Shared Services Best Practices

Best Practices for Shared
Services Chargeback
CNJohnson & Associates, Inc.
2009
Shared Services Chargeback

Introduction
More frequently, corporations move to
a shared services organization for
functions that are common and
corporate-wide in scope.
The synergistic opportunities of
consolidation of common functions
can no longer be ignored.
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Introduction
Human Resources, Facilities
Management, Finance, and other
administrative and managerial
functions are included.
Information Technology is an
important and expensive shared
function.
IT is often used as a model for
charging other shared services.
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Introduction
Shared services organizations have
expenses, often times quite
substantial.
Shared services seldom are revenue
producing.
It is important how these expenses
are shared among the revenue
producing business units.
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Discussion
Best Practice Considerations
Alternative Methodologies
Some Actual Examples
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What is the objective?

Simple Budget Controls
Ignore the costs.
Consider the costs as general overhead.
Cost Accounting Exercise

allocate the costs to other functional
groups.
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What is the objective?

Chargeback Goals
Provide Business Units with Information
Identify Services Required
Control or Influence Costs
Use Resources More Effectively
Improve Productivity
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Materiality of Shared Services

Costs
Is the expense large enough to justify
its own activity center?
Can the business unit influence or
control the expense?
Dont chase dimes with dollars.
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Characteristics of Best Practice

Chargeback Systems
The system must be:
Equitable.
Repeatable and Accurate.
Understandable.
Controllable or Predictable.
Economical.
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Equitable
Fair to all customers.
One customer is not subsidizing the
cost of another customer.
The customer pays for the services
they consume or the capacity they
request.
Use activity-based costing
methodology.
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Repeatable and Accurate

It should not matter when (time of day
or day of the month) the job or activity
is performed.
The same volume of work should cost
the same each month.
Assuming the same input, it should
consume the same resources each
time.
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Understandable
The customer must understand the
chargeback process and
methodology.
Service provider (IT or Shared
Service) must understand the
chargeback process and
methodology.
They both must know what is being
charged.
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Controllable or Predictable
The customer must have the ability to
control or predict the cost of
performing a particular activity.
If the customer processes more
transactions, the cost should
increase.
If the customer reduces activities, the
cost should decrease.
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Economical
The system itself must be relatively
inexpensive to run, including:
Collecting data.
Processing.
Reporting on the information.
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Activity-based Costing Methodology

The activity consumes resources;
therefore, the cost driver is assumed to
consume (cause) costs.
Activities
Activities
Measured by
Cost
Cost Drivers
Drivers
Consume
Drive
Resources
Resources
Measured by
Costs
Costs
Activity-based Costing
Methodology
Establish meaningful activity centers
(cost pools).
Ensure that the cost drivers selected
have a strong positive correlation with
the resource cost.
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Additional Considerations
Charge for resources that are
expensive (material).
Data is easy and inexpensive to
collect.
Sufficient detail to allow customers to
influence the usage (cost).
Track information by service
(application) and customer (company,
division, cost center, etc.).
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Additional Considerations
Include flexibility for baseline and
incremental (fixed/variable) reporting.
Charge for different skill sets
Junior and senior labor resources
Different cost/performance factors with
hardware and software.
Provide for service level agreement

charges.
Prime and non-prime time services.
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18

Models
Overhead.
Charge revenue generating
business units.
Sequential charging.
Simultaneous charging.
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19
Overhead
Simple process.
Control through the budget process
only.
Understates the cost of the operating
units and the shared service
organizations.
Distorts service or product
profitability.
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Charge Business Units

HR
Business A
Facilities
Business C
IT
Business C
Legal
Charge Business Units

only.
Allocation based on revenue
generation or other methods.
Misstates the cost of the operating
organizations.
profitability.
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Sequential Charging
Facilities
Only
Legal
Charge
HR
The
Down
Hierarchy
IT
Sequential Charging
only.
Allocation based on a variety of
methods.
Misstates the cost of the operating
organizations.
profitability.
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Sequential Charging
Distorts Functional Costs.
Legal, HR, and IT have true cost of
Facilities.
IT has true cost of Facilities, Legal, and
HR.
Facilities has no visibility to HR and
Legal costs.
Facilities, Legal, and HR perceive IT as
free.
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Sequential Charging
No incentive to use service resources
effectively.
Provides misleading information to
management.
May result in erroneous management
decisions.
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Simultaneous Charging
HR
Business A
Facilities
Business C
IT
Business C
Legal
Simultaneous Charging
Perfect world solution.
Potentially complicated.
Possibly resource intensive.
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Optimized Solution
Combination of the models.
Services with immaterial costs
Bundle into overhead.
Allocate those costs on logical methods
(square feet, head count, contracts, etc.)
Services with materials cost should

be charged back to those who
consumer the resources.
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Optimized Solution
Example:
It is important for HR to understand the
cost for IT services to be more effective
in using those resources.
While it is important for IT to understand
the cost of HR, it is unlikely that IT will
alter its staffing decisions based upon
those costs. Nor is there a direct
correlations of the HR costs to IT staff.
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Summary of Company
Examples
We asked the following questions:
What are you doing?
Why are you doing it that way?
The answer to the Why question

often was, Because somebody set
it up that way.
Corporate inertia is as immutable as
the laws of physics.
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31
Major Telecommunications
Company
Uses separate service companies to
capture costs in separate legal entities.
These are very visible and have
independent budgets.
IT has a comprehensive chargeback
scheme.
Corporate, Finance, Legal, and HR are
prorated to lines of business based upon
share of total operating expenses and
taxes.
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32
Major Telecommunications
Company
Each line of business receives a monthly
Corporate Prorate bill.
There is some direct billing. For example,
Real Estate may bill directly for repairs on a
specific building owned by a line of business.
Why
Keep in mind that our approach is "shaped" by

regulatory requirements, so our methods may
appear inconsistent and erratic to the
perceptive observer, but we are subject to the
whims of the regulators.
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Major Insurance Company

Facilities costs are allocate on square
foot usage.
HR costs are allocated on headcount.
All other corporate functions are
allocated on a variety of methods.
Why
Someone said to do it that way. They
would prefer to use the method
recommended in this presentation.
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34
Major Canadian Bank

Everything is a percentage allocation.
Why
The contact did not state a specific
reason.
It has just always been done that way.
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35
European Financial Services

Company
Currently, shares services is only IT.
They are implementing a new
allocation model that may include
additional shared units such as
Human Resources and Facilities.
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36
IT Financial Management
Association
Terry Quinlan, Executive Director
reports that in the vast majority of
cases, in his experience, companies
incorporate their non-IT shared
services costs into overhead.
Overhead is then allocated to units
using a variety of methods (e.g., FTE,
revenue).
Why
It is the easiest method.
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Conclusion
The most effective use of chargeback
in shared services environments
should revolve around the optimized
solution.
Materiality, recovery objectives, and
the resource intensity of maintaining
the systems, are all part of a best
practices shared services chargeback
system.
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Questions
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CNJohnson &
Associates, Inc.
11433 Buttemer Road
Phelan, CA 92371
760-868-2080 Voice
760-269-31501 FAX
Charlie CNJohnson.com
http://www.CNJohnson.com
2009
All rights reserved. This presentation may not be duplicated in any form
without the expressed written consent of the author.
2009
40

Shared Services Best Practices

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Best Practices for Shared

CNJohnson & Associates, Inc.

Shared Services Chargeback

CNJohnson & Associates, Inc.

Shared Services Chargeback

Shared Services Chargeback

Shared Services Chargeback

CNJohnson & Associates, Inc.

What is the objective?

Cost Accounting Exercise

CNJohnson & Associates, Inc.

What is the objective?

CNJohnson & Associates, Inc.

Materiality of Shared Services

CNJohnson & Associates, Inc.

Characteristics of Best Practice

Repeatable and Accurate

CNJohnson & Associates, Inc.

Activity-based Costing Methodology

CNJohnson & Associates, Inc.

Provide for service level agreement

Shared Services Chargeback

CNJohnson & Associates, Inc.

Charge Business Units

Charge Business Units

CNJohnson & Associates, Inc.

CNJohnson & Associates, Inc.

Services with materials cost should

The answer to the Why question

Keep in mind that our approach is "shaped" by

Major Insurance Company

Major Canadian Bank

CNJohnson & Associates, Inc.

European Financial Services

CNJohnson & Associates, Inc.

CNJohnson & Associates, Inc.

CNJohnson & Associates, Inc.

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