As companies grow, there comes an increasingly difficult business challenge to provide visibility and insight into the consumption of internal costs. Organizations receive tremendous benefits by organizing to take advantage of certain economies of scale with regard to their back office functions. However, this also creates a disconnect from the revenue generating line of business and the expenses required to generate that revenue, causing difficulties in accurately measuring profitability. Shared Services Recovery creates the necessary visibility by re-engineering an organization’s indirect cost allocations into a Shared Services Charge-back model, effectively aligning the costs based on consumption of the internal services. Lines of business organizations understand the services available and receive accurate cost assignments based on volume consumption. Shared Service providers can be measured similarly as a pseudo profit center positively motivating the segment to focus on efficiency and cost control, by providing services at competitive rates.
The ultimate goal of utilizing the Shared Services Recovery model is to realize improved financial performance of a corporation. By billing each business segment for Shared Services, departments are forced to monitor demand, possibly foregoing requests for marginally profitable services. Organizations seeking accountability for the consumption of internal costs can positively motivate management on both sides by measuring the business economics of their organization as if they were stand alone businesses.
An effectively applied Shared Services Recovery system, can control demand by holding consumers of shared services responsible for resources consumed within their organization. It also simultaneously forces business segments to evaluate the necessity of services in meeting their respective customer demands by making shared service charges an above the line, accountable expense. Shared services also improves efficiency by holding providers to a standard unit rate recovery throughout the year. Operational efficiency within the organization can then be measured by a shared service profit and loss forcing provider management to focus on continued improvements. Shared services implementation can also maximize capacity by aligning business unit capabilities to the enterprise strategy. It can eliminate investments in capacity that do not add value to the operating units or their respective customers. Lastly, the business organization is now able to compare the internal cost of the services to industry benchmarks in a more meaningful way, allowing the evaluation of outsourcing opportunities and improvements of internal performance standards.
Leveraging a proven consumption based cost methodology is key to increasing the credibility of Shared Services Recovery implementation. It also reduces the debate over validity of cost assignment within the organization. It is also imperative that an organization have detailed consumption billing data that includes volumes and rates for organizational cost management. If an organization is committed to operational improvement on an executive level success can be achieved in implementation and accountability can be facilitated across the enterprise.
Contact the Armada Consulting team for an experienced guide in Shared Services Recovery architecture and implementation if your organization wants to find out more about Shared Services Recovery or is ready to engage in other Strategic Cost Management initiatives.
Tags: Improving Financial Performance, Shared Services Recovery