Chargeback VS Showback

Chargeback VS Showback

Chargeback and showback are two very different ways to manage costs within an organization. Both of these methods have been used for decades to help organizations keep track of the costs associated with their operations. In recent years, they have become increasingly popular due to their ability to provide organizations with greater oversight and control over their spending. In this blog, we will explore the differences between chargeback and showback, and compare their respective benefits and drawbacks to help you decide which approach is best for your organization. 

What is Chargeback? 

Chargeback is a method of cost allocation that allows organizations to track and charge different departments or divisions for the costs associated with their activities. This method is particularly useful for organizations that have multiple departments that need to use the same resources, such as IT infrastructure or software licenses. With chargeback, each department or division is assigned a certain amount of the total cost and is billed according to their usage. 

Chargeback is often used in a variety of industries, including banking, healthcare, manufacturing, and retail. Organizations typically assign a cost to each department for the resources they use, such as servers or software licenses, and then track their usage to determine the cost of each department’s activities. By assigning each department a specific cost, organizations can ensure that each department is paying their fair share of the costs associated with their activities. 

What is Showback?

Showback is a method of cost allocation that allows organizations to track and report the costs associated with their activities, but does not require them to charge each department for their usage. This method is often used in organizations that do not want to assign a cost to each department or division, but still need to monitor their spending and usage. With showback, organizations can track and report the costs associated with their activities without having to assign a specific cost to each department. 

Showback is often used in a variety of industries, such as banking, healthcare, manufacturing, and retail. Organizations typically track the costs associated with their activities, such as server usage or software licenses, and then report the costs to their departments or divisions. By doing this, organizations can ensure that each department is aware of their usage and associated costs, without having to assign them a specific cost.

Showbacks vs Chargebacks: Operational differences
Chargebacks and showbacks have many similarities but also a few important differences. Both are used to account for the costs associated with IT services and resources.

  • Chargebacks are a more formal approach to recovering costs. They are typically used in an enterprise setting to ensure that IT resources are allocated to the right departments and that they are used in the most efficient manner. Departments are charged for the services they use based on predetermined rates, and the funds collected are then used to cover IT costs.
  • Showbacks, on the other hand, are less formal and more flexible. They are typically used in smaller organizations or departments to help IT understand the cost of providing services and resources, and to help departments plan for future IT resource needs. Unlike chargebacks, showbacks are not used to recover costs, but instead are used to provide departments with an understanding of the cost of their IT services.
  • When it comes to operational differences, chargebacks are typically used to recover costs while showbacks are used to provide departments with an understanding of their IT costs. Chargebacks are typically more formal and require more detailed tracking and reporting, while showbacks are more flexible and less detailed. Chargebacks are also more expensive to implement as they require more complex systems and processes.

Advantages of Chargeback

  • Promotes cost-efficiency: By charging customers for IT services, organizations can ensure they are only using resources they need and are paying for what they use.
  • Increased transparency: Chargebacks allow organizations to have a better understanding of their IT usage and costs. This helps ensure that IT departments are able to accurately assess the value of their services and make informed decisions about which services to continue or discontinue.
  • Encourages strategic use of resources: By making users accountable for their IT usage, chargebacks incentivize users to use resources strategically and responsibly.
  • Improves IT service delivery: By providing users with a better understanding of the cost of IT services, chargebacks can help IT departments deliver services more efficiently and effectively.
  • Recovers costs: By imposing a chargeback system, IT departments are able to recover the cost of services used, thus providing a more sustainable funding model for the organization.
  • Ensures fairness: By charging users for the services they use, chargebacks can ensure that all users are paying their fair share. This encourages users to use resources responsibly and fairly.

Disadvantages of Chargeback 

  • Creates tension and conflict between departments, potentially leading to exacerbated issues between IT and operations
  • Requires businesses to perform financial true-ups against budgets on a regular and ongoing basis
  • Increased the chance of accounting errors, due to the nature of the method
  • Requires businesses to integrate chargeback processes into existing financial systems
  • Presents a lower risk of adoption across the organization and a higher risk of failure
  • Can be difficult to standardize chargeback processes across departments
  • Can be difficult to identify the true cost of IT services and accurately track the cost of IT services over time
  • Can be time-consuming for IT departments to administer chargeback processes

Advantages of Showback 

The primary advantage of showback is that it is much simpler and less expensive than chargeback. 

  • Encourages users to make resource-intensive changes that positively impact cost 
  • Correlates the cost of IT with business capabilities and goals
  • Allows businesses to compare cost of vendor solutions with actual departmental usage needs 
  • Easy to implement
  • Existing accounting systems and practices don’t need to be amended to implement showbacks 
  • Requires no additional accounting processes, like true-ups 
  • Decreases the chance for error, keeping mistakes relatively low 
  • Provides transparency between departments and IT 
  • Helps IT and business departments understand the cost of systems 
  • Gives a clear view of the overall IT costs for better budgeting and decision making 
  • Enables accurate and timely billing of IT services 
  • Shows the cost of IT services over time to identify cost reduction strategies 
  • Allows IT organizations to better anticipate demand 
  • Provides detailed visibility into resource costs

Disadvantages of Showback 

  • Showbacks do not incentivize departments to change their resource consumption habits, only showing them their usage.
  • IT departments cannot recover costs under this model.
  • Without proper communication and education, departments will not understand or be motivated to adjust their usage.
  • Showbacks can be difficult to manage and monitor on a regular basis.
  • The lack of granular data makes it difficult to accurately assign costs to individual departments.
  • Showbacks are typically based on averages, making it difficult to identify and allocate costs.

Wrap Up

Chargeback and showback are two very different methods of cost allocation that can be used by organizations to manage their costs. Each method has its own advantages and disadvantages, and it is important to consider these when deciding which approach is best for your organization. 

Chargeback provides organizations with greater oversight and control over their spending, but can be difficult to set up and maintain. Showback is simpler and less expensive than chargeback, but does not provide the same level of oversight and control over spending. Ultimately, the decision of which approach to use will depend on your organization’s specific needs and objectives. We hope that this blog has helped you to understand the differences between chargeback and showback, and to decide which method is best for your organization.

How nOps can help?

Based on our experience working with clients, showbacks are often the most suitable starting point for many businesses. This is especially true for companies that lack experience in creating IT bills, want a simple setup, are looking to avoid major process changes or connecting accounting software, or wish to avoid the potential for mistakes.

Many organizations that want to use chargebacks in the future may find it more beneficial to initially begin with showbacks. The lower complexity allows them to start quicker and refine the process over time, leading to a smoother chargeback introduction.
Ultimately, both approaches have their advantages, and more firms are taking advantage of the cost-saving benefits of these strategies. At nOps, we help you deliver FinOps in two ways. First, we provide a wide range of cost optimization capabilities to help you keep cloud spending to a minimum. In addition, we provide the ShareSave feature that enables your team to optimize cloud costs continuously with smart Reserved Instance planning. Schedule a demo to see it in action.