One of the most challenging aspects of running a SaaS business is dealing with highly variable costs.
Every service you provide needs resources, and the demands for those resources fluctuate. Just when you think you’ve got this quarter’s budget nailed down, an engineer makes a restructuring decision or a new feature launch exceeds expectations (or falls flat).
Suddenly, your bill looks totally different than what you were expecting.
Some companies struggle with constantly growing costs in addition to this variability. The bill always goes up and never comes down, and it’s not always easy to tell whether revenue balances out the increases or not.
To encourage some departmental accountability for costs — in the hopes that accountability will cause employees to carefully consider the cost impact of each decision and hopefully smooth out the spikes — some businesses choose to use one of two accounting techniques: chargeback or showback.
While similar, these two methods can produce very different results.
Let’s take a look at the differences between chargeback vs. showback, so you can decide which, if either, would work best for your business.
What Is Chargeback?
When a company receives a bill, usually it pays the bill with a budget set aside specifically for this purpose. The budget typically comes from a general pot of company money, which is shared between departments and allocated as needed.
Under a chargeback policy, however, the company asks each department to pay its share of the bill based on the proportion of resources it used and the associated costs incurred.
Think of it like a shared family phone plan. Mom and Dad might start out paying the bill, and they’re probably happy to continue doing so under normal circumstances.
But if their teenagers start racking up overage data and running up the phone bill, Mom and Dad might start asking each child to pay their fair share based on how much data they used every month.
As a natural consequence, the kids will probably think twice next time they decide to stream an HD movie using the data plan. Over time, this accountability may lower the amount of data they use, but even if it doesn’t, the bill will impact each user in the appropriate proportion.
What Is Showback?
With a showback policy, the company would still foot the bill for each department’s resource usage.
However they would report that usage, along with the associated costs, to the corresponding department so employees can see how their decisions have contributed to the overall bill.
Following the previous example, instead of Mom and Dad asking their teenagers to pay for their own phone data usage, they simply show them the bill and point out the proportion of the total cost incurred by each child.
It’s a gentle way of teaching the responsible parties how they’ve contributed to total costs without taking the money out of a departmental budget.
What’s The Difference?
On the surface, chargeback and showback sound very similar. Both can be effective ways to encourage each department to be accountable for their own resource usage.
The only difference between them is that with chargeback, departments must pay for their resource costs, while with showback they simply are made aware of their cost impact.
As you might expect, the results you can expect from each approach are very different.
For one thing, chargeback policies usually lead to more conscientious spending habits than showback policies. As a teenager, knowing you’ve contributed $90 to the family phone plan this month and actually having to pay the $90 are two very different feelings.
Company departments run by adults can be held to a higher level of maturity, but human nature still dictates that understanding the consequences and actually facing them are completely different things.
On the other side of the coin, chargebacks come with a risk of tension and friction.
This friction can happen between the departments and the executives who suddenly ask those departments to pay for bills they’re not used to paying. As a parent, think of how the conversation would go if you suddenly asked your teenager to start paying their own bills.
Chances are, you might expect some pushback and some assertions about unfairness. This is especially true if one teen has to pay more than a sibling.
Similarly, expect strife if one department suddenly has to pay far more than the others simply because it needs more resources to operate effectively. Engineers, for example, will end up footing most of the cloud bill because their decisions affect cloud costs the most.
If keeping all teams working together in harmony is a top priority for your company, any chargeback policies should be well planned and carefully executed.
Between Chargeback And Showback, Which One Is Better?
The answer to this question depends on your goals.
If you simply want to raise awareness around cost management, it’s simpler and far less risky to opt for a showback policy. But if costs have gotten out of control and you need to right the ship quickly, the higher stakes of a chargeback policy could be worthwhile.
There’s no better way to teach departments to stay under budget than by taking costs directly out of their funds.
If your situation is somewhere in the middle — or you’re unfamiliar with breaking costs down by department — it’s probably wise to start with showback rather than chargeback.
Many companies have the ultimate goal of implementing a chargeback plan, but they use showback as an intermediate step.
Often, telling departments they will need to start footing the bill for their used resources in six months and then showing them the costs they will have to pay when the policy takes effect is sufficient to rein in errant spending.
Keep in mind that tempers can flare when you suddenly ask departments to pay their own bills. If there’s any chance your estimation of costs could be off the mark, it’s better to avoid starting a battle.
Stick to a showback plan until you’re completely confident in your ability to break down costs accurately.
In fact, finding a precise number for each department’s costs can be tricky. Before you can implement either of these policies, you’ll need to have the proper tools in place to determine who is responsible for what proportion of the bill. This is where CloudZero can help.
Showing Your Departments Their Costs Requires A Deep Understanding Of Where Those Costs Come From
It would be tough to break your costs down to the granular level required to show your departments their costs if all you have to work with is your monthly bill. Most bills include a lump sum and that’s it. Any action you take based on this sum would be an educated guess.
If your company tags resources thoroughly, you might have a vague understanding of which resources contributed the most to cloud costs in particular. But tagging isn’t a top priority for most companies, and even when it is, some resources are simply untaggable.
CloudZero’s cloud cost intelligence platform helps you allocate untagged and untaggable resources, so you can keep track of cost generators and their points of origin.
Using CloudZero Dimensions, you can view costs associated with each product, feature, resource, department, and more, depending on the metrics you choose to track.
to see for yourself!
The Cloud Cost Playbook
The step-by-step guide to cost maturity
