Transparency - A Game Changer in Shared Services success
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Transparency - A Game Changer in Shared Services success

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This white paper discusses the challenges

This white paper discusses the challenges
confronted by Shared services in justifying
their costs and pricing their services to
chargeback to the Business.

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Transparency - A Game Changer in Shared Services success Transparency - A Game Changer in Shared Services success Document Transcript

  • Transparency -A Game Changer inShared Services successA Thought Paper on“Profitability & Cost Management”from the Business Consulting Group
  • Executive SummaryRecent times have seen significant upturn in “Maximizing the value of shared services and mini-exploring for options that might help gener- mizing the risks entail getting a clear view of theate a better bottom line. In such highly cost benefits the enterprise seeks. The design, implemen-conscious environment, the desire to pursue tation and operation of shared services are builta Shared services approach is often driven by around these benefits, taking into account thepotential for savings and efficiency. But Busi- enterprise’s appetite for, and ability to accomplish,ness units often complain that Shared change” – Gartnerservices unit’s services often end up incurringmore cost than they targeted to save.This white paper discusses the challengesconfronted by Shared services in justifyingtheir costs and pricing their services tochargeback to the Business. It furtherdiscusses how these challenges can beaddressed by using the “right” costingmethod for Shared services and by integrat-ing planning and budgeting processes ofShared services units with Business units.These approaches can unlock the investmentin Shared services by not only enabling coststransparency for their services but partneringwith Business in improving forecasting accu-racies and thereby achieving desired benefitsof savings and efficiency. 2
  • The Issue & the Challenge >Getting the most out of your Shared services?A Shared services unit provides end to end Our interactions with the client’s Businessservices of administrative and support func- and Shared services unit indicate the reasonstions like IT, HR, finance, risk, compliance etc. as:-to the entire organization. As a Sharedservice model matures, organizations move Lack of cost transparency due to use offrom single function shared service to costing methodology which cannot validlymulti-functional shared services. While cost measure, report and chargeback equitablysavings due to consolidation of common to the Business unitswork and infrastructure is a major driver to Lack of life cycle view of costadopt this model, more and more organiza- Lack of concurrence on the costs, hugelytions are recognizing the other benefits of due to misaligned capacity between theshared services like increased operational Business and Shared service unitseffectiveness and efficiency by standardiza-tion of services, delivering high quality and Limited understanding of how changingproductivity, improved resource allocation demands of the Business influence theand thereby increasing the capability for high Shared service costperformance. Summing up the above reasons, SharedDespite of rapid adoption of Shared service service units find difficulty in justifying itsmodel, it has its own set of issues. To grow as costs due to lack of cost transparency anda strategic partner to business, it needs to infrequent dialog between Shared Servicesoperate like a business. It means a Shared and Business leads to a misaligned capacityservice needs to have an understanding of and inaccurate forecasting of Shared servicestheir costs and capacity associated with units costs.delivering services to Business and aligningits resources with Business demand. Activity based costing can address these issues and act as a translational tool to helpAs an example, business units of our client, a Business understand Shared services costsleading Bank in South Africa, had two and bridge the communication gap andcommon complaints from their Shared enable cost transparency.services units:- “What are my Shared services costs made up off?” “Shared services costs are too high and affecting my product profitability”Charge back from Shared services to Businessunits is often a constant source of internalstrife and negotiation between them. Thequestion is why? 3
  • The Need >Bringing in Cost TransparencyCost transparency in context of Shared Ser- Sequential chargingvices is to show the business Services it consumes Cost of delivering these services Breaking the cost down to activities and resources involved in producing these servicesActivity Based Costing can detail the cost ofservice offerings of Shared service units to theactivities involved in producing them andhow these activities consume resources andits respective GL costs. This establishes adirect relationship between services used and Sequential charging also known as Waterfallcosts to customer. It further helps in identifi- costing, the charging begins with one Sharedcation of value adding and non-value adding service area like in this figure “IT”. IT assigns allactivities. This fosters communication its costs to HR, Fin, other Shared service unitsbetween Business and Shared service to and Business units. Next step is to assign allunderstand how they can work together to the costs of HR including the cost receivedreduce costs by eliminating non value added from IT to Fin, other Shared service units andactivity and retain the same effectiveness and Business units. Finally, Fin assigns all its costsefficiency. to Business units. Simple and easy to under- stand approach but lacks the simultaneousShared service units have substantial approach of cross charging.expenses and are seldom revenue producingunless they cater to external clients as well.Most of the Shared services cater to other Simultaneous chargingShared services and Business in the organiza-tion. It is finally a zero sum game for Shared Cross charging between Shared services unitsservice wherein its costs are reassigned to before charging eventually to Business units,other recipient Shared service units and can be one time assignment using reciprocaleventually to Business units. costing or iterative assignments using recur- sive costing.Total cost of a Shared Service unit = Its OwnDirect cost + Net inward cost Reciprocal costing is the method of simultaneous charging. It is a 2 step method.So the method of calculating inward cost In the first step, there is a onetime assignmentthrough cross charging should be simple to of costs between the Shared services units. Inunderstand and equitable in its approach as the second step, Shared services unit costswell. So let’s look at various methods gener- including the allocated cost from otherally used to calculate net inward cost:- Shared service units are eventually charged out to the Business units. 4
  • Budgeted chargeback rate is calculated using budgets at the beginning of the reporting period Budgeted chargeback rate for a service offering = Budgeted service cost Budgeted service volume (2) Actual chargeback rate is calculated using Recursive costing also a method of actuals at the end of the reporting period.simultaneous charging enables iterativeassignments of cross charging between the Actual chargeback rate for a serviceShared services units till substantial costs of offering =Shared services is transferred to the Business Actual service costunits. Actual service volume (2) 2 Volume can be demand or capacity of the service offering The difference between the budgeted and the actual chargeback rate i.e. variance or recovery is charged to the buyer units based on the nature of variances and agreed Service volumes.We have seen that Reciprocal costing method Using budgeted chargeback rate from Sharedis more accurate than the Sequential charg- services, Business units can have an estimateing method but less accurate than Recursive of the impact of Shared services cost on theircosting method. But Reciprocal method is product profitability. Reporting period endeasy to understand and costs can be easily variances will relate to change in cost andtraced to its orgin which enables Cost Transa- volume from budgets to actual. Using aprency for Shared services units unlike that of method of costing which is simple, equitableRecursive method. and allows traceability to the origin helps in increasing the frequency of variance report-Once the total cost of Shared services units ing at regular intervals drives accountabilityare arrived then Chargeback unit rate for their among Business units and Shared servicesservices should be computed, inorder to issue and provides early warnings of under or overa Service Catalogue for each Shared service consumption of resources.unit for its services.Chargeback rate are of two types – Budgetedand Actual 5
  • The Way Forward >Capacity Management and Improve Enterprise wideForecasting accuracyTo enable business agility in this highly com- Using driver based budgeting of Sharedpetitive environment, Business units need to services and integrating it with high levelplan and budget their share of Shared enterprise wide budgets highlights theservices cost which are indirect in nature, to impact of external and internal factors onget a full picture of product and customer resource and capacity needs of Sharedprofitability. But in many organizations, the services. Shared services can leverage exist-Business and Shared services operate and ing idle capacity to add new services atplan in silos. Shared services and Business reduced incremental investments and opera-units do not work closely in planning and tional cost. Better alignment of resourcesforecasting their respective demand and across the organization, minimizes the risk ofcapacity. This leads to misaligned capacity of duplication of capital investments andShared services which is counterproductive improves forecasting accuracy by enablingto the Business and leads to higher costs. If the organization to frequently reforecast toBusiness doesn’t get involved in the process keep capacity of Shared services in lines withof setting the chargeback rate for Shared Business demands are the benefits which canservices, by integrating their budgets with improve the Return on investment.that of Shared services, then suboptimalcapacity and high costs will prevail in Sharedservices and they need to accept thesecharges no matter how high they are.A Potential Tool Option >SAP Profitability and Cost Management (PCM)An important aspect of a cost model imple- the origin, cross model integration within thementation or change is the tool capability to tool and on demand “what if” and scenariosupport the same. We believe SAP PCM con- modeling capabilities which make opera-tains a powerful modeling framework which tional management and forward planning ofhelps organizations allocate costs using enterprise wide cost responsive and simple toactivity based costing and budgeting. It is a control. to keep capacity of Shared services inscalable and flexible enterprise class solution lines with Business demands are the benefitswith the ability to process multiple and itera- which can improve the Return on investment.tive cost allocation rules, trace back of cost toReferences“Planning and Budgeting for the Agile Enterprise” by Richard Barrett, 2007 6
  • SummaryBusiness tends to be critical of Sharedservices due to the revenue generator vs. costgenerator mindset. Cost transparency, closeralignment in planning operational plans andintegrating driver based budgeting with theBusiness, using “what if” modeling and sce-nario planning for enterprise wide resourcesenables Business to assess budgets morefrequently and accurately. Shared servicesunit’s resource leverage from economies ofscale can help value generation and evolvethem strategic partner from just an internalservice provider. 7
  • About the Author(s)Sweta Virani is a Lead Consultant with PCMpractice at ITC Infotech, Business ConsultingGroup. She is a Chartered Accountant withover 6 years of experience in Financial andBusiness Performance Analysis, Strategic Costand Profitability Management and FinancialAnalytics in Banking & Financial servicessector. She has worked extensively on PCMModeling for Shared Services Models usingActivity Based Costing.Indranil Das is a Principal Consultant withEPM practice at ITC Infotech, Business Con-sulting Group. He holds a degree in Mechani-cal Engineering with M.B.A in finance withover 9 years of experience in Strategic Costand Profitability Management, Enterprise Per-formance Frameworks, Financial Perfor-mance Management and Business Analyticsin CPG, Travel & Hospitality, Retail and Manu-facturing sectors. He has built comprehensiveActivity Based Costing models, Cost to serve About the ITC Infotechmodels and Cost and Profitability analytics forCPG and Manufacturing sector. Business Consulting group ITC Business Consulting Group provides rich business consulting capabilities across key business functions such as product design & development, manufacturing & supply chain management, sales & service, loyalty & cus- tomer relationship management, etc. The group has expert practices around Enterprise Performance Management, CRM and Loyalty, SCM and Operational Excellence, Auto ID Solutions and Corporate Sustainability. Our domain experts and management consult- ants bring in expertise of addressing cus- tomer needs and problem statements in these areas across verticals such as CPG, Retail, Process & Discrete Manufacturing, Travel & Hospitality, Banking & Financial Ser- vices and Logistics & Transportation. 8
  • For more information please write to: contact.us@itcinfotech.comwww.itcinfotech.com © 2012, ITC Infotech. All rights reserved