Have your company decided to start looking into showback/chargeback for your public cloud costs? And have you been given the responsibility to set it up? This article gives you the 3 elements of showback/chargeback as well as the process of implementing it.

The whole point of chargeback is making the different business owners accountable for their cloud spend. Implementing a simple model first and then refining it over time will create understanding and ownership. This article gives you an overview so you can plan when to implement which steps – and not create obstacles early on for natural extensions you will want later.

To implement showback/chargeback in practice there are three elements you always need to go through.

Element 1: Who is spending?

For chargeback/showback you need to know exactly who uses what resources and who drives what costs in Azure. Keeping track of the different departments usage and checking their Azure bills is time consuming work. Tagging resources is the common approach, but in order to minimize administration we recommend a combination of the following:

 

Resource tagging: All resources with a cost center tag are allocated after these tags.

Virtual tagging: Enrollment accounts, subscriptions (or resource groups) are given a cost center tag, that will be used as tag, if there isn’t a tag on the individual resource.

Cost center for unmapped costs

 

We have seen other rules applied, but the above mentioned consistently deliver robustness and limited time spent administering allocations. You may want to start by allocating to only one or a few major internal customers and then continue with a wider group.

Even if you have decided on a strategy to rely on resource tagging make sure you include the other two levels. Not all costs and resources can be tagged, and you will never be 100% up to speed with resource level tagging.

Also, make sure that you have a process in place to clean up unmapped cost items monthly by assigning them a resource or virtual tag and a process to regularly check for validity of used tags.

Element 2: How much are they spending?

When your tagging is in place you have a clear picture of who owns which resources and the associated costs. But this is only the first element of chargeback – the second is to figure out how much they should be charged.

 

   a) What rate to use?

Out of box all the clouds offer two different rates you could use for chargeback: a) actual costs, and b) amortized costs.

The actual cost is what reconciles directly with your monthly cloud bill. This means that if you prepaid something – the actual cost is zero. If you bought a reservation there will be a cost for the reservation, but the cost for the resource it is applied to will be zero.

Amortized costs are the cost where any committed use discounts are applied (depending on your cloud: reserved instances, compute savings plans, CUDs etc.). This gives a better representation of the real cost – but it comes with a flaw: if you manage commitments centrally, you cannot control who benefits from the commitments. Hence, a cost center might use the same quantity of resources in two subsequent months, but their charge may vary – not by a lot, but enough to cause confusion and extra work.

Blended rate – which is currently only an option in the AWS portal – ensures all that all resources covered by the same commitment plans are charged the same unit costs. This reduces variances from month to month. Your FinOps partner might – just like Kostner – offer a calculated blended rate if this is your preferred choice.

A few more options exist, i.e., standard cost, but we strongly recommend that you settle on either amortized cost or blended rate.

This is the one decision which is critical to get right when starting out – using the wrong rate might cause issues later – and changing the rate along the way will always create internal issues and lack of ownership.

 

   b) Need to charge any additional costs?

Once you have settled on which rate you will be using the next decision is if you need to charge any additional costs, e.g.:

 

Add-on costs

In this step you decide which add-on costs to add that are driven by your cloud usage, but not invoiced through the cloud bill. This can be direct costs (i.e., costs for Microsoft licenses used for AHB), people costs enabling cloud development (CCoE, Cloud Foundation Teams, FinOps teams etc.), and more depending on your setup.

 

Costs of shared resources

On your cloud bill you may find costs that are shared between different cost centers e.g., Kubernets, micro services etc. You want to allocate these to the cost centers driving the costs – though not necessarily down to the last eurocent.

 

Shared expenses

Lastly, you will have items on your cloud bill which are not directly shared resources, but are nevertheless costs indirectly related to running the cost centers, e.g., shared infrastructure, nonutilized reservations, resources without tag etc.

When you first start out, these items may not appear very important – in fact we see many organizations where the cloud adoption is initially so business driven that there is not much shared cost personnel to consider allocating costs for.

However, it will become relevant so make sure that you prepare for this – at least in communication – right from the start.

Element 3: Practicalities

Coordinate with Finance

Make sure you involve Finance early on. You might find that there are existing policies that could guide you on the decisions above – and they will certainly have views on additional costs whether they should be charged by you or in a separate process.

Also, you want to ensure that the process and communication is aligned with your budgeting process – otherwise the line-item cloud costs will not be taken seriously.

Lastly, you want to ensure that you have agreed on the practical process with Finance:

When do they need a total cost (estimate) for the month?

When do they need the chargeback file?

Who and how do you reconcile between the bill, the estimated total, and the chargeback file?

 

Implementation

Before implementing chargeback, you need to be completely sure what it is you want, so you can explain to the organization’s department what it is they are being charged for. As every big change needs an adjustment time, it is a good idea to start implementing showback first, and getting the organization used to the idea that they have to keep an eye on their cloud spend. People need to see and hear things before they accept it, hence make them used to realizing the size of their own cloud spend before starting to charge them for it.

 

Supporting chargeback

Once implemented you have three tasks that are part of supporting chargeback operationally:

  1. Providing the data to the cost center owners
  2. Supporting the cost center owners with input on what they can do to control costs
  3. Providing Finance with the necessary data

On 1. you not only need to provide your cost center owners with data – but also a meaningful representation of what they are spending on.

Also, you want to make sure that it is clear to the cost center owners that a number of savings options have already been handled centrally, i.e., by providing a “Pay-as-you-Go” cost and the costs they are charged. This will help build credibility around the FinOps efforts you are orchestrating.

To support the cost center owners, you need to understand their data about what is driving costs – and what initiatives can be started to reduce costs. Most likely you have centralized price optimizations (i.e., commitment documents), but you can support them on discussing major cost items, and cost architecture.

How to get started?

If you want to fasttrack your showback/ chargeback project and avoid mistakes others are doing, then make sure you consult with a FinOps partner.

Do you want guidance to decide on policies? Get an “out-of-box” PowerBI solution? Design your tagging for minimum administration.

Kostner’s FinOps-as-a-Service will give you all of this and much more – we would love to be part of your virtual FinOps team. Book an inspiration meeting with us today to get started on your chargeback.

To get off to a good start, spend 30 minutes on our chargeback webinar.

Join our webinar Chargeback of Public Cloud for Managers!

In only 30 minutes you will gain the key to:

… and get the shortcut to create an actionable plan to get started and what the important next step is.

If you are considering showback / chargeback for your cloud costs, this blogpost will give you the necessary perspective on it. We will offer you a strategic context of chargeback, highlight the central decisions you need to make, and offer some thoughts on how to successfully implement. Jump to the bottom to sign up for a 30-minute webinar on showback/chargeback.

1.1. Buying XaaS requires a new model for financial Governance

 Just a few years ago, financial governance was – to exaggerate a bit – a matter of tough negotiations of a few large hardware and software contracts. In a historic context the IT cost as a percent of revenue has been very stable despite a year over year increase in the use of IT. This was possible due to a steady decrease in cost for the same capacity – often referred to as Moore’s law.

Over the last five years we have seen several trends:

  • Your company is talking more and more about digitalization of services – not only in the innovation hubs, but all the way to the board room.
  • Decisions and IT development is moving closer to the business. Buzzwords like flexibility, agility, and speed are (over)used to justify this movement.
  • More and more IT is bought as a service – everything from SaaS solutions (Sales and marketing automation, ERP, Microsoft 365 etc.) to infrastructure (Azure, AWS, GCP etc.).

… and the consequences most organizations are facing is that IT costs are starting to go up.

1.2. Buying cloud requires a new form of financial governance

This is not necessarily a bad thing – after all digitalization of services might be exactly what is needed to make your company prosper. But it does require a new financial governance.

The main driver for this new financial governance is the decentralization of decision making – and uneven use of technology across the organization. This voids the traditional central IT budget / headcount allocation – and the financial accountability must reside where decisions are made – that is closer to the business.

Hence, chargeback is a crucial component in the financial governance of the future.

1.3. The end goal is financial accountability – what does it take?

You need showback / chargeback to get the different departments on board with the agenda of focusing on managing cloud costs. It takes 3 steps for you as a manager to make the business units aware of the magnitude of cloud costs and get them to take action and manage their cloud costs.

  1. Ownership: Make sure they understand their budget.
  2. Impact: Make sure they understand how they can impact the cost.
  3. Benefit: Make sure that benefits end up where effort is taken.

All knowledge points to the fact that people will only act if they themselves have the financial responsibility. As the decisionmaker you therefore need to implement chargeback in the organization. Giving them the responsibility for their department’s cloud spend gives them the incentive to make the decisions necessary to manage cloud costs as they are now the one drawing the benefits and therefore see the value in it.

While the above gives you the strategic context across any type of XaaS financial governance we will now take a closer look on chargeback for cloud costs (Azure, AWS, GCP, etc.).

 Using chargeback, you are faced with two questions:

  1. Who should get what costs?
  2. How much should they be charged?

Surely, the ”who” is already top of mind. You might have started tagging your resources in the cloud – or intend to do so shortly. Without going into detail here you want to plan this so that you do not end up with a significant bureaucratic overhead. Virtual tagging and a robust maintenance procedure are useful additions to resource tagging. You can read more about this here (link til chargeback for practitioners).

The other question on “How much“ is a bigger question and widely forgotten at least when starting to work with chargeback.

Initially, you will focus on the direct cloud costs and there is only one critical decision here: which rate you will use; actual cost, amortized cost, or blended rate. We will not go into more detail, but you can read more here.

However, only charging the direct cloud costs will not give a fair representation of the total costs. Later, you will want to include additional cost components from one or more of these three categories:

Add-on costs

Add-on costs driven by your cloud usage, but not invoiced through the cloud bill. This can be direct costs (i.e., costs for Microsoft licenses used for AHB), people costs enabling cloud development (CCoE, Cloud Foundation Teams, FinOps teams etc.), and more depending on your setup.

Costs of shared resources

On your cloud bill you may find costs that are shared between different cost centers e.g., Kubernetes, micro services etc. You want to allocate these to the cost centers driving the costs – though not necessarily down to the last eurocent.

Shared expenses

Lastly, you will have items on your cloud bill which are not directly shared resources, but are nevertheless costs indirectly related to running the cost centers, e.g., shared infrastructure, nonutilized reservations, resources without tag etc.

When you first start out, these items may not appear very important – in fact we see many organizations where the cloud adoption initially is so business driven that there is not much shared cost personnel to consider allocating costs for.

However, it will become relevant so make sure that you prepare for this – at least in communication – right from the start.

What components you include is up to you, but chargeback is part of a bigger puzzle. If you want to know more about it, you can read our practitioner’s guide to showback / chargeback – how do you do it.

When considering how to implement it in your organization remember our three steps model:

  1. Ownership
  2. Impact
  3. Benefit

… it all starts with ownership.

We have seen it more than once that chargeback has been implemented across the organization, only to end up with shrugged shoulders and no accountability because neither finance nor the business owners understand how they got the budget in the first place, nor what they can do about it.

This is probably the reason why many organizations start with showback which will then serve as a rehearsal for later chargeback. You will be reassured that the methodology for providing the numbers is robust. As well as have time to build a process and the necessary competencies to have the dialogue with the business owners so they understand their numbers and how they can impact their cost.

Also, you want to make sure that you can track the cost savings related to the efforts of the business owners and your team.

Showback and Chargeback definition

How do I get started?

We cannot encourage you enough to start working with chargeback on your cloud costs. Typically, we see 20-25% waste that can be eliminated with chargeback and financial accountability.

Getting started is about finding the right path to the simplest possible solution – and one that does not overburden your team or add bureaucracy in your organization.

If you think chargeback sounds strategically interesting but could use a guide on the subject, we would be happy to help and discuss with you what would work for your organization. Book a 30-minute discovery meeting with us, and we will go through what would be the best way forward for you and your organization.

To get off to a good start, spend 30 minutes on our chargeback webinar.

Join our webinar Chargeback of Public Cloud for Managers!

In only 30 minutes you will gain the key to:

… and get the shortcut to create an actionable plan to get started and what the important next step is.