ITIL & ISO 20000 Blog

Branimir Valentic

ITIL Financial Management – To charge or not to charge?

Maybe it sounds simple: “We deliver some services, charge for them and generate profit.” In this context, charging is “just” one step, but in the real world… well, it takes a “few” more things to consider.

First of all, charging for IT services goes beyond IT topics, so significant involvement of the financial department is necessary. Important decisions regarding charging are usually made outside the IT department, e.g. by the financial head (director of finance or CFO).

Secondly, charging has to be well prepared. What does that mean? It means that behind the prices on the invoice, everyone has to understand where those prices come from:

  • Customer who pays the invoice – what exactly he is paying for.
  • Service provider – which costs are covered and what margin is invoiced.

Invoices are not made by feeling. There are many things that need to be considered. Let’s see some of them.

Rules, rules…

As with many other things, charging needs regulation – usually in the form of a policy. Here are a few examples of what policy defines:

  • To charge or not (well, relevant only for Type III organizations – according to ITIL, these are IT organizations delivering services to external, i.e. outside of its own organization, customers)
  • How to recover costs – the two most popular options are break-even and cost recovery with margin. The first one, as its name applies, means that you charge the same amount as your costs, i.e. without profit (e.g. if your costs are 1,000, you charge 1,000). The second one means that you will generate some profit (e.g. if your costs are 1,000, you charge 1,100). From my experience, recovery with margin is very tricky in Type I and Type II organizations (these are organizations which provide services to internal customers, i.e. inside the scope of their own organization).
  • How to handle customers’ behavior – let me explain this with an example. A Type III organization charges for usage of the Service Desk based on number of incident tickets. What a customer usually does is try to open as few tickets as possible. This leads to self-initiated workarounds, which could be dangerous in the long run.


Chargeable item

These are the items that the customer is paying for. They have to describe the service as well as possible, and they have to be easily understood by the customer. For example, the customer pays invoices for e-mail service, not for server, administrator, backup device, storage device, electricity, etc.

If the customer understands what chargeable items are, he can shape and plan his demand for them, e.g. customer is invoiced per number of GB for data space usage.

Pricing

Pricing has to answer the question “How much will the customer be charged?” As already mentioned (while discussing policy), break-even (price = costs) and cost plus (prices = cost + x%) are two options.

I am sure you experienced one more option: differential charging. This is when, e.g., a telecommunication provider charges different amounts for voice service. One price is valid during working hours (also called peak hours) and another during the night. In such a way, it is possible to connect charging with customers’ demand (or better to say – shape customers’ demand) and provided capacity to satisfy that demand.

Who charges?

Everyone? No. Type III organizations must charge for their services if they want to stay in business.

The difference appears with Type I and Type II organizations (these are organizations which provide services to internal customers, i.e. inside the scope of their own organization). They can charge also, but they have the other option – not to charge. Confusing, isn’t it?

Let me explain. I am familiar with a case where an organization did not charge in the first step. What they did was the cost recovery. This means that the collected costs of the whole IT organization were distributed (the key to split costs changed several times) to other (serving) business units. There was always dissatisfaction with that principle. After accounting for IT services was introduced, invoicing (the process of issuing invoices for the services) took place.

Was it better? Yes. First of all, business units paid for what they consumed. Secondly, when someone has to pay (even inside the same organization) – they are aware that the services they are consuming cost something, and they know that they have to earn that money on the market (which is not always easy, right?).

Importance

In ITIL, charging is one third of the Financial Management process. For ISO 20000 – it is not relevant because charging is not within the scope of the standard. That doesn’t mean it is not important. It’s just under the responsibility of the financial department.

Although the result of charging is collecting money (i.e. funding) I have to admit that it’s even more important to do the homework: to know your costs and costs of the services. Otherwise, how do you know how much to invoice?

To learn how to set up charging for your services, download a free preview of our Financial Management process template.

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