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.
- Ownership: Make sure they understand their budget.
- Impact: Make sure they understand how they can impact the cost.
- 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:
- Who should get what costs?
- 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:
- Ownership
- Impact
- 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.
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.
