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.:
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.
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?
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.
Once implemented you have three tasks that are part of supporting chargeback operationally:
- Providing the data to the cost center owners
- Supporting the cost center owners with input on what they can do to control costs
- 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.