Shared Services Chargeback Models: Aligning Cost Allocation with Strategy
/
Every company with Shared Services must decide how the costs of the organization should be allocated. Chargeback models for captive shared service organizations refer to the methods used to allocate costs and charge expenses within a shared service organization (SSO) that operates within the same company or group of companies. These captive shared service organizations typically provide support functions, such as IT, finance, HR, or procurement, to various business units or departments within the organization.
There are several chargeback models that can be used for captive shared service organizations, and the appropriate model depends on the specific needs and objectives of the organization. Here are a few common models:
Cost Allocation Model: In this model, costs incurred by the shared service organization are allocated to the business units or departments based on some predefined cost drivers. For example, IT costs might be allocated based on the number of users or devices in each business unit, or HR costs might be allocated based on the number of employees in each department. This model aims to distribute costs fairly based on the resources utilized by each unit.
Service-Based Model: In this model, the shared service organization defines a catalog of services it provides to the business units. Each service is associated with a specific price, and the business units are charged based on their usage of these services. For instance, if the shared service organization offers IT support, the business units would be charged based on the number of support tickets or the hours of support provided to each unit. This model promotes transparency and allows the business units to understand the cost of the services they consume.
Activity-Based Costing (ABC) Model: ABC is a more detailed cost allocation model that assigns costs based on the specific activities performed by the shared service organization. The costs are allocated to business units based on their consumption of these activities. For example, if the shared service organization performs financial analysis activities, the costs would be allocated to business units based on their usage of financial analysis services. This model provides a more accurate reflection of the actual cost drivers.
Flat Fee Model: In this model, the shared service organization charges a flat fee or a fixed percentage of the business unit's budget as a service fee. The fee is typically negotiated based on the anticipated level of services provided. This model simplifies the chargeback process by providing predictable costs to the business units, but it may not reflect the actual resource usage.
It's important to note that the choice of chargeback model should align with the goals and objectives of the organization, including cost transparency, fair allocation, and incentivizing efficient resource utilization. The specific model chosen may also depend on the maturity and complexity of the shared service organization and the level of understanding and cooperation among business units.
