Pricing Models for Shared Services
Internal service organizations, whether Global Business Services, Shared Services, or something similar, usually have a core tenet that they “run like a business” as a key difference from being just another corporate function. In addition to signaling a greater customer-focused approach, these organizations often charge out for their services using some type of pricing model. In addition to recovering costs (and possibly more for investment), pricing models can be a significant part of the change management associated with a new business model by influencing the behaviors of the organization’s customers.
Pricing models can:
- Provide Transparency – A conversation starter between provider and customer to understand what is driving the costs behind the price. Allows comparison to outside providers and a direct link to service levels.
- Energize Innovation – Partnering for process improvement can drive down costs and prices. Customers with “cleaner and leaner” processes pay less.
- Encourage Scale – Business cases for added services or additional volume can be quantified.
- Clarify Investment ROI – Creates a clear link between investment and return. Promotes expansion of Shared Services model (if executed correctly).
A recent webcast in the Peeriosity Shared Services Leadership research area featured an in-depth discussion on pricing strategy and the various models that can be implemented. Our feature company pointed out that during the past decade they have gone through several iterations for their pricing model, depending on the strategic objectives at the time.
The webcast started with a poll of participants that indicated that most service pricing is based on either actual or budgeted costs.
A follow-up question indicated the biggest challenges in implementation were finding ways to develop a fair and meaningful model.
Our feature company led off our discussion indicating that in the initial years of Shared Services, their pricing was based on total volume divided by total service cost by service area. With this model, each customer segment paid the same per AP transaction regardless of how advanced they may have been in paperless or non-PO transactions. The objective was to get the visibility into the organization which, for all practical purposes, viewed these services as “free” prior to Shared Services.
Over time, they evaluated the various options of pricing keeping in mind that the model itself shouldn’t be too complex or resource intensive. The organization chose to go stay with a “cost per transaction” model with some very significant changes. To calculate the cost per transaction the organization would:
- Charge by transaction type (e.g. ERS, E-Invoice, P-Card, Paper PO, No PO)
- Include all activities and overhead (e.g. facilities, management, process, project and quality teams, IT, etc.)
The objectives in moving to this new pricing model were clearly defined:
- The incentive to Change Behavior (changing vendor from a paper PO to ERS is a significant cost reduction)
- Visibility Drives Value (partnering reduces costs and creates value)
- End-to-End Process View (it’s not just the “back-office” it’s the E2E process that matters)
- Benchmarking and Goal Setting (all-in costs and plans to improve)
The webcast concluded with a discussion on impediments to successful implementations, as well as what models have worked for various organizations. While the models may take various shapes and forms, there was consensus that the objectives were all fairly similar and, when done correctly, can create great value for the entire enterprise.
How is your Shared Services organization pricing your services and what added value is it bringing?
Who are your peers and how are you collaborating with them?