How Shared Services Continue to Miss a Trick

The majority of shared services directors think about their internal charging model after they’ve thought about everything else. This article looks at how that might not be the most sensible approach, and examines one charging model that works.

A shared services director (SSD) can be likened to an entrepreneur. Although the SSD has the fall-back of the mother company’s resources, reputation and money, there is still a business that needs to be set up – a case needs to be determined, a plan needs to be designed and executed, and the fundamental rules of setting up and running a business need to be followed.

It is at the stage of building a business case that you would assume an SSD would start thinking about the “commercials.” This is what entrepreneurs do when they set up a business. They run their cost line, but above it, they run their revenue line, which is based on pricing and forecasted units sold.

When SSDs put their plan together, it’s largely based on the cost of running a function in a shared services organization, versus running the function outside the shared services model. Pricing or revenue rarely feature in their thinking.

Arguments for this approach are sound, but not fully convincing. Some arguments for not featuring pricing in the plan might be:

“We are going to be operating as a cost center, not a profit center.”

“Why take from the left pocket to put in the right pocket?”

“We are going to cover our charges based on a flat price of revenue-per business unit, or FTEs per-business unit, but not actually bill the customer – that’s too administrative.”

I will present, quite happily, arguments to counter all the above, as I am a supporter of the trick that I believe a lot of SSDs are missing: Activity based costing  – ABC – charging, or unit based charging, or incentive based charging. For the sake of this article, I'll use “ABC” to refer to the general model that these three labels describe.

O.K. Let me explain.

Your business units are instrumental to your lowering your cost of function. When you start on the shared services journey, this might not be apparent. Huge cost savings come just from centralizing the function, and beginning to standardize the process and reducing the number of ERPs used. However, when you move into Continuous Improvement, you start to realize how much your function’s cost base is dependent on your customers’ behavior.

PO compliance is a key example. You rely on your business units to be PO compliant so you can achieve a higher probability of a good first time match rate. If they are not PO compliant, you continue to have an unnecessary high cost-per-invoice. The moment they are PO compliant, your cost per invoice – and therefore your overall cost of running the function – reduces dramatically.

The beauty of ABC is the following:

1. It educates your user and customer in a very powerful way. How is a customer supposed to know the true cost of running finance, if they don’t have visibility at a unit level?
2. By educating the customer, by pricing your different services and offering different prices, you are empowering him to make changes at his end to lessen his costs. ABC helps your customer drive compliancy, be aware of how one behavior “over here” drives up cost “over there,” and to be thoughtful as to what he actually needs from the SSD rather than what he thinks he wants.
3. Your customers will increase their value-perception of the shared services organization. It’s hard to value something that is nominally free. By putting a price tag on a service, and indeed at a line level, you are making the customer think about how much the services are really needed, and how they themselves can contribute to lowering the cost.

There is often resistance by the customer to ABC. This is because, in a sense, their hiding place is being dismantled. The financial impact their business unit is having on the company’s cost base is being exposed, line by line, behavior by behavior. It can make many business unit heads feel very vulnerable, or scrutinized. With this comes fear, often dressed up as anger and frustration. So expect this as part and parcel.

However, all an SSD is doing when setting up and following an ABC model, is making the rest of the business aware of how much impact certain behaviors and demands are having on the business, and is therefore driving a wider sense of responsibility for these costs. For example, many SSDs that operate the ABC model talk about:

• How the number of internal financial reports the shared services has had to run for their customers has dropped significantly because they now charge for these reports. This weeds out the running of reports that were issued to the business but not read. ABC weeds out “waste-of-time” activities.
• How the requests for “urgent payment” by buyers have dropped dramatically, as the business unit is loath to pay $150 per urgent payment versus $10 for a standard invoice payment. ABC separates the genuinely-needed requests from the nice-to-have requests.
• How a shared services is seeing massive momentum in its e-invoicing campaign now that it has an internal charge of $1 per electronic PO invoice, and $50 per paper and non-PO invoice. You can see how this pricing will get your customers behind e-invoicing and help your program with adoption.

The most compelling argument that SSDs can present against ABC charging is the administrative effort they will need to invest, and the billing system they will need to implement. However, this is a) worth the investment – your cost of running the function will decrease once you have applied ABC – and b) you do not need to over complicate this – you don’t always need a full time person just managing the ABC charging administration, and you don’t always need an elaborate billing system to manage the monitoring and issuing of monthly/quarterly bills. The most important aspect of the billing system is that it is accurate, and therefore trustworthy.

If you are not operating ABC today, I urge you to rethink this. It’s a model that has far reaching benefits, and enables you as the SSD to educate the rest of the business as to what their role is in reducing the cost of the function. They have a role. You can’t reduce the cost of running the function without the customer’s awareness of the true cost of running finance, and ABC helps you get there.