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Shared Services Charge-out Methods for Core and Incremental Services

Ask a Shared Services leader their philosophy on charge-out methodology and you are likely to hear diverse opinions ranging from “charge-outs don’t add value, so why bother” to “charge-outs drive value-creating behavior – the more detail the better” and everything in-between.

Recently, a Peeriosity member performed custom research using iPolling1 functionality to request feedback from peers with experience in charge-out methodologies. They were interested in the method currently used for core services (defined as services provided to the vast majority of their internal customers), as well as for incremental services (defined as services provided in addition to core services, but limited to a single business unit or operation).

Representative comments included:

  • For our core services, we’re considered a corporate entity and our costs remain in corporate and are not allocated. Project work or non-core get charged, usually at cost.
  • We are allocating based on our actual costs and using business unit revenue as the denominator to determine percentage charged for core services. We chose this method because it’s easy and directionally representative of the effort involved.
  • We use an allocation based on budget with a number of drivers to determine the allocation share to each business. We do the calculation and have the discussion once a year and then it’s a recurring entry each month. If the allocation drivers change, we generally defer any changes until the next budget cycle. We usually absorb new work/projects, but there are exceptions for large scope changes.
  • If the non-core work exceeds a pre-determined threshold of time and cost, we will implement a direct charge-out for it.
  • Non-core work needs its own budget to be approved so the business receiving the service will have planned for the cost and will pay for the resources until such time it become part of our core services. We’ve learned from experience that if we don’t charge, we can become a dumping ground for work that has no scale.
  • Based on the previous year’s results, we have tiered pricing for the upcoming year. For instance, a business with relatively low defect rates, high “paperless” rates, etc. is charged less per unit than others. Our hope is that this will motivate behavior to improve the process activities located within their operations.
  • We have two types of core services; some charged based on standard transaction cost (high volume, standardized and repetitive) and others based on actual (expert services).
  • How we charge-out depends on if it’s a mandated service (operations do not have a choice) in which those costs are not allocated and held as part of corporate versus using Shared Services by choice, in which case they are charged at the agreed upon rate.
  • We base our charge-outs on our budget and historical business unit drivers. We do a true up at mid-year and year-end to reflect our actual costs and their drivers. Any incremental work is charged-out directly at cost.

Many leaders have pointed out that the charge-out methodology in their organizations has changed over time, depending on priorities and maturity of services. For instance, with the initial rollout of Shared Services, the priority may be to consolidate the services, standardize, and deliver a consistent high quality service. The change management associated with such a transition can be complicated by discussions related to charge-out policy, and some organizations choose to defer the implementation of a charge-out.

Once initial implementation is completed and services are stable, charge-outs can be introduced or become more targeted. For instance, charge-outs may be cascaded to specific operating unit segments based on specific drivers to encourage best practice behaviors throughout an end-to-end process. It is not uncommon for first-pass-yield (for Accounts Payable) or pricing accuracy (for Accounts Receivable) to be a driver of the actual charge to cost center in operations.

It’s important for Shared Services leader to review their charge-out methodology at least annually to determine if it is adding value or not. Since there is a cost to the activities associated with charge-outs there should be a business case that is justifiable and measurable. What was value-adding activity to drive behavior a few years ago may be profit reducing overhead today.

As with all Peeriosity custom research and iPolling, members have full visibility of respondent names by company, as well as the ability to contact them for follow-up discussion using Peer Mail, Peeriosity’s integrated email system.

How are you leveraging the knowledge and experience of your peers in determining the charge-out methodology for your Shared Services organization?

Who are your peers and how are you collaborating with them?

1 “iPolling” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content.

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