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For more information on the Institute of Management Accountants or the IMA Annual Conference visit

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Shared Services Costing & Pricing

Institute of Management AccountantsAnnual Conference

June 2006

Michael Hasik



About the Speaker

Education:• Executive MBA—Operations Management, Washington University in St Louis• MBA—Finance, Webster University School of Business• BA—Economics, Duke University

Certifications: • CMA• Six Sigma Black Belt

Michael Hasik is a financial consultant with expertise in shared services, business planning, investment analysis, M&A integration, project management, systems implementations, Six Sigma, and supply management. He has served as a Budgeting Analyst at a $30B component of a Federal Agency, the Director of Operations at a $1B distribution company, and a Shared Services Leader and Program Manager at a $2.5B financial services firm. He currently works at The Johnsson Group, a Chicago-based firm specializing in shared services, FP&A, and finance transformation consulting.



Definition: shared services

What does this mean? Service providers’ costs are transparent to customers. Variable services are properly unit costed, benchmarked externally, and included in Service Level Agreements; and their volumes match demand. Model facilitates decision-making, increases productivity, and enhances business performance.

An operating model in which business support functions promote efficiency, service, and value for their internal customers—business units within their company—and possibly external ones as well, to the extent that they compete like free market businesses. It’s much more than centralization—it’s all about servicing the customer!



Internal service providers running like

businesses, and therefore focused on

customer service!

Service Level Agreements (SLA’s):

contracts between business units and

support areas that govern their operations

Support areas focused on their core

function, and leveraged across multiple

business units

AGAIN, it’s NOT JUST centralized transactional functions…

Definition (2): shared services

IT’S MUCH MORE…Efficiency

Service

centralized

decentralized

Shared; best value



1. Providers clearly identify their customers and conduct structured dialogue with them to understand service requirements.

2. Providers use metrics to track performance against valid customer requirements.

3. Providers establish stretch performance goals that fulfill valid customer service requirements and exceed expectations.

4. Providers develop comprehensive and transparent charge backs. Customers know what services cost, are charged based on usage, and can influence the level and cost of some services received.

5. Providers operate like competitive service businesses. Customers are accountable for their consumption planning and execution.

optimal shared services early stage shared services1. Requirements planning is not an enterprise-wide, regular event between Service Providers and their Customers.

2. Providers may give Customers limited performance metrics on a regular basis.

3. Providers set few performance targets on behalf of their Customers, nor are they fully communicated.

4. Customers are not always sure what services they receive for what price, or more importantly how they can influence their level of usage and cost.

5. Providers set service budgets on behalf of Customers. Customers are not active planners of service budgets, nor vigorous buyers of service units.

Definition (3): optimal shared services



1. Increased transactional efficiency. Consolidation of services into a “shared” operation.

2. Increased customer service levels: Creation of service ethic, recognition of Customers by Providers, more accurate/higher quality transactions processing, clearer service definitions and pricing, and competitively benchmarked metrics.

3. Business units focused more on core competencies.

4. Internal inefficiencies aren’t passed to outsourcers.

5. Improved working capital management (AR/AP) and technology leverage.

6. Facilitates enterprise growth. Simplified processing model creates platform for easier organic growth or acquisition integration.

7. Establishes a central and standard operating environment that leads to stronger controls at a lower cost of compliance. Improved quality, timeliness, and transparency of management information supports regulatory compliance.

Attributes: shared services



1. Improved Service Management

(a) Increased cost transparency. Consumers buy less units primarily in demand driven (variable) services. For services with low demand or value, or where smaller internal scale can’t be achieved, Providers eliminate or source differently to maintain rates.

(b) Increased service choice. Consumers opt for lower cost service levels primarily in demand driven (variable) services.

Example: HR charges for service calls, but not for online self service. Consumers elect self-service and HR decreases its expenses.

(c) Increased adherence to preferred processes. Standard services priced lower to encourage consumption that’s aligned with enterprise standards. Costly Consumer behaviors avoided, lowering Provider cost base.

Example: AP charges higher rate for manual PO's. Drives Consumers to adopt lower cost, electronic PO process preferred by the enterprise.

Attributes that drive savings



2. Stronger Governance Structure

(a) Formal Governance Council drives governance and limited control service allocations into demand driven (variable) services. Result is greater cost transparency and lower consumption.

Example: IT implements charge backs for server usage.

(b) Council enables savings through enterprise process management, which includes enterprise process sourcing.

Example: Council decides to reduce pay entities or outsource the Payroll function as a means to lowering a charge back.

(c) Council composition: Service Provider Leaders, Corporate Finance, Service Customers (on rotational basis), Governance Unit leader.

Attributes that drive savings (2)



Service Provider Definition

Functional ProviderProvides internal services that are not industry-specific: information technology, human resources, finance accounts payable, and legal services. Services can be sold directly to product lines, or are inputs to operational providers' services.

Operational ProviderProvides internal services that are more specific to the enterprise’s industry. All services are sold directly to product lines.

• Supports or is “shared” by > 1 customer. • Center of Operational Excellence for the enterprise.• Either functional or operational.



Services Costing & Pricing

Defines governance components of service providers.

Supports transparency of future charge-backs as well as sourcing decisions.

Ensures providers properly segment their services; their tendency could be to lump them together otherwise.

Step 1: Divide Provider Processes into Services




Translate services into catalog offerings.

Define customer needs and required service levels.

Determine choice-based services (variable or demand driven).

Determine scaled services (fixed to time period, or limited control).

Step 2: Establish Service Catalogs




Full absorption—for transparency, support of benchmarking, and to determine zero-profit service opportunity. Market pricing not as transparent … allocates year end shortfalls.

Pool costs for application to services.

Use Activity Based Costing (ABC) to cost services as close as possible to true activity costs; this reveals low value processes.

Step 3: Establish Baseline Service Costs




Aggregate costs at process, not service, level. Might subsidize a desired behavior in one area, like use of employee self-service, with a higher charge in another, like payroll for instance.

Provide transparency to customers: what’s received at what price.

Limited Control example: Payroll based on headcount Demand Driven example: Cost per transaction

Define for customers how they can control costs. For instance, define choice-based services by establishing premium services and standard, lower cost ones. Blue versus gold versus platinum.

Limited Control services allocated on a simple, period basis with quarterly true-ups.

Step 4: Establish Charge Back Rates (prices)




Drive desired Consumer behaviors with differential pricing. Lower cost processes priced lower (e.g. electronic PO’s).

Simplicity of rates ensures Administration Costs < Benefits of Charge-Backs.

Charge out Limited Control services to support accuracy of sourcing analysis and decision making.

Service providers will inter-charge. Corporate Finance should set materiality standards to eliminate circular calculations.

Step 4: Establish Charge Back Rates (prices)




Use benchmarks to set targets / evolve to target pricing.

Use target pricing on maturing to mature services (scaled, automated, etc) to support cost transparency KPI.

Selectively market cost services. Only outsourced ones Supports cost transparency KPI

Use combination of pricing methods Full cost, Target, and Market Recognized best practice: most effective and customer centric

Step 5: Negotiate SLA Pricing with Customers




Define and train System Administrators.

Develop the mechanism for commerce, such as an online “buying/selling” portal.

Develop Service Management System (SMS).

Develop and publish customer reports, which include cost, volume and KPI data.

Step 6: Design and Implement Transactions, Billing & Reporting Processes




“Buying” services first (customers), “filling orders” second (service providers)

Transparent costs support investment, sourcing, expense management, and process improvement decisions of both customers and providers

Review service options and trade-offs, and update service catalog

Step 7: Incorporate Costs into Budgets / Operating Plans



Costing Method Implementationby phase

Improvemarket costing

Measuretarget costing

Automate

Standardize

Scale full recovery costing

Centralize

Time



Evolution of Service Mix

% services

100 fixed

variable

0

time



Effect of Cost Transparency

% demand total servicesdriven services cost ($)

100 $ X

Y %

$ Y

X %

0

time



Risk Impact1. Lack of acceptance by service Implementation slowed and providers.

Shared services is a benefits delayed. Shadow low priority with few resources units emerge.assigned.

2. Service management process not Process degradation oversustained. Implementation viewed as time. Implementation slowed a project, not a process change. and benefits delayed.

3. Costly service management process. Projected benefits not gained.Process administration costs > system System loses credibility, and benefits. participants lose interest.

Primary Implementation Risks



Discussion

Thank you for your time and attention today! Please contact me after the Conference with any questions you may still have on shared services pricing…

MICHAEL HASIK

The Johnsson Group

566 West Adams, Suite 601

Chicago, IL 60661 USA

[email protected]

312.454.4155

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annual ima conference

project management

supply management

shared services leader

internal service providers

service providers costs

variable services