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Cloud computing: Why you can't ignore chargeback

Bernard Golden | Nov. 8, 2010
One reason chargeback is controversial is that it's really hard for IT groups to accurately assess the actual cost of a resource on a granular basis.

There's been a lot of discussion that perhaps chargeback is not necessary -- that just sharing information with resource users is sufficient. This is referred to as "showback," with the notion that a resource user, when confronted with how much, for example, storage it's consuming, it will act to conserve resource use. In general, I feel that is a naive belief, borne out of a hope on the part of IT groups that indicating resource use will enable them to avoid the hard work of identifying specific costs for resources that are consumed.

And that's really what's at the bedrock for these discussions about chargeback -- accurate cost assignment to those who use IT resources. With Amazon Web Services, it's very clear how much one gets charged, and that the charge is based on Amazon's costs (with a profit margin for Amazon as well, of course).

Regarding internal IT resources, chargeback is designed to accomplish the same thing -- to ensure that all IT costs are associated with granular resources and also that the costs of those granular resources are accurately assigned to those who consume them. That's it. Simple. But not easy.

A Crucial Business Need

But the controversy over accurate cost assignment is, to my mind, being joined by a second reason chargeback is controversial but extremely important. And that reason, may, in fact, be more important long term.

Let me explain by starting with an anecdote.

It's no secret that the world of media-oriented consumer electronics is transforming quickly. The rise of digital formats is upending traditional media that were played in predictable ways -- think cassette tapes played on a Walkman.

Today, however, digital media is upon us with a vengeance and is making mincemeat of traditional distribution. These changes, however, also provide the opportunity for new media services (think Pandora) that are, at bottom cloud based. Another example is the rapid conversion of Netflix's business from physical DVD distribution to on-demand digital streaming. Another cloud service.

This means that manufacturers of consumer electronics have to respond and figure out how to incorporate cloud services into their products. In other words, they have to figure out how to integrate IT functionality into their products.

I was talking to someone from a consumer electronics company and he told me that design engineers at his company obsess with how to remove an additional one dollar of cost from their devices. The pressure to cut costs in these hyper-competitive markets is relentless.

So imagine that you're building an IT-infused device and need to keep your costs down. It would be pretty important that you understand exactly how much it costs for the IT portion of that product -- on a very granular basis.


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