Companies interested in improving overall margins are now focusing on below-the-line cost efficiency as a means for cost improvement. Also referred to as shared services or overhead costs, these “allocated” costs represent a growing share of the overall expense base. For years, the process of simply allocating these costs to the revenue generating functions of the business has been ignored as an uncontrollable cost of doing business. Companies are now realizing benefits of conducting cost studies on back office functions and billing internal organizations based on these services.
IT Cost Recovery leads the way
Trends in aggressive cost management of back office functions began with the rising costs of IT departments. The proliferation of technology throughout the enterprise resulted in rising costs with minimal transparency into the causal drivers of IT expenditures. Traditional allocations provided no capabilities for management to gain insights and take the necessary actions to reduce consumption of IT resources. Success in developing more sophisticated chargeback processes based on usage brought managers from across the enterprise into a more productive, even collaborative dialog around IT cost control. Now, the methodology is gaining momentum across all shared services and back office operations departments, providing a Profit and Loss (P&L) reporting view to managing non-revenue generating business units.
Activity Based Costing is key
These efforts can be complex and the corporate politics involved can be treacherous. Few finance functions are as contentious as the assignment of costs to managers that do not directly control the budget. Successful adoption requires a fair and consistent methodology that provides credible and actionable information. Activity based costing provides the best approach to accurately provide cost transparency to management. Activity based costing lost ground in the ‘90s as a methodology, due to manually intensive data collection and implementation complexity. The emergence of big data, improved technology, and increased demand for cost analytics have given new life to the method. Implementations are taking weeks instead of months and providing immediate cost savings, often self-funding the project investment.
Costs are the most controllable part of the profit equation
Today, companies are able to leverage advanced cost modeling systems to provide detailed cost analytics that not only provide insights into the drivers of profitability in their business, but also identify and eliminate unnecessary costs. With increased regulations, competitive markets, and economic uncertainty decreasing top line revenue growth, below the line cost improvements can drive much needed bottom line results.
If you are interested in learning more about Cost Modeling or Strategic Cost Management, contact Armada Consulting here.