The document discusses a new cost allocation system within BP, focusing on the transition from a centralized cost model to a decentralized profit center structure for staff departments. It highlights challenges such as the imbalance of power between businesses and staff, concerns over service pricing, and the potential for staff departments to seek external business to mitigate internal service demand losses. Recommendations are made for BP's corporate staff departments to operate as profit centers, enhancing accountability and cost tracking, while also noting potential risks of increased competition and loss of teamwork.

1. COVERBENETTON DIVERSITY CONSULTINGMark Bundang, TulayCantas, Ron Cohen, AmalKhorchid, RachnaSundaram

2. AGENDASituation OverviewThe ProblemStaff Departments: Cost vs Profit CentersEvaluation of Staff Department PerformanceImpact of BP Minerals SaleNew System Impact on Total CostsRecommendationQuestions2

3. SITUATION OVERVIEW3

4. BP Key PlayersSir Peter WaltersChairmanRobert Horton / James Ross*CEODavid SourwineController, HQ & TreasuryBill JohnsonBusiness Forum ChairmanJohn BishopCorporate Controller*Took over CEO position in April 19884

5. Old Cost Allocation SystemCorporate costs controlled by CEO benefitting corporation as a whole. Includes planning, control, and executivesBusiness-related costs allocated on …Headcount

6. Billable hours

7. Space occupiedBusinessStaffCEO5

8. New Cost Responsibility StructureFirst Year of ImplementationOverall Philosophy of New Structure:Decrease corporate OH by dispersing more costs to users

9. Businesses’ awareness of the value of staff servicesBusinesses:Freedom of choice when sourcing servicesBusinessStaffProfit CenterCost CenterCEOInvestment CenterStaff Departments:Demonstrate value for dollars

10. Competitive with respect to alternatives

11. Ensure customer satisfaction6

12. Business Forum: Overall GoalsIntroduce the buyer-seller procedure1Take out business-related activities out of stewardship and place them in the businesses2Eliminate activities that the group no longer needs37

13. First Year Implementation Results8

14. New System: Cost Responsibility (after first year of implementation)Business-related stewardship costs(From Corporate to Businesses)$16 millionNext Year$?9

15. IncongruityBusinessesStaffBusiness heads perceive that Staff could offer lower costs.Staff departments uncomfortable with being challenged: prices for services and activities performedPerceive that some businesses “playing games”: unrealistic rates required; exceeding budgeted numbers10

16. Cost Discrepancy(after first year of implementation)Budgeted costs in disagreement(Between Staff and Businesses)1st cutFurther cuts$141 million$11 million$1.1 millionAbsorbed by the stewardship Budgeted costsUnbilled services in disputeUnbilled services in dispute11

17. The Problem12

18. Business ProblemImbalance of Power between Businesses and Staff Departments13

19. Imbalance of PowerOption to source externallyStaffBusiness14

20. Leveling the Playing FieldOption to source externallyLeverage of some kindBusinessStaff15

21. Evaluating the Staff Departments 16

22. Staff Departments ControlsLabor variancesBased mainly on efficiency rather than rateOverhead variancesBoth on efficiency and rateAs a Cost Center17

23. Evaluation of Staff DepartmentsAs a Profit CenterLabor variancesBoth on efficiency and rateOverhead variancesBoth on efficiency and rateSales VariancesMarkup to internal & external clientsGross Profit or Contribution MarginCo-ordination of Costs and Revenues18

24. Impact of Change on Staff DepartmentsSale of BP Minerals19

25. Impact of Sale of BP MineralsDecrease in internal service demandRemaining businesses must now increase their own demandCould result in staff reductionAs a Cost Center20

26. Impact of Sale of BP MineralsStaff departments can solicit external demand to compensate for loss of internal activityNew external revenue could be higher than that generated from BP MineralsAs a Profit Center21

27. New System Implications on Total Corporate Cost22

28. Implications on Total Corporate CostAs a Cost CenterNew procedure Intention: Disperse corporate overhead to BusinessesNon-value adding services are recognized & eliminated What actually happened: Corporate costs successfully dispersed $16MHowever, unbilled services of $1.1M were still taken on23

29. Implications on Total Corporate CostAs a Profit Centers Staff more concerned with cost traceabilityForces businesses to be more responsible for costsHence, further reduction in corporate costs24

30. Recommendation25

31. RecommendationBP America’s corporate staff departments should be designated as Profit Centersand allowed to solicitbusiness externally.26

32. RecommendationOption to source externallyOption to solicit external businessBusinessStaff27

33. Benefits of RecommendationLevel playing field for both business & staff

34. Increases businesses’ accountability & responsibility

35. Better cost traceability & control