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How To Build Chargeback Models (and Why You Need Them)

How To Build Chargeback Models (and Why You Need Them)

Are your cloud computing resources spread thin across multiple projects and departments? If so, implementing the chargeback model can help you gain transparency into cloud expenses and ensure accountability among cloud users.

But, implementing chargeback for the first time can be challenging. IT teams can have difficulty getting buy-in from various departments and difficulty gaining access for successful implementation.

This tactical guide to chargeback models for AWS will examine how best to strategically implement chargeback into your organization’s accounting workflow. We’ll show you key strategies for success and essential tools needed for the job.

What is a chargeback model?

Chargeback models in cloud computing refer to the systems IT departments use to allocate and bill the costs of cloud resources to individual departments, teams, or projects within an organization.

These models are essential for organizations that have adopted a shared cloud infrastructure, as they provide transparency into the consumption of cloud resources and help in budgeting and optimizing cloud costs over time.

Organizations on AWS use tools like Cost Explorer, AWS Budgets, and Cost and Usage Reports to create a detailed itemization of cloud expenses across departments and projects. There are also a variety of custom scripts and third-party tools available to help automate and streamline the data collection and resource optimization process.

The benefits of charging back

The chargeback model, when applied to cloud computing platforms like AWS, offers a host of benefits that promote efficient resource utilization, accurate cost allocation, and a culture of accountability. 

Chargeback ensures organizations can harness the full potential of the cloud while maintaining financial transparency and control. 

It does this through the following:

  • Increased efficiency: Chargeback models promote a culture of resource optimization. When departments or teams know their company will bill them based on their actual consumption, there’s an inherent motivation to use resources judiciously.
  • Better cost allocation accuracy: Traditional methods of cost allocation, such as evenly distributing costs across departments or using rough estimates, can lead to inaccuracies. Chargeback models, on the other hand, ensure IT teams can allocate based on actual usage.
  • Recognition of group value: Chargeback models provide a detailed breakdown of costs associated with each department or project. This granularity allows organizations to recognize and appreciate the value brought by different groups.
  • More cloud resource flexibility: One of the significant advantages of cloud computing is its flexibility, allowing you to scale resources up or down based on demand. Chargeback models complement this flexibility by adjusting resource consumption based on real-time needs.
  • Increased accountability over costs: Accountability is a cornerstone of the chargeback model. By attributing costs directly to the consumers of resources, this ensures departments or teams are responsible for their spending.

Examples of costs chargebacks cover

In the context of AWS, the chargeback model can cover a wide range of costs associated with the diverse services and resources an organization uses.

Here’s a detailed breakdown of how that works:

Compute and storage services

Compute and storage services represent the foundational building blocks of AWS, allowing users to run applications and store data in the cloud.

  • Compute: The primary service in this category is Amazon EC2 (Elastic Compute Cloud). EC2 provides resizable compute capacity in the cloud, allowing users to run virtual servers and scale compute capacity based on their requirements. Charges for EC2 instances vary based on factors such as the instance type, operating system, region, reserved vs. on-demand instances, and the number of usage hours.
  • Storage: AWS offers a range of storage solutions tailored for different needs:
    • Amazon S3 (Simple Storage Service): An object storage service that offers scalability, data availability, and security. AWS bills users based on the amount of data they store, the number of requests made, and data transfer costs.
    • Amazon EBS (Elastic Block Store): Provides block-level storage volumes for use with EC2 instances. Costs depend on the size of the volume, the type of volume (e.g., general-purpose, provisioned IOPS), and any additional features like snapshots.

Data transfer services

Data transfer services pertain to data movement within AWS or between AWS and other environments. Data transfer costs can vary significantly based on the nature of the transfer:

  • Intra-region data transfer: Transferring data between services within the same AWS region usually incurs costs.
  • Inter-region data transfer: Transferring data between different AWS regions incurs charges, with rates depending on the source and destination regions.
  • Internet data transfer: Costs are associated with data moving from AWS to the internet. Incoming data transfer is typically free or has a minimal charge.

Security services

Security services in AWS provide tools and features to protect users’ data and resources in the cloud.

Key services in this category include:

  • AWS IAM (Identity and Access Management): While IAM itself is free, it’s a crucial service that allows users to manage access to AWS services and resources securely. Any associated costs would typically come from related services or features IAM interacts with.
  • AWS Shield: A managed Distributed Denial of Service (DDoS) protection service that safeguards applications running on AWS. AWS bills users based on the protection tier (Standard or Advanced) and additional data transfer or request costs.

AWS networking services

Networking services in AWS provide the infrastructure to deploy and manage network architectures in the cloud. Some of the primary services and their associated costs include:

  • Elastic Load Balancing (ELB): Distributes incoming application traffic across multiple targets, such as EC2 instances. AWS bills users for each hour or partial hour that an ELB is running and the amount of data processed.
  • AWS PrivateLink: Allows users to privately access services securely hosted on AWS. Costs depend on the number of interface endpoints, endpoint hours, and amount of data processed.
  • AWS Direct Connect: Provides a dedicated network connection from a user’s on-premises data center to AWS. The port speed and the amount of data you transfer determine pricing.

Building a chargeback model

Implementing a chargeback system is not without its challenges. It requires clear communication, robust measurement and monitoring tools, and a fair and transparent pricing strategy. The goal is to strike a balance where departments feel empowered to use resources as needed but are also held accountable for their consumption.

If this is the first time your organization is looking into chargeback models for AWS, here’s a step-by-step implementation guide to help you get started:

Begin the planning process

Initiating an effective chargeback process within an organization starts with creating a robust planning initiative in collaboration with IT and BizOps units.

This synergy is vital because while IT brings technical expertise and an understanding of costs, business units offer insights into operational needs and strategic objectives. Together, they can craft a chargeback model that’s technically sound and aligns with the organization’s goals.

The essence of the chargeback model is to enhance transparency and accountability for IT costs. Instead of viewing IT expenses as a single entity, the chargeback model breaks down costs based on actual consumption. This clarity ensures departments understand their IT expenses, fostering a culture where IT is seen as a value-driven service.

When introducing this model to business leaders, it’s crucial to frame it as a value proposition. Here are some tactics:

  • Highlight the benefits: Focus on the advantages of the chargeback model, such as improved resource utilization, better budgeting, and increased accountability.
  • Use real data: If possible, provide a mock breakdown of costs based on recent data. This tangible representation can help leaders visualize the impact of the chargeback model.
  • Address concerns proactively: Anticipate potential reservations or objections and address them upfront. For instance, if a department is concerned about potential cost increases, explain the mechanisms in place to monitor and optimize usage.
  • Engage in open dialogue: Encourage business leaders to voice their thoughts, concerns, and suggestions. This collaborative approach ensures the chargeback model is tailored to the organization’s unique needs and challenges.

Organize and outline responsibilities

As organizations transition to a chargeback model, it’s essential to clearly define roles and responsibilities. This ensures the model is technically sound, aligns with the organization’s broader objectives, and is sustainable in the long run.

A successful IT chargeback model requires a blend of technical, financial, and strategic expertise. Key roles include technical experts, financial analysts, strategic planners, and more.

The chargeback organization acts as the bridge between the tech and business units. Key responsibilities include: 

  • Product and service owners responsible for specific offerings
  • A dedicated monitoring and reporting team to oversee the chargeback model
  • A system for implementing feedback and optimizing returns

Different organizations might also adopt different chargeback strategies based on their objectives. For example, here are some common chargeback models to consider:

  • Cost or break-even: This strategy aims to recover the exact costs you incur in providing IT services. It’s transparent and straightforward, ensuring you bill departments for precisely what they consume.
  • Cost + model: Here, IT teams add a markup to the actual costs. This markup can cover overheads, future investments, or even profit margins if IT operates as a profit center.
  • Strategic pricing: This strategy is less about recovering costs and more about driving behavior. For instance, you might set the pricing model to encourage departments to adopt newer, more efficient technologies or to discourage the use of legacy systems.

Use the right tools for accuracy

While the immediate goal of chargeback is to allocate IT costs based on consumption, its broader purpose is to align engineering spend with business value.

Chargeback is the best method for FinOps teams to instill accountability in users or teams. When departments are directly responsible for the costs of IT resources, they’re more likely to optimize from the development stage, leading to proactive cost management rather than reactive adjustments.

Pricing IT services in a chargeback model should reflect not just the direct costs but also the value these services bring to the organization.

 Here’s how to approach it:

  • Cost analysis: Understand the direct costs associated with each IT service, including infrastructure, software licenses, maintenance, and support.
  • Value assessment: Evaluate the business value of each service. For instance, a data analytics service might lead to better business decisions, while a collaboration tool might improve team productivity.
  • Transparent communication: Once you’ve priced services, communicate the rationale to business units. Highlight both the costs and the value, ensuring departments understand what they’re paying for and why.

Gather reliable data

Data is the backbone of any chargeback model. Before implementing chargeback, it’s crucial to capture the comprehensive baseline state of cloud consumption. This baseline serves as a reference point, allowing organizations to measure the impact of the chargeback and ensure its effectiveness.

To establish a comprehensive baseline, organizations need to gather a range of data, including:

  • Total IT costs: This encompasses all expenses related to IT, from infrastructure and software licenses to support and maintenance costs.
  • Total Cost of Ownership (TCO): TCO provides a holistic view of IT costs, factoring in not just direct expenses but also indirect costs like downtime, training, and end-user support.
  • Portfolio of products and services: Understand the complete range of IT products and services offered within the organization. This includes both internally used tools (like collaboration software) and customer-facing applications (like e-commerce platforms).

Gathering and baselining data is a critical step in the chargeback implementation process. It ensures the model reflects the true costs of cloud consumption and promotes transparency and fairness across the organization.

Prepare to explain products and services

The final step involves rolling out the chargeback model you’ve meticulously built. This means applying the pricing strategies to actual IT consumption data, generating bills for various departments or projects, and ensuring that the entire process runs smoothly.

Given the complexity and dynamic nature of IT consumption, automation is key to the successful implementation of a chargeback model:

  • Cost tracking: Use tools and software that can automatically track IT consumption in real time. This ensures that billing data is always up-to-date and accurate.
  • Bill calculation: Automated systems can calculate bills based on predefined pricing strategies, ensuring consistency and eliminating manual errors.
  • Money transfer: Some organizations might transfer actual funds between departments based on the chargeback model. Automating this process ensures timely and accurate fund transfers.

Implement and create reports for stakeholders

Transparency is a cornerstone of the chargeback model. Stakeholders, whether they’re department heads, project managers, or C-suite executives, will want clear insights into how you’re allocating costs.

Provide detailed breakdowns of costs, ensuring stakeholders can easily understand what you charge them and why. Beyond just numbers, offer explanatory reports that provide context.

For instance, if a department’s costs have increased, a report might explain that this is due to increased usage of a particular high-cost service.

To further avoid bill shock among stakeholders, you may also want to enable amortization to spread out chargeback costs over the lifecycle of each commitment. (ProsperOps offers a prepayment tracker to help with amortization of Convertible RIs that do not hold to a strict amortization period.)

Remember, the chargeback model is not a set-it-and-forget-it solution. It requires ongoing monitoring to ensure its continued effectiveness. Periodically review the chargeback model to ensure it still aligns with the organization’s objectives and the evolving IT landscape. Also, remember to make changes to the model based on new data, feedback, or changes in the organization’s strategy.

Achieve lower AWS costs with ProsperOps

By analyzing AWS costs with detailed financial insights, organizations can more accurately attribute cloud costs to various departments or projects using the chargeback model. 

ProsperOps automatically manages a portfolio of AWS Convertible Reserved Instances, Standard Reserved Instances, and Compute Savings Plans to identify cost-saving opportunities and ensure organizations achieve the maximum possible AWS compute savings while minimizing commitment risks.

Want to learn more about how you can optimize your AWS costs with more efficiency using ProsperOps? Get a demo today.

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