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Implementing an Effective Shared Services Cost Allocation Structure


Developing the capability to properly allocate costs related to Shared Services activities to the operating units can be a challenging task, but one that can provide a number of long-term benefits to both Shared Services and its internal customers.  There are a variety of ways to accomplish this, each with its advantages and disadvantages.

In the world of Shared Services, there are a variety of diverse opinions regarding cost allocations 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.  Many leaders have pointed out that the charge-out methodology in their organizations has changed over time, depending on priorities and the maturity of services. For instance, with the initial rollout of Shared Services, the priority may be to consolidate the services, standardize, and deliver a consistently 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 formal charge-out until the dust settles.

Once the initial Shared Services 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-match (for Accounts Payable) or pricing accuracy (for Accounts Receivable) to be a driver for the actual charges to operational cost centers.

Company Experience

Recently a large global company with over 100,000 employees, was featured on a Peeriosity PeercastTM in which they shared in detail their approach to the allocation of the costs associated with their Shared Services operation.    

The Global Financial Services operation at the member company includes within its scope of services Accounting, Accounts Payable, Payroll, and Travel & Expenses.  A combination of outsourced and captive centers is used.  Due to a number of fairly recent acquisitions, a variety of financial systems are currently being utilized, with SAP and JD Edwards among the most prevalent.

The development of the cost allocations to internal customers for the Shared Services operation is a formalized process that is carried out on an annual basis.  Looking at the various categories of costs at this company, approximately 60% of their costs are related to what they would consider to be “uncontrollable”, such as the costs from their outsourcing service providers, bank fees, and postage.  These are pass-through costs that are based upon the volumes that the business units control.  The value-add in these areas provided by Shared Services is related to process improvement opportunities to help the business units reduce their costs.

Transaction data is captured on a monthly basis.  They have developed an automated billing process for the chargebacks and the billing also takes place each month.  Finally, the allocation methodology itself is reviewed on a regular basis to make sure that the cost drivers are still relevant and the costs are being allocated in an equitable manner.

iPollingTM Results Review

A recent poll created in conjunction with this PeercastTM using the iPollingTM technology provides some excellent insight regarding Shared Services cost allocations.  The first question looked at the basis of the allocation methodology utilized by the companies participating in the research.  The approaches varied significantly by company, with the most popular being the allocation of cost based on budgeted expenses, which 29% of the companies are using.  Another 10% also use the budget as the basis of their allocation, but, in addition, adjust for variations in volume and/or the use of non-preferred processes.  Just 14% of the companies allocate costs based on actuals, with another 10% also using actuals along with a true-up for variations.  Lastly, 24% of the surveyed companies are not allocating costs to their customers.

iPolling: best description on how your shared services organization allocates costs | Effective Shared Services Cost Allocation Structure

The second iPollingTM question focused on what aspect of the Shared Services cost allocation effort companies considered to be the most challenging or the biggest opportunity for improvement.  There were several responses that were popular, with using cost allocation to steer customers away from non-preferred processes being the top response at 33%.  This was closely followed by making costs and cost drivers transparent and understandable to customers, which had 27% of the responses.  Finally, developing reliable workload forecasting methods was selected by 20% of the companies and 13% indicated that identifying cost drivers and including them in the cost modeling tool was most important to them.

Some of the comments related to this poll made by Peeriosity members include the following:

Consumer Products & Services Member: Our costs are allocated to the customer base via general corporate allocations. There is no provision made or looked at for Shared Services in the corporate allocations.

Healthcare, Pharmaceuticals, Biotech Member: Allocated based on budget, but true-up quarterly based on actual volume and expenses.

Real Estate & Construction Member: Shared Services costs are currently included as part of an overall corporate allocation.

Computers & Electronics Member: Costs are allocated at budgeted cost with a true-up at year-end.

Consumer Products & Services Member: Shared Services costs are charged to business units and functions, but not customers.

Real Estate & Construction: We allocate actual costs annually to our customers. It is a big project that usually takes a month each year.

Closing Summary

Depending on a variety of factors, the manner in which costs are allocated to Shared Services customers can be a powerful tool in not only providing visibility to these charges but also in encouraging customer behavior that is beneficial to the company as a whole.  It’s important for Shared Services leaders to review their charge-out methodology on a regular basis 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 a value-adding activity to drive behavior a few years ago may be profit-reducing overhead today.

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?


“PeercastsTM” are private, professionally facilitated webcasts that feature leading member company experiences on specific topics as a catalyst for broader discussion.  Access is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from attending or accessing discussion content.  Members can see who is registered to attend in advance, with discussion recordings, supporting polls, and presentation materials online and available whenever convenient for the member.  Using Peeriosity’s integrated email system, Peer MailTM, attendees can easily communicate at any time with other attending peers by selecting them from the list of registered attendees. 

“iPollingTM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated email system, Peer MailTM, members can easily communicate at any time with others who participated in iPollingTM.

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