses rather than buying new all the time, another plus point for SAM is the ability it offers to cross charge IT services to an organization, based on cost of ownership, number of installs and general usage levels.
As SAM data forms the essential ingredient in a cross charging policy, our customers have started asking for insights into how to go about implementing cross charging. This blog aims to provide practical advice and answers questions such as: What do you charge and how? Is it just an internal financial exercise? Can you determine the true internal cost of all applications? And how can you plan for the future to accommodate inevitable change?
Understand the psychology of software ownership
At the outset, one of the most difficult aspects to overcome when beginning to think about cross charging is the potential political and emotional impact on an organization where individual business units ‘owned’ software and were formerly even responsible for purchasing their own licenses. Of course ‘owned’ is a relative term because ultimately the software ownership lies with the company not the individual, but nevertheless, the psychology of having to ‘give something up’ and then get ‘charged’ in the future whenever software is needed, is not always straightforward to overcome.
Before you embark on this journey, ensure internal agreement between departments is in place, clearly define what needs to happen with exceptions, make sure it’s possible to measure installs or usage and report on them. Then decide what costs you are going to re-charge. Will it be the license cost plus operating cost or license cost only?
Each department within an organisation generally has its own budgets and part of this needs to be allocated to the cost of running IT equipment, software, licenses etc. A SAM solution will track the software installed and software actually being used. Based on this information it is possible to measure exactly what departments are consuming and charge users accordingly. For example, if the sales department all have access to the CRM system, they get charged for it. And the system used to provide the data should be flexible enough to change at a moment’s notice, in the event of the user’s requirement changing.
Mirror cross charging with financial operations
It is also important to ensure charging policies reflect both the existing organizational structure and the way financial departments work. It sounds obvious, but this is a common mistake to make, because in most cases the IT landscape is completely different to the worldview that finance tends to have. In addition, charging must be linked to controllable aspects for customers (users) as they may wish to alter their behavior (usage) of services based on any charges incurred.
The last thing to consider is how a cross charging policy will respond to inevitable structural change. Whilst the current financial organization needs to be reflected in a cross charging policy, it also needs to be flexible enough to change as your company changes.
How can a pricing model be structured?
From experience there are several ways pricing levels within cross charging policies can be structured. These include the following:
- Cost price – This is based on the recovery of costs associated with provision of services.
- Cost price + – This is essentially the cost price plus a percentage mark-up value.
- Going rate – Here a charge is derived based on the way other departmental services are recharged.
- Market price – This is the price that would be charged by a third party provider if the service of software provision were to be outsourced.
- Fixed price – This is an independently agreed price, which is based on the actual use of services.
What’s the final verdict? Shall we or shan’t we?
So is cross charging worth the effort? In my opinion the answer is ‘yes’ and there are multiple benefits. These include the ability to have greater control of costs and implement software re-harvesting. However, don’t under estimate the work that needs to be done to get there and effectively implement cross charging and there is the potential emotional, political impact to consider. It is also essential to have both a SAM platform and efficient SAM processes in place to be able to track with accuracy software installs and usage, making sure your organisational structures are easily identifiable.
And in the end, even if the final result is simply the capability to exchange ‘wooden dollars’, it serves a purpose by highlighting both the contribution made by IT to individual departments, and the extent to which they are utilising IT resources within the organization. It is a way to justify the existence of IT as a vital support function and effectively create a ‘cost neutral’ department. It just becomes a matter of weighing up whether the total cost of implementing cross charging will outweigh the benefits.