Shared Services Management and Costing Models
- Do you
have the uncomfortable feeling that your shared service departments are
burdening your line departments with higher costs than are being reported?
- Are line
managers frequently protesting their charge-backs?
- Has your
annual financial performance been stubborn to improve after you cut expenses?
-
Are you sure the reported product and customer profits
you're using for forecasting and investment plans are correct?
- Has accounting avoided giving you and your line managers a full disclosure about the shared services cost allocation methodology they're applying?
We can help you:
Ø Determine
your true and precise shared services costs.
Ø
Thoroughly understand
what's driving your
shared services costs.
Ø
Give your organization effective tools to trim
and optimize shared services costs.
Ø
Avoid erroneous financial reports and the
lawsuits they cause.
Inaccurate or unknown shared service costs can easily mis-state your true product and customer profitability. Just a 5% cost error can alter reported profits by 100%!
Check through this list. How many shared service costs do you really know?
Sales
Do you know your sales costs for each product and customer
segment? Some products are ordered with little sales expense while others
require an expensive sales process. Most sales expenses are driven by the
customers, not the products or the revenue associated with the sale.
Billing and Accounts Receivable
Billing and A/R cost can vary widely.
We helped one client discover its billing and A/R cost for its Professional Services
segment (attorneys, doctors, etc) cost 5 times more, per revenue dollar, than
the same transactions for its manufacturing clients. Before their AIM Customer
cost model, they allocated billing and A/R expenses on a per-revenue-dollar base and
over-stated the profit for this customer segment. AIM discovered the problem and
predicted the value of various fee-based solutions.
Information Technology
What IT costs are directly caused by
individual products and customers and how do they vary? IT costs are not driven
by headcount or revenue but by the time IT spends delivering its services. Today it's
common for IT costs to vary from 2% to 20% of a product's total cost. Are you
allocating your IT cost with activity costing or are you still using a headcount
and revenue
allocations?
Customer Service
Do you have a service center that handles calls
from any customer about any product? If your cost allocation is based on revenue
like most companies, your products have false customer service costs and create
false profit margins. Studies consistently prove that low-volume, low-revenue
products for small customer segments incur the largest customer service costs!
If you guess that these few shared service items total more than 5% of your product and customer cost… you might have a serious profit management problem. Your reported operating profit for your products and customers could be wrong by 100%!
Smart companies know they need
accurate shared services costs for every product and customer segment
if they're going to effectively manage their profits, accurately price, and
precisely forecast results. Shared service costs are usually allocated on the
basis of revenue or headcount. This is wrong and misleading because shared
services costs are driven by actual cost consumed by for products
and customers.
We Deliver Solutions
Until now it has been impossible to easily and quickly determine the exact cost of shared services for products and customers. We've changed all that and built a new solution. AIM-Activity Information ModelingTM delivers the precise costs of shared services within a few weeks. For the first time, our clients know the exact cost of each shared service for every product and customer. Their P&Ls are accurate and they make better decisions.
If you've been wondering how to determine your true profits, call us and learn how AIM has helped others and will help you too. We'd be happy to conduct a web meeting to discuss your interests and show you some exhibits. Call us at (888) 444-2210 to arrange.
Some Other Considerations
Ø Inaccurate shared service costing always misleads a company into investing and growing the wrong business while withholding investment from more profitable products and customers. They bet on the wrong products and can't understand what happened when expected profits fail to materialize.
Ø Inaccurate shared service costing makes some products less competitive. Your prices reflect your costs. When a product's costs are inflated, it's priced higher and less competitively than it could be priced and the company loses its competitive opportunities in the market.
Ø Growth often occurs in products and customer segments that are marginally profitable because management has mistakenly under-priced them based on incorrect cost data. Their low prices make them attractive to customers. Unfortunately for the company, its profit performance continues to deteriorate and it doesn't know why.
Ø Poor or inaccurate shared cost allocations create an abusive situation. Managers who are charged the same, regardless of actual cost used, will ask for everything they can get. They will ask for new IT systems they don't need and accounting services they can live without. There is no incentive to use only what they need. When managers are charged for the actual costs their products and customers incur, they make value-based decisions and decide if the additional cost is worth the outcome. They use only those services that they truly need and find valuable.
One of the country's largest banks provided month-end budget analysis and forecasts to every one of its divisions. When they implemented activity based costing, they announced that there would be a charge-back for the monthly reports. Ninety percent of the division managers told them to only provide quarterly or semi-annual reports… because they didn't ever use the monthly reports. This single change saved over $1 million.
Ø Determining outsourcing opportunities is difficult and often fails to reduce costs. Without accurate cost information it is impossible to determine if outsourcing options will actually reduce costs.
Ø Poor shared service cost allocation creates false profit performance that affects people's bonuses and their decision to stay with the firm. No one wants to work for a low profit business.
Ø Without accurate charge backs, there is little incentive for shared service managers to tightly control their costs. They're not discussing cost/value options with the line managers and jointly making the best decisions for the business.
Ø
Economies of scale often and mysteriously fail to materialize.
Consolidating a number of decentralized units will actually cause some line
departments' costs to increase. We've seen this often happen when accounting
departments are consolidated. Before consolidation, when line managers had
their own small accounting department, they were only incurring the costs of
their own work. After the consolidation, their cost allocation for consolidated
accounting services is frequently higher because they are now "incurring
and carrying" the accounting costs of other departments who may require more
accounting work… even though the unit's accounting work hasn't changed.
Don't wait for the shareholder suits and SEC
investigations... implement an accurate, guaranteed system today.
We offer a no-cost pilot that allows you to evaluate how AIM-Activity
Information ModelingTM
will give you shared services cost models.
A Shared Service Cost Story
In the mid-nineties there was a North East regional bank we'll call Bank of Northeast that did not accurately cost its shared services. Its CFO used headcount as its cost allocation basis. Thus, most of its information technology expenses were allocated out to the branch operations, not its credit card and lock box operations because the branches had 18 times more people than credit card and lock box.
Profits in the branch operations were very poor, management continued to downsize and cut budgets, but had little success. Meanwhile, they invested heavily in their credit card and lock box business because these reported the largest profit margins. Both credit card and lock box operations require massive computing technologies. Major banks spend on average, over $30,000 per person on their technology to process credit card transactions. Additionally, industry wide, lock box and credit card businesses have very thin profit margins. And so for 3 years, Bank of Northeast invested heavily in its lock box and credit card businesses and cut expenses in its branches and the related branch products.
The Bank of Northeast's troubled financial condition continued to worsen and it was finally forced to go on the auction block. One of the interested buyers, who we'll call Smart Bank, had a CFO who understood how to accurately cost shared services and he quickly concluded that Bank of Northeast's headcount based IT cost allocation method had caused major errors on their P&L. When he did some rough cost allocations based on estimated IT time, it looked like their branches were more profitable than his own. He and his bank immediately made a generous offer and purchased Bank of Northeast.
They then implemented their own ABC study of IT costs by time and consumption- not headcount. They discovered the lock box business lost money, credit cards broke even and the branches were highly profitable. They sold the lock box business, outsourced the credit card system and merged their branches into those they acquired. They beat all Wall Street profit estimates, and Smart Bank has continued to be one of the country's most profitable regional banks.
Had Bank of Northeast's CFO allocated its IT costs accurately using a time-based method, Activity Based Costing, instead of his headcount based formula, he would have known they were actually wasting branch profits on money losing businesses. No one doubts that with an accurate profit picture of their services, Bank of Northeast could have been successful and would still be here.
The CFO of Smart Bank is now the CEO who still has an excellent activity based cost accounting system and continues to make successful acquisitions.
