Why Organizations Should Reconsider Their Current Chargeback Systems
Imagine Mary, Fred and George are gathered for a budget meeting with Ellen, their company’s CIO, to discuss another budget shortfall. Ellen asks, “What caused this million-dollar shortfall?” George says, “We think it’s related to the decision by accounting to shift one of their major workloads from our Power Systems* platforms to our VMware tower. We were getting approximately $800,000 in chargeback recoveries for that application, called the XB app, and those recoveries disappeared when they moved it.”
Mary adds, “We’re behind in our VMware recoveries too. It looks like we’re headed for a $230,000 deficit there and we think it might also be due to the new XB application.”
Then Fred says, “I know they took the application off, but I haven’t seen a reduction in capacity requirements, so my Power* costs haven’t decreased. I certainly don’t want to be the one explaining to the other departments why their chargeback is going up again!”
Ellen asked her team to gather more answers about the XB application shift.
The Staff Meeting
Mary asks Fred, “What did you find out about the Power situation?”
“We recover our Power costs by charging for LPARs,” says Fred. “We try to set the LPAR chargeback rate every year by looking at our total cost and dividing by the number of LPARs hosted during the year. The users always complain. They can’t figure out what drives a need for more LPARs; frankly, neither can we. That’s up to the architecture and programming teams. We just host the workloads. The XB application was using four LPARs last year and that drove $800,000 in recoveries. When they took the application off, it freed up some capacity on the servers, but we still need to pay for the servers and maintenance. It didn’t drive down the peak requirements for CPU resource either, so we still need as many cores as we used before. Those are our cheapest MIPS. Our actual expense only went down about $30,000.”
George looks perplexed. “Why were we charging them $800,000 if this application only costs us $30,000?”
“I think it has to do with the way we average things,” Fred explains. “Many of our costs are fixed, so when we remove LPARs, our costs don’t go down much. The idea of the Power enterprise server is to put lots of work in it to defray the overall cost. Taking work out doesn’t really decrease the fixed-cost burden, so it leaves the last remaining applications and LPARs with carrying all of the burden and drives up their cost. While it makes sense to the platform defector to leave based on the chargeback cost, it isn’t necessarily a good decision for the company.”
“But,” George asks, “Why are we down by $1 million?”
Mary reveals a chart (see Figure 1).