Chargeback of shared services

Abstract

Shared Service Centers are designed to combine the efficiency and leverage of centralization in order to achieve convergence and streamlining of an organization's functions such as HR, SCM and Finance. This enables the appreciation of economies of scale within the function and can enable multifunction working when there is potential to create synergies. To achieve this balance, companies bring together activities that are performed similarly in various locations across the business (often focusing on transaction processes) and standardize on a common process design with emphasize on high quality and customer responsiveness. There are various benefits of setting up a shared services center. But the primary reason is to reduce costs. Other benefits include improvements in productivity and customer service, standardization of processes through centralization and an increase in the business value of non-core functions. Moreover, certain companies use the shared services platform for growing their business without growing their administrative costs at the same rate. There are various services that shared service centers provide e.g.-Payroll, Payables, Receivables, Fixed Asset Accounting, etc. But all SSCs are faced with the same cost-related questions:* What are the cost drivers in our operation, and how can we manage them?* How do we determine how much to cross-charge back to each customer for the services we provide? Cross-charges have been a constant source of irritation and quarrel between the shared services provider and the business units in many organizations. The primary reason being the limited understanding of how the demands of the business unit influences these costs, with many times the cross-charges exceeding a simple apportionment of total costs. SSC managers have discovered over a period of time that activity-based costing (ABC) can be put to use in order to create a framework that will provide the necessary cost information to answer these questions and to develop a deeper understanding. ABC provides detailed information to business units including the information about their consumption of central resources. In addition, it also provides a common understanding about how to go about reducing shared services costs. This white paper examines the role of various costing techniques (including ABC) in shared services costing and concludes with three case studies to illustrate how organizations have adopted these techniques to successfully manage shared services costing.