Invoicing & Chargeback

Framework / Domains / Manage the FinOps Practice / Invoicing & Chargeback

Developing specific reporting, cloud invoice reconciliation workflows and chargeback models, in direct collaboration with Finance Personas with input from Product and Engineering Personas, to align cloud cost data and reporting to specific budgets and accounting requirements.

Manage invoicing financial interactions

Manage Purchase Orders with providers
Understand provider invoicing format and procedures
Define provider invoice reconciliation procedures and policy

Manage chargeback financial interactions

Define and maintain finance and accounting decision making and coordination and integrations
Chargeback reporting to internal budget owners
Accounting close processing with accounting personas
Handle adjustments and corrections with accounting systems

Definition

Managing cloud invoices and creating official chargebacks to the organization’s Finance systems are important – and specific – processes that must be established as official interactions between the FinOps practice and Finance & Accounting personas. Accounting must have the ability to effectively understand, reconcile, and pay invoices from cloud suppliers. In organizations where there is a need to perform official chargeback to the organizational budget or accounting systems, Finance must be able to rely on cloud cost data consistency, timeliness and accuracy to allocate expenses in a transparent and accountable way. This ensures that each organizational profit and loss (P&L) owner bears financial responsibility for the cost of the resources or services it consumes.

The goal of this capability is to support Finance to allocate invoiced cost to cost centers they’ve identified, in the formats and at the timing intervals required to support accounting and finance activity required by the organization. In addition to managing invoices, and creating chargeback reporting, this capability must address ongoing maintenance of required data and reporting requirements over time to support maturing cloud practices and changes in accounting or finance needs. This includes providing guidance to the FinOps team on how data quality should be checked and verified, how data and reporting integrity should be maintained (e.g. some organizations will require SOC compliance or similar), what elements of cost should be included in chargeback reports (and using which cost metrics), and providing process for situations where chargeback reporting needs to be corrected because of changes that occur after accounting period closing. The chargeback process should align to the goals of both the FinOps team and ITFM/TBM, primarily around the level of granularity for chargeback, general ledgers (cost centers) to use, and timing requirements for close activities.

Reconciliation of Cloud Service Provider (CSP) invoices can be challenging due to several variables:

Timing – CSP invoices are received monthly between 3 and 12 days after the end of the previous month in most cases, but cloud usage data is delivered continuously through the month, and consumption data can be received after a month ends. The ability to perform accounting close very shortly after the end of an accounting period can be challenging if the invoice and usage data haven’t been received. It may be necessary to use incomplete data and make estimates for both total spend and individual line items, with proper processes in place to reconcile with journal entries once data and invoicing are complete
Data accuracy and alignment – CSP invoices present summarized information detailed to a sub-account level, which may be difficult to allocate to cost centers. When using tags or labels to categorize, or dividing shared cost, it can be difficult to validate the data as summarized on the invoice. Additionally, the impact of commitment based discounts (e.g. custom pricing, Committed Use Discounts, Savings Plans, Reserved Instances) may not be included on the invoice as desired
Volume of invoices – Organizations may receive numerous invoices across multiple cloud providers and other vendors (including separate ones for prepaid commitments, usage, marketplace subscriptions, credit memos, etc.) depending on how they have organized and deployed their cloud resources

To overcome these challenges, this capability will have strong ties to the Data Ingestion, Allocation, and Reporting & Analytics capabilities which will create the integrated datasets to support showback reporting for all personas in addition to reconciliation and chargeback reporting.

The primary difference between showback and chargeback is the formality described in this capability of sending expenses to official accounting budgets. Showback reporting can be used at any granularity to show any group, large or small, the costs of the scope it’s responsible for. Neither type of reporting should be considered more mature than the other. Chargeback is not always required in every organization. When cloud costs are allocated to a single, or easily allocated set of cost centers, the additional cost and burden of creating official chargeback reporting may be unwarranted. Showback is always required in any FinOps practice, but chargeback is dependent on organizational accounting policies.

Some of the actions in this capability rely upon decisions made in the Cost Allocation capability. Decisions around a tagging and account strategy will help influence what level of granularity you can determine ownership and designate a cost center for chargeback. Another consideration that relies on Cost Allocation is how shared organizational costs will be identified. If it is not easily identified within the Cost Allocation capability, the ability to chargeback these costs will be limited to only certain types of costs (enterprise support charges, commitment based discounts). However, questions such as “Will these costs be held centrally or allocated based on consumption?” should be answered within this capability and determined in collaboration between the FinOps team and finance.

Maturity Assessment

Crawl

Cloud spend is charged back to teams based on estimated spend month and there is typically a material variance (which is not material for the overall organization) from estimated spend to actual spend
Ledger estimates with incomplete data are made without additional true-up entries once data is complete
Shared costs like enterprise support are held centrally due to lack of strategy on how to provide visibility
Commitment based purchases made in a specific sub-account are charged to the owner of the account and not based on the consumption of the discount
Commitment based purchased made in a central billing account are held centrally and not charged back to teams based on the consumption of the discount
Monthly invoice reconciliation is done at a macro-level ensuring total cost expected per service provider matches the total invoiced amounts
Processing invoice payments and the chargeback process happen days or weeks apart from each other due to manual efforts
No tooling in place to automate data capture, data mediation or exception handling
Chargeback is done using spreadsheets, manual journal entries, with no service catalog or cost center hierarchy tooling in place
Chargeback file is high level with total costs per service provider across cost centers without shared cost or other costs split out for visibility
Cost center hierarchy is relatively flat with cost centers only assigned to leadership
The only consistent touchpoint for the Finance, central FinOps, and Accounting teams is the sharing of chargeback data to be posted

Walk

Cloud spend is charged back to teams based on estimated spend with some level of variance between estimates and actuals
Placeholder ledger entries or incorrect charges are common due to manual effort
Ledger estimates with incomplete data often require additional entries to true-up actual cost
Initial strategy implemented on how to charge and show shared costs in the chargeback file
Majority of all commitment based purchases are charged to teams based on their consumption of the discounts
Centralized tooling is in place to for chargeback data and exported to a file that is manually edited before integrating into the company’s financial tooling
Processing invoice payments and the chargeback process happen over the course of the financial close process (days)
Chargeback file is expanded to include breakout some shared cost components and split out committed use or marketplace purchases
Invoices are manually validated ensuring credits, discount rate, and one-off charges are all correct and received into the accounting system
Cost center hierarchy is expanded to more granular parts of the organization for more detailed chargeback
Currency conversion is factored into chargeback file as a part of the monthly process
Finance, central FinOps, and accounting are actively collaborating on decisions related to maturing the chargeback file, level of detail, and determining initial strategy for shared cost charges.

Run

Teams understand their direct and allocated shared cost portion of cloud spend based on their actual consumption
All commitment based purchases are charged to teams based on their consumption of the discounts
Chargeback/Showback reporting is integrated automatically into the companies finance tooling
Invoice reconciliation and the chargeback process happen simultaneously due to automation and integration of tooling
Finance is self-sufficient in reconciling spend or answering questions regarding chargeback without intervention from the central FinOps team
Ledger estimates with incomplete data are within a small enough error that additional entries are often not required but can be quickly mediated if necessary
Chargeback data is fully automated each month into the financial system with the ability to support charging, mark-ups and allocation both in advance and in arrears
Chargeback file is expanded in detail to show all types of charges split out
Currency conversion is automated if possible and is distinct in the chargeback file to allow for additional analysis on any fluctuations not related to cloud usage
Finance, central FinOps, and accounting have finalized all associated processes for charging and showing shared cost and have expanded chargeback to the most granular levels of the organization

Functional Activities

FinOps Practitioner

As someone in the FinOps team role, I will…

Receive Cloud Provider invoices and direct invoices for payment, or arrange for the appropriate team to receive them
Understand internal procurement process to generate a Purchase Order Number or Term Sheet for Cloud Provider to submit invoice against
Work with Finance to validate Cloud Provider invoice on a monthly basis, including expected costs, discounts, tax, credits
Validate any Marketplace invoice as needed and route to appropriate team
Understand how cloud expenses are generated
Help teach teams the tagging and account policies and the importance of expense accountability required for chargeback and invoice reconciliation
Establish and maintain data source/tool for allocation methodology for cloud usage and shared charges (i.e. commitment based discounts) and leverage this to create chargeback data
Validate chargeback data aligns with costs expected from invoice plus any added costs
Help teams reconcile their portion of expenses that is allocated to them each month using chargeback data
Partner with the accounting and finance team during close activities. Advise on estimation best practices for initial chargeback. Provide “true up” chargeback data to Finance if not in a single system in alignment with close timelines.

Product

As someone in a Product role, I will…

Review the cloud costs I am accountable for each month
Understand how these costs impact my budget
Have an understanding of organizational policy regarding chargeback/showback and allocation of shared costs/discounts
Message cost expectations for my application to leadership
Leverage chargeback allocation information for prioritization of optimization work

Finance

As someone in a Finance role, I will…

Understand how cloud expense is generated
Help teams understand their budgets and update forecasts as an iterative process
Explain variances to budget to leadership and budget owners (typically monthly, quarterly, yearly)
Partner with central FinOps team and Accounting to ensure the chargeback process evolves overtime to meet any changes to the organization’s budget or alignment needs
Help teams reconcile their portion of expense that is allocated to them each month
Partner with Accounting and the central FinOps team during close activities to ensure invoices are validated and paid on time
Utilize the centralized data/allocation tooling to execute chargeback postings in the financial system
Establish criteria for compliance with chargeback procedures that are in line with the company’s financial close, budgeting, and forecast processes
Provide detailed line item accounting such as General Ledger codes that tie back to budgets to enable proper chargeback
Track changes in cloud costs relating to currency fluctuations versus usage
Collaborate with central FinOps team to establish a process for charging back share cost and commitment based purchases
Execute on any necessary true-up entries after billing data is finalized to ensure cost to each department is accurate

Procurement

As someone in a Procurement role, I will…

Understand how cloud expense is generated
Partner with Finance, Accounting, and the FinOps team on close activities and chargeback if Purchase Orders (POs) are required with cloud expenses, such as marketplace purchases via the Service Providers
Provide invoicing and payments terms to finance and accounting to ensure our chargeback processes meet the contractual criteria

Engineering

As someone in an Engineering role, I will…

Understand how cloud expense is generated for each service used
Comply with company tagging and account policies that help drive more detailed chargeback
Review costs allocated to relevant teams/applications each month for awareness, trends, budgeting, etc.
Message cost expectations for my application to leadership and finance controller
Have an understanding of organizational policy regarding chargeback/showback and allocation of shared costs/discounts
If applicable, partner with FinOps practitioners, accounting, and Finance team to validate planned chargeback for shared services I own

Leadership

As someone in a Leadership role, I will…

Understand how cloud expense is generated
Review cloud expense for portions I am accountable for
Leverage this information for real-time decision making
Establish metrics to measure and support chargeback success
Understand the organizational policy regarding chargeback/showback and allocation of shared costs/discounts and contribute to its evolvement if necessary

Measures of Success & KPIs

Measures of success are represented in the context of cloud costs and may include one or more key performance indicators (KPI), describe objectives with key results (OKR), and declare thresholds defining outliers or acceptable variance from forecasted trends.

KPIs

Chargeback Processing Time – Efficiency of chargeback process from cost incur to allocation to the departments, projects and products.
% of Invoices Paid On-Time – adherence to terms with Service Providers
General Ledger Recharge Rate (Total and Per Cost Center) – variance between cloud spend in cloud management tool and amount charged in General Ledger
% Accuracy of Chargebacks – Proper charges allocated to the correct cost center
% Variance in chargeback estimates vs actuals

Measures of Success

Periodic reconciliation of invoices to ensure rate, discounts, and credits are validated
Budgets and forecasts are not impacted by material shifts in cost due to incorrect charges
An established and collaborative relationship between finance, accounting, and FinOps teams
An increase in awareness and accountability for cloud spend for each budget owner
Effective reporting on chargebacks executed
Reduced cycle time between receiving invoice and processing chargeback

Inputs & Outputs

Inputs

Tagging standards and strategy provided by the FinOps team and determined as a part of Cost Allocation
Cost Allocation data provided by FinOps team from the established tooling
Cost allocation model for shared services provided by FinOps team and Finance
Internal allocation reporting built by FinOps team to feed chargeback process
Financial Policies, Procedures, Protocols, and Practices, including financial expenditure approval thresholds; depreciation and amortization policy/strategy; capitalization bias/strategy provided by finance and accounting team
Company cost center/department hierarchy provided by the finance team
Invoicing payment terms with each CSP provided by procurement team
General ledger requirements (Chart of Accounts, Cost Centers, Business Unit Codes, Capital Budget Codes, Location Code) provided by accounting team

Outputs

Charges executed in financial systems and are visible in expense center actuals
A centralized reporting tool as the source of truth feeding the chargeback file
Feedback to Allocation on how Finance needs to officially allocate costs in Chargeback to organizational cost centers / General Ledger codes / etc.
Feedback to Data Ingestion Capability for specific data, metadata required for Chargeback or invoice reconciliation purposes
Feedback to Reporting & Analytics Capability on how showback reporting should be formatted into Chargeback reporting
Feedback to Intersecting Disciplines capability no how IT Finance or other financial extracts should also allocate or categorize costs
Terminology specifics around information provided on invoices and chargeback reports, for use by other personas to be more precise about reporting
Documentation of period close and invoice processing requirements to meet organizational finance needs
Chargeback file containing metadata, data – in the predetermined currency – aligned to the organization’s General Ledger for financial system ingestion and processing

View former Chargeback & Finance Integration page

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Invoicing & Chargeback

Definition