What is chargeback?

This approach differs from simple spread models, which allocate a fixed share of resources to BUs (such as marketing, HR, customer service, finance or R&D) ahead of time, often based on their headcount or the revenue they generate.

A third approach, known as a showback strategy, can be thought of as a compromise between chargeback and simple spread. It tracks IT spending across BUs and sends each department a comprehensive usage report without charging them for the expenses they accrue. The strategy aims to hold departments accountable for their resource usage without the distraction of cost recovery.

Organizations might incorporate a chargeback model for several reasons, including to foster a culture of efficient infrastructure spending and cost optimization across the company. Because departments are directly responsible for their own energy and IT costs, each is motivated to make strategic usage decisions and cut down on wasteful behaviors. Chargebacks can also contribute to a sense of fairness across the company, empowering individual teams to allocate resources on their own terms.

Chargeback management might fall under an organization’s risk management program, with IT and finance handling tracking, billing and enforcement collaboratively. A chief information officer (CIO) is often charged with overseeing the strategy.

Chargeback approaches frequently fit into an enterprise’s larger FinOps (or cloud FinOps) and technology business management (TBM) strategies. FinOps emphasizes cross-functional collaboration between IT, finance and business teams to maximize business value from cloud and infrastructure investments across hybrid cloud and multicloud environments.

Chargeback supports key FinOps principles by promoting accountability (teams own their usage and costs), optimization (visibility enables smarter decisions) and governance (policies guide responsible consumption). These models help organizations shift from reactive cost control to proactive financial operations, an increasingly critical step as IT spending is expected to reach USD 5.74 trillion in 2025, up 9.3% from 2024, according to Gartner.

But a chargeback strategy might not be appropriate for every business. It is more operationally complex because it requires detailed tracking of resource consumption across multiple divisions, many of which rely on different services and methodologies. A chargeback strategy can also breed hostility between IT teams and BUs, who might feel unfairly burdened by resource usage they have little control over. It also saddles departments with more financial responsibilities, including forecasting, or the process of anticipating future events based on current data and trends.

Enterprises can organize their IT spending in multiple ways, with some approaches prioritizing team accountability and autonomy and others focusing on efficiency and simplicity.

Simple spread is among the most common IT financial management approaches, especially for smaller enterprises. As the name suggests, this method distributes IT costs as a fixed rate across BUs. Common variants include:

• Even spread: Departments are charged identically, regardless of the amount of IT resources they use. Each is responsible for paying an equal share of the total IT budget.
  
  
• Headcount fraction: Departments are charged based on headcount, with larger BUs paying more than their smaller sized counterparts. For example, if a 100-employee company spends USD 100,000 on IT, a department with 10 employees would be charged USD 10,000, or one-tenth of the total cost.
  
  
• Revenue fraction: Departments are charged based on revenue. Those divisions that generate higher earnings are responsible for a larger share of IT expenses.

One common reason that enterprises might choose a simple spread allocation method is that it takes relatively few resources to implement this allocation strategy. The organization does not have to collect and pore over complex datasets to determine how each department should be charged. Instead, it divides the total IT cost by the number of BUs or breaks down costs by headcount or revenue.

In addition, a simple spread approach can reduce friction between IT teams and BUs because teams know well in advance what they need to contribute to IT costs each month or quarter. The cost breakdown is simple and easier to understand, leading to fewer transaction disputes between departments and IT leaders.

However, simple spread systems are often considered less equitable because some departments inevitably pay for more resources than they use while others pay for less. Also, under a simple spread framework, departments have little reason to mindfully moderate their energy usage because they are charged the same amount regardless of their spending habits.

They might not be aware of their consumption each month, giving the impression that they have virtually unlimited resources at their disposal. This mindset, in turn, can put added strain on IT teams as they struggle to accommodate departments’ capacity demands while adhering to budget constraints.

IT showbacks combine elements of simple spread allocation and chargeback, striking a balance between flexibility and cost transparency. Like chargebacks, they show BUs a detailed breakdown of their energy and resource costs. Showbacks often take the form of a bill of IT—a document resembling a utility bill. But unlike chargebacks, they do not charge departments based on their usage. 

Showback IT bills provide a detailed breakdown of costs for resources such as cloud storage, software licensing, hardware maintenance, cybersecurity, database infrastructure and more. Like a utility bill, effective bills of IT also include guidelines for how business divisions can reduce their energy consumption and implement more efficient workflows.

For example, if an IT department notices that a particular unit is using two different services to perform similar tasks, it might suggest choosing just one and retiring the other. Or, if a department is paying the highest tier for a cloud storage subscription but using only half of its storage capacity, the IT team might suggest switching to a lower tier.

Organizations often use a showback strategy to ease the transition from simple spread to chargeback. It allows departments to challenge inaccuracies in their bill of IT with relatively low stakes because they are not yet responsible for covering IT costs themselves. After the transition is complete, departments are not surprised by their bills because those bills closely resemble the ones they received during the showback phase.

Showback adds transparency to the IT process, helping departments understand how their resource usage affects overall business spending. For example, a unit might feel an obligation to delete outdated data if it notices it has accrued a storage bill twice as high as other departments. At the same time, showback strategies tend to be more lenient and forgiving because teams do not have to directly foot the bill if they accidentally overspend or exceed capacity requirements. Instead, the additional expenses are distributed across the company.

A potential downside is that while simple spread allocations can be calculated quickly and easily, showbacks add new complexities to the IT accounting system, requiring more complex metrics and reporting methods. Also, while departments are shown their IT costs each period, there are no enforcement mechanisms to compel them to act on this information. IT teams must rely on departments’ own willingness to contribute to the company’s efficiency goals.

In a chargeback model, the IT team effectively becomes a commercial supplier to a BU, with the BU becoming IT’s internal customer. Mirroring the business world, the BU can decide whether to purchase its infrastructure needs from the IT department or a third-party supplier offering better products and services at a lower price.

In a chargeback model, IT teams send departments bills based on how many resources they’ve used, like a showback strategy. But chargeback goes a step further by compelling departments to pay their bill of IT, just as they would any other expense. The bill might also include in-depth analytics, helping teams understand cost drivers and levers they can pull to reduce their costs. Under a chargeback model, BUs might also internally track usage trends, including by analyzing previous months’ expenses, so that they can accurately estimate and prepare for future bills.

Cost-based chargebacks, also called break-even chargebacks, require teams to pay back the exact cost of resources and services they used. While relatively straightforward, it might require IT to take on the burden of any additional costs (for example, unexpected licensing fees or hardware replacements) to break even each quarter.

Cost-plus strategies call on teams to pay for resources they used, plus a flat fee to cover any surprise expenses. The fee typically ranges between 2–3% above base costs. If there is leftover funding at the end of the quarter, departments can be reimbursed for these chargeback fees.

Chargebacks with rate-setting, also called strategic pricing, add another layer of complexity by allowing the IT department to fix prices in accordance with its own long-term roadmaps and strategies. By setting custom rates for different services, it has the power to artificially sway market forces to match its needs.

For example, an IT team might want to accelerate the adoption of a new data security service so that it can retire an old service. To facilitate this transition, it can assess demand, price sensitivity and market alternatives. Next, it can set a rate that motivates departments to stop deploying the outdated service and quickly adopt the new one. IT teams might even provide certain in-house services at no cost to align the organization around a particular workflow.

IT chargeback systems hold departments directly accountable for their energy and infrastructure usage, aligning the company around shared efficiency and cost-cutting measures. This strategy also enables different departments to choose the IT services and data solutions that best match their needs, rather than being limited to the IT department’s service options.

If a unit needs more data capacity, it can seamlessly factor the additional costs into its budget instead of negotiating with the infrastructure team. In turn, the IT organization has an incentive to offer top-quality services, knowing that BUs can look elsewhere if they are unsatisfied with its offerings.

Chargeback also enables internal benchmarking, allowing departments to compare their efficiency and cost-effectiveness. This approach can foster healthy competition and drive innovation in how teams use IT resources.

However, IT chargeback models can fuel tensions between the IT team and other stakeholders, who might see the approach as fundamentally unfair. For instance, a development team might find it unreasonable that it pays a higher bill each month compared to divisions like HR or sales, despite the team inherently needing more computational resources to carry out its responsibilities. BUs might also feel less motivated to experiment and innovate out of fears that using more resources would be too costly.

IT chargebacks shouldn’t be confused with credit card chargebacks, when a customer disputes a transaction, leading their bank (the issuing bank) to issue a refund to the cardholder’s account. The dispute process typically begins with the customer’s financial institution initiating a chargeback with the merchant’s bank (the acquiring bank or acquirer). The chargeback typically includes a chargeback reason code, a special identifier that describes the reason for the claim. The bank also temporarily gives the disputed money back to the cardholder during the arbitration process.

The issuing bank might initiate this process after its fraud detection service flags a suspicious transaction—or after a customer notices that an e-commerce site, payment processor (such as PayPal or Stripe) or merchant account charged them in error. The merchant then has an opportunity to dispute the customer’s claim by providing compelling evidence that they were rightfully charged, a process known as representment. The merchant might rely on a transaction processing system (TPS) to surface data related to the transaction.

If the chargeback dispute (also known as a payment dispute) remains unresolved, the chargeback can enter arbitration, when a card issuer or card network (such as Mastercard, Visa or American Express) reviews the evidence and makes a final decision, culminating in a dispute resolution.

Merchants often dedicate significant resources to dispute management and chargeback prevention. Both strategies aim to limit fraudulent transactions and detect friendly fraud, when a customer disputes a charge on their credit card statement despite making the purchase, knowingly or unknowingly. If a merchant’s chargeback ratio (or chargeback rate) grows too high, payment card companies might ultimately choose to cut ties with them. Organizations often assess their chargeback ratio while modernizing their payment system with AI-powered fraud detection, anomaly detection and other advanced capabilities.

Put another way, while both IT chargebacks and credit card chargebacks involve the recovery of costs, the former is an internal organizational strategy, while the latter involves financial institutions reclaiming erroneous credit card transactions and returning the disputed amount to a customer’s bank account.

If implemented haphazardly, chargeback strategies can fuel tensions between teams. But policies that promote communication, transparency and accountability can help mitigate these risks.

Chargeback requires IT teams to take on new responsibilities, including modeling the cost of products and services, setting rates and calculating bills, all in the service of recovering costs. IT teams often implement chargebacks gradually so that they have time to troubleshoot accounting issues without becoming overwhelmed. They might begin with a showback system, transition to a cost-based structure and eventually adopt a more advanced cost-plus or strategic-pricing approach.

The IT department must decide how often to reassess the value of different services and how to charge BUs for their usage. For example, an IT department might charge a team for its average resource consumption over the past three months. This approach helps ensure that the team isn’t punished for any outlier months. IT departments might also create detailed playbooks for how to address financial disputes and reconciliations.

Confusing, vague or inaccurate bills of IT can quickly erode trust around the chargeback process. IT teams can build confidence in their model with bills of IT that consistently reflect each team’s resource usage through metering, automation, machine learning and other tools.

IT teams can also cultivate a sense of fairness through rigorous, regularly scheduled audits. Without trust, teams might begin acting outside of the official IT system, including by using external services without notifying the IT team, a phenomenon known as shadow IT.

Accurate cost attribution depends heavily on consistent tagging and metadata practices. Incomplete or inconsistent tagging can lead to misallocated costs, disputes and reduced trust in the system. IT teams should establish clear tagging policies, enforce compliance and regularly audit tagging hygiene to help ensure reliable reporting.

IT teams can improve transparency by sharing how they determine the value of different services through the enterprise’s service catalog (the entry point that employees use to access company-approved applications). IT can also bring stakeholders into the decision-making process so that their opinions are reflected in reporting and enforcement policies.

Training programs and webinars might also be an important part of a chargeback model, helping ensure that each team knows how to interpret relevant metrics and make informed decisions accordingly. Otherwise, teams might have trouble pinpointing which of their behaviors contribute to higher or lower bills.

Organizations can make targeted IT investments, such as upgrading cloud infrastructure, to deliver cost savings across the company. Strategic investments can contribute to a sense that the entire enterprise—not just individual teams—is committed to cost management and efficiency, generating buy-in from stakeholders.

Stakeholders might be more likely to support a chargeback strategy when they can see how it’s benefiting the enterprise’s bottom line. IT teams can track how spending and usage habits have evolved over time and highlight shared successes, such as cutting annual energy usage by 25% or recovering 100,000 USD in lost revenue due to new cost-cutting measures.