ITIL Financial Management – Charging as a moment of truth
When taking part in some of the ICT-related conferences, I meet many people working in many different industries and company sizes. Of course, since working environment dictates daily activities and the issues they live with, there are always many different stories. One thing is always among “the topics” – Financial Management.
There are many elements and activities within the scope of the Financial Management process, but most of them are not visible to the outside (of the IT organization) world. We already discussed the three main activities of the Financial Management process according to ITIL in the article Financial Management for IT services – theory and practice – budgeting, accounting, and charging. Well, charging is an activity that is highly visible and that will provide proof about the quality of the services you deliver. How? It’s simple: if customers are satisfied with your service – they will pay for it. The next question is – how much are they willing to pay or, to take the opposite point of view, how much can you charge them?
There are several options, depending on what type of organization you are.
Internal or external – What’s the difference?
There is a big difference depending on whether you are a Type I, Type II, or Type III organization (you can recall more details in the articles ITIL Service Provider types – Type I: Internal service provider, ITIL Service Provider types – Type 2 or Shared Services Unit, and ITIL Service Provider types – Type 3 or External Service Provider). Or, if we simplify it, whether you are supporting your own organization (internal IT) or providing your services to external customers on the market.
The point is, if you are internal IT (Type I or Type II organizations) – you have to comply with many internal (financial and accounting) rules, and you actually don’t have to bother with too many details about charging or, in this case, recovering costs.
But, if you are providing services to external customers – it’s a different story. In that case, you are limited by the market and rules that are purely business oriented. That means that you have to take care about the cost side, but also about competitors, market, revenue, business model, etc.
Internal services – Living on the safe side
I spent quite some time in this role – leading an internal IT organization. And, I can tell you, although it seems simple – it’s not. Other than having to fight with politically oriented issues, one of your biggest concerns will be – costs. There are several models for charging as internal IT:
- Notional charging – this means: “I will not charge you, actually, but I will notify you of how much it would cost if I sent you an invoice.” What’s the point then? Until people know how many resources (services, HW, SW licenses…) they spend – they don’t understand that the resources they use really cost something. So, don’t expect them to be rational while using the services, unless they know how much costs they caused.
- Cost recovery – this is the simplest method: the IT organization has 100 X (X is your currency) of costs and they will recover exactly 100 X. Not more, not less. Key to distributing costs – well, it’s not really that simple after all..
- Cost plus – almost the same as “Cost recovery,” but the IT organization is allowed to charge a certain percentage above their cost (from the previous bullet – they will charge, e.g., 100 + 5% X).
- Going rate – the IT organization compares prices in similar organizations and charges the same amount.
Figure 1: Charging options for internal IT organizations
External services – You never know
Once you try to sell your services, the moment of truth comes. You will get direct feedback from the market about how much your services are worth, if anything. Other than having to compare yourself with other competitors (which is always a good idea), there are several models of how to form the price:
- Market price – you know how much that service costs on the market, and you charge the same.
- Fixed price – when negotiating with the customer, you will define a set of services or consumption of the service(s) and set a fixed price. Yes, you have to be very careful when creating this kind of price.
- Tiered subscription – let’s start with an example. You have, I assume, seen some packages while buying, say, a support service for, e.g., network maintenance. And, there are Bronze, Silver, and Gold packages – differentiated by, e.g., support hours (Bronze – 8×5, Silver – 24×5 and Gold – 24×7). So, you have one service, but are charged separately depending on the options that are included in the package.
- Differential charging – in this model, you will charge different prices for the same service depending on some pre-defined parameters. For example, there are telecom operators who charge different prices at different times of the day. So, during business hours, a minute of conversation costs more than during the night. In such way, you can also influence capacity of the service (better utilization during off-peak hours, in the telecom example).
Figure 2: Charging options for external service providers
Moment of truth
Although charging models sound complicated, they can be implemented pretty simply, but you have to know your options. And you are not alone in “the game.” In the case of internal IT, there are financial policies or principles (set by financial people) that you must use. If you are sending invoices outside the company – talk to sales people and management. It will give you a clear picture of what to do.
No matter what kind of organization you are, you have to validate how much your service is worth. Charging gives you the answer.
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