Shared Services Costing Models

In today’s highly cost conscious environment, enterprise wide cost savings can be achieved by consolidating common work and infrastructure by using Shared Services units. But Business units often complain that Shared Services end up costing more than they targeted to save and also have the below questions:-

n“What are my Shared services costs made up off?”

n“Shared services costs are too high and affecting my product profitability”

Shared services are unable to answer these questions due to lack of cost transparency in their cost models. Typical reasons for lack of cost transparency in shared services cost models are:-

nUsing complex costing methodology which makes measurement, chargeback and report to Business units difficult

nLack of standardization of allocation logic

nInability to completely automate the cross charging process

ITC Infotech’s Shared Service models Our Shared services models enable cost transparency for multi-functional and reciprocal services rendered by Shared Services units. Cost transparency in context of Shared Services is to show the Business

nServices it consumes

nCost of delivering these services

nBreaking the cost down to activities and resources involved in producing these services

nAllocation logic for cross charging

nOn demand “what - if?”scenarios with respect to demonstrate how costs change due to change in demand for services ,resource drivers and allocation logic

Such cost transparency for multi-functional and reciprocal services rendered by Shared Services units

can be enabled using PCM which facilitates various methods of cross charging of cost for reciprocal services among Shared Services and eventually charge out to the Business. Various cross charging models which reflect reciprocal services among Shared Services are as follows:-

Reciprocal costing model

This costing model makes one time assignment of cost between Shared Services and eventually charges out Business for the Shared Services cost. This method is easy to understand, fairly accurate and facilitates in tracing cost to the origin. It also differentiates the rate at which Shared service unit is charged with that charged to Business.

Business benefits of the models:-nSubstantial reduction in lead time of calculating cross

charging rates by eliminating manual and repetitive interventions

nIncrease in frequency of variance reporting which leads to improved control of costs

nDetailed breakdown of cost of each service by the activities consumed and resources utilized

nFacilitates root cause analysis by tracing costs to origin for each service provided by Shared Services

nAvailability of accurate and timely actionable cost data to analyze performance of Shared Services units and impact of its cost on Business

Implementation approach

Preparation & Information gathering

Blueprint/ Cost Model

Definition

Model Configuration,

Data Integration

Reporting & Dash

boarding

Documentation & Training

Case study on consulting engagement Business need

A leading South African bank faced various Business challenges, while cross charging Shared Services cost, using their cost models built in PCM. Key Business challenges were loss of visibility and life cycle view of actual Shared Services costs allocations, lack of insight into actual and true product profitability and ability to respond to Business queries. In order to address them, they felt the need to reassess the following:-

nShared Services costing models and its methodology of cross charging

nExisting architecture of their cost models in PCM

nInteraction with other transfer pricing applications to calculate cross charging rates

Business benefits delivered

ITC Infotech suggested change in the costing methodology, standardization of models and roadmap definition reflecting how un-exploited features of PCM tool can be leveraged, to deliver the following Business benefits:-

Change of existing costing methodology into a transparent cost chargeback method provides visibility to Business units with insight into cost constituents.

Improved cost transparency

Recursive costing model

This costing model makes reiterative assignments of cost simultaneously to Shared Services and Business. This method is accurate and reflects simultaneous charging at the same rate to Shared service and Business.

SAP Profitability and Cost Management (PCM) is a scalable and flexible enterprise class tool which enables costing and cross charging of Shared Services costs to Business across industries. With its unique cross charging functionality , powerful calculation engine, “what if” and scenario modelling capabilities, operational management and forward planning of Shared Services cost, is responsive and simple to control.

Availability of actionable and accurate historical cost information improves forecasting accuracy and control of ongoing costs.

Increase in operational efficiency

Shared service centers can work with the Business in producing budgets and forecast, analyzing operational results and develop programs to improve operational effectiveness.

Business partnering with Business units

For more information, please write to: contact.us@itcinfotech.com

www.itcinfotech.com

© 2012, ITC Infotech. All rights reserved.