Global

Finance
360
SHARED SERVICES
PRICING MODELS
DRIVE DESIRED BEHAVIOR WITH THE
RIGHT PRICING STRUCTURE
Author: Stephen G. Lynch

The method through which a company prices its Shared Services has a significant
“The pricing impact on the perception and usage of a Shared Service Organization (SSO). When
Shared Services are treated as little more than a corporate department, services
model chosen rendered are typically inefficient and costly. However, when an organization treats
impacts the Shared Services as a true business, services provided are more innovative, effectively
meet the needs of its buyers, and are cost competitive with the external market.
behaviors of the
Business Units Given the importance of the pricing model to the overall success of the Shared Service
Organization, the decision to price services should involve careful thought and the full
that consume participation of all key stakeholders. The pricing model will heavily impact the behavior
of the Business Units and will either enable or inhibit Shared Services from providing
these services. innovative and competitive services. Ultimately, the pricing model should create a
Buyer-driven model that speaks to the needs of the Business Units and other
An effective stakeholders that interact with Shared Services and drives the correct consumption
behavior.
model will
enable Exhibit 1: Key Attributes of Supplier-driven vs. Buyer-driven Shared Services

competitive
pricing, deliver
needed services,
drive innovation
and properly
allocate
organizational
resources.”

In a supplier-driven model, stakeholder groups have to take what they’re given, and
have little or no say in what services are offered or the price that they’ll pay. This is a
very bureaucratic mentality and is not appropriate for any company that is looking for
the Shared Services model to drive innovation and cost leadership.
In the buyer-driven model, stakeholders who will actually be consuming the services
have a large role to play in the development and continued governance of the Shared
Service Organization. In order to create a buyer-driven model, an organization must
carefully weigh the possible pricing models.

Global Finance 360 | Copyright 2011 | All Rights Reserved 1

About Global Finance 360
Typical Pricing Models for Shared Services
Global Finance 360 covers the
world of corporate finance and There is no one pricing structure that is right for every organization, and the pricing
accounting and how these model that is ultimately chosen should meet the objectives of that particular
activities are impacted by organization. Pricing models range from no cost allocated through a market-based
globalization. Focus areas charge-back mechanism that considers the range of external options and pricing
include Finance Delivery structures.
Strategy, Shared Services,
Business Process Outsourcing,
Process Improvement and Exhibit 2: Typical Shared Services Pricing Models
Organizational Design.

Global Finance 360 is run by

Steve Lynch. Mr. Lynch is a
Principal in the Finance
Transformation practice of a
global consulting company. He
is responsible for the marketing,
sales and delivery of Finance
Transformation services in North
America and serves as a key
liaison for his company’s global
Finance practice. He brings
more than 15 years of
No charge-back of costs. This is the most basic model and is often employed
experience advising global by companies just starting on the journey to Shared Services. There will be a
companies on their service move to centralize support services in the corporate group. This centralized
delivery strategies and has
support group doesn't have a separate identify or a separate budget.
served over 60 clients in a
Consequently, its costs are simply part of the broader corporate organization.
variety of industries including
Perhaps the costs are ultimately allocated back as part of a corporate allocation,
consumer product and industrial
but the costs of the service organization itself are not directly allocated back to the
manufacturing, aerospace &
defense, transportation,
Business Units. Consequently, no signal is sent to the Business Units about the
technology, entertainment and
true cost of the services they're consuming.
financial services. He has also
served as a Controller in private
Fixed price charge-back. Among the charge-back models, this one is the
industry and as an auditor in simplest. An estimate of volume is made and a price is set based on that
public accounting. estimate. This pricing mechanism can be updated annually as part of the annual
budgeting process or more frequently if desired. At a minimum, it sends the
Mr. Lynch is an active content
message to the Business Units that they are in fact paying for these services, but
contributor on the topics of
ultimately it isn't based on actual volume. Consequently, the Business Units
Finance Transformation and
won't have a vested interest in reducing its consumption of services or partnering
globalization and has presented
with the SSC to optimize processes and reduce costs.
at various forums including the
IQPC Shared Services &
Outsourcing conference. He can
Variable pricing structure based on actual volume (e.g. invoices processed)
be found on the web at and cost. This model charges back costs based on an activity drivers so that the
www.globalfinance360.com. Business Units creating the most volume and consuming the more complex
processes will pay more for their services. Only the actual cost is charged back
Contact Information: and no profit margin is built in. The SSO acts as a true cost center without a profit
motive.
Steve Lynch

Toll-free: +1.800.216.2512
Office: +1.719.481.2599
1042 W. Baptist Road
Suite 194
Colorado Springs, CO 80921
slynch@globalfinance360.com

Variable pricing structure based on actual volume and cost plus a profit
margin. This model is similar to the one above but adds in a pre-determined profit
margin. The SSO acts as a profit center; however, it only sells its services
internally and does not attempt to sell its services to customers outside the
organization. This pricing model can have the effect of distorting a Business Unit’s
cost structure if it results in an above market rate for the services rendered.

www.globalfinance360.com

Global Finance 360 | Copyright 2011 | All Rights Reserved 2

About Global Finance 360
Global Finance 360 covers the
world of corporate finance and
accounting and how these
activities are impacted by
globalization. Focus areas
include Finance Delivery
Strategy, Shared Services,
Business Process Outsourcing,
Process Improvement and
Organizational Design.
Global Finance 360 is run by
Steve Lynch. Mr. Lynch is a
Principal in the Finance
Transformation practice of a
global consulting company. He
is responsible for the marketing,
sales and delivery of Finance
Transformation services in North
America and serves as a key
liaison for his company’s global
Finance practice. He brings
more than 15 years of
experience advising global
companies on their service
delivery strategies and has
served over 60 clients in a
variety of industries including
consumer product and industrial
manufacturing, aerospace &
defense, transportation,
technology, entertainment and
financial services. He has also
served as a Controller in private
industry and as an auditor in
public accounting.
Mr. Lynch is an active content
contributor on the topics of
Finance Transformation and
globalization and has presented
at various forums including the
IQPC Shared Services &
Outsourcing conference. He can
be found on the web at
www.globalfinance360.com.
Contact Information:
Steve Lynch
Toll-free: +1.800.216.2512
Office: +1.719.481.2599
1042 W. Baptist Road
Suite 194
Colorado Springs, CO 80921
slynch@globalfinance360.com
www.globalfinance360.com

Variable pricing structure based on competitive market offerings. In the
market pricing model, services are priced to reflect the actual value of the services
in the open market. If you think of the Business Units "outsourcing" their support
services to a separate entity, the choice is between a captive service unit
providing those services or an independent organization providing them. In effect,
the captive unit and the independent supplier are competitors. The market pricing
model reflects that reality. Ultimately, if a captive service organization can't
provide the services at or near market, the company should consider outsourcing
that service to an outside party that may specialize in the process (e.g. Payroll)
and has the ability to perform more efficiently than the captive service center.
Drive Desired Behaviors through the Pricing Model
The pricing model chosen will have a profound impact on how an organization uses
shared services. When the Business Units and other stakeholders consume services
without consideration for cost, they typically waste resources by consuming more than
they actually need. When a variable pricing structure is introduced, managers
presumably make intelligent and informed decisions about capital allocation and are
more judicious in their use of corporate resources. Every company should consider
the behaviors they require of their stakeholders before deciding on the appropriate
pricing model.
Choosing a Pricing Model for your Organization
The two models that should be considered are the variable cost model and the market
pricing model. Companies often choose a captive model over outsourcing because
they believe they can provide those services more cheaply than an outsourcing
arrangement over the long-run. This lower cost will provide an additional advantage to
the Business Units as they price their own goods and services for the external market.
Market pricing can make sense, particularly if the company intends to sell to external
customers. Genpact, the former captive GE service unit, it a good example of a
previous captive that became its own business. If the Shared Service Organization
has become so efficient that it can price at market and still make a profit, it doesn't
distort the Business Unit pricing mechanism since they would have to pay that market
rd
price regardless of whether that service was bought from a captive service unit or a 3
party service provider.
Pricing as an Element of Governance
Regardless of the pricing model chosen, it is critical that the Business Units be
involved with the pricing decision. In a properly operating governance model, the
Business Units will be an integral part of the Shared Services evolution from inception
to its continuous improvement. The consensus reached should be based on a number
of factors, including the overall corporate objectives of establishing the Shared
Services Organization. Additionally, the Business Units should work with Shared
Services to optimize processes and reduce cost over time.
It is important to keep in mind that the pricing model in effect could very well change
over the life of the Shared Service Organization. In the early stages of the SSO, it
could make sense to start with a variable cost model. As the Shared Services
Organization continues to improve and mature, it could move to a market pricing
mechanism.
Conclusion
The pricing model chosen impacts the behaviors of the Business Units that consume
these services. An effective model will enable competitive pricing, deliver needed
services, drive innovation and properly allocate organizational resources.
Global Finance 360 | Copyright 2011 | All Rights Reserved 3