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27SEPTEMBER/OCTOBER 2015 COST MANAGEMENT

T oday, one of the most chal-lenging parts of functionallymaster ing and execut ing acost ing methodology is theallocation of shared services

costs across the organization. There area number of barriers to success, includ-ing an effective business case that can bear t iculated to s takeholders , a lack oft ransparency across centers , and up-front cost concerns. It is only throughef fec t ive handl ing of shared ser v icesexpenses that an organization can trulyunders tand the e f f ic iency and prof-itabi l i t y of the inner workings of thebusiness and be able to hold the appro-priate stakeholders accountable.

Whether the goal is to facilitate analy-sis of organizat ional profitability, iden-t i f y areas for increased ef f ic iency, orensure that business units/owners areproper ly he ld accountab le for theresources they use, in today’s world, aprocess must be put into place to deter-mine how shared expenses are spreadacross the company in support of thesegoals.

So what a re the s ecre t s of cos t ingshared services? Simply put, they are themethod of al locat ion, the software usedto calculate the allocations, and the matu-rity continuum that can help you moveforward in costing shared services moreeffect ively.

This ar t icle aims to highlight some ofthe key concepts of building a costing solu-t ion and some of the chal lenges associ-ated specif ica l ly w ith shared ser v icescost a l locat ions and to ident if y somebest pract ices for tackling those chal-lenges head-on to help get you on theroad to opt imizat ion. Shared serv icesare all about leveraging efficiencies in theorganizat ion on a g lobal sca le. Theseefficiencies wil l eventually lead to costsavings, ease-of-use improvements, andan opt imized mode l ing approach .Finance, HR, IT, and marketing are al ltypical shared serv ices cost centers thatwork in unison to streamline and stan-dardize administration, automation, andinfrastructure in an effor t to present asingle voice to customers.

THE SECRETS OF COSTING

SHARED SERVICES

RU S S HO F F M A N A N D K U RT I S VA RGA

RU S S H O F F M A N , a senior manager at ADI Strateg ies, has 14 years of management consulting experience in client-facinginitiatives, serv ing as an analyst, consultant, technical lead, and project manager. He is a certified project management pro-fessional (PMP) and Scrum Master (CSM), specializing in enterprise per formance management solutions.

K U RT I S VA RG A , a manager at ADI Strateg ies, is experienced in managing and implementing Hyperion EPM solutions,specifically in the fields of costing/profitability (using HPCM) and budgeting/planning (using Hyperion Planning). In addi-tion to deliver ing EPM solutions to clients, he provides guidance on costing and profitability best practices.

If a key ser vice means something dif ferent to each line of bus iness , each

countr y, and each depar tment, then uniformity is lost and chaos reigns .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As IT solut ions continue to improvetheir ability to provide massive amountsof data with the click of a button, finan-cial analysts are constantly looking forways for their businesses to improve per-formance, profitability, and efficiency. Atthe same t ime, it is equally (if not more)important to ensure that the method-ologies applied are truly effective in pro-ducing accurate results.

Analyzing your core financialsWhen beginning to assess the perfor-mance and success of your business, theprocess often begins with analyzing thecore financials of the organizat ion. Askyourself:• How much revenue is being gener-ated by each line of business (LOB),product, serv ice offer ing, and/orcustomer?

• What are the direct costs to producethose products and/or serv ice offer-ings and support those LOBs?While this type of analysis is effec-

t ive in providing a cursory overview ofthe organizat ion, it is not possible tofully assess performance and profitabilitywithout proper accountability for sharedservices expenses. However, before div-ing deep into detai l , you must considertwo things: the maturity level of the cur-

rent process and the end-state goa ls .Consider the fol lowing:• Is there a methodology defined inthe organizat ion that is capable ofy ielding the r ight results now and isflexible enough to adapt as yourcompany changes over t ime?

• What is the ult imate goal of improv-ing the shared serv ices model? Forexample, is the goal to produce a“management report ing” level ofdetai l to faci litate analysis of prof-itability and efficiency? Or is thegoal to garner enough detai l aboutactuals to support the planning andforecast ing processes? Or perhapsthere is a different goal.

Methodology: Allocation of cost using amulti-stage modelWith shared services defined, let us startto cover some of the core building blocksof a cost ing solution and how that foun-dation can be built upon to solve someof the challenges associated with allocatingshared serv ices costs.

One of the biggest chal lenges whendefining a methodology for allocation ofshared serv ices cost is v isualizing a wayto take expenses from the general ledger(GL) and drive them to a more atomiclevel of detai l across different metadata

28 COST MANAGEMENT SEPTEMBER/OCTOBER 2015 COST DIMENSIONALITY

EXHIBIT 1 Cost Allocation Model

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

within the organizat ion. This chal lengeis best portrayed using the example inExhibit 1. The dimensionality and detailsof this example may or may not a l ignwith the specific needs of the organiza-t ion, but the concepts that it highlightsare relevant and crit ical in being able todesign your own model.

Stage 1 represents the expenses that acost model would receive from the GL,which is typically stored by an account andcost center. In this particular example,the end goal is to be able to identify whatportion of those GL expenses should becharged to each LOB, product, and cus-tomer. It is not uncommon for the knee-jerk reaction to be, “Well, the hierarchiesin my GL already tell me a lot of informationabout those expenses.” Although the way

the account andcost center hier-archies have beenstructured in theGL may be ableto tell you someadditional infor-mat ion aboutthose costs, rarelydoes i t prov idethe level of detailnecessary to trulybe able to dr ivebus iness dec i-

sions. Attempting to embed this sort of logicand mapping into your GL is rarely evera viable option for two main reasons.1. The expenses in a shared serv ices

cost center typical ly cannot be“mapped” directly to LOBs, prod-ucts, and customers simply byadding addit ional levels into a hier-archy or adding new hierarchies,because those expenses shouldrightful ly be split among them. If abank’s corporate faci lity housesemployees from both the mortgageand commercial banking LOBs, towhich LOB would you map yourfacility’s cost centers?

2. Introducing many new layers intohierarchies could massively increasethe amount of maintenancerequired. If your model aims to onlysupport direct costs, it may be feasi-ble to define how your accounts and

cost centers could hierarchical lyroll up to LOBs, products, and cus-tomers. However, this would likelyrequire introducing many new lay-ers into the hierarchies. Not onlywould this convolute your ledger,but it could also massively increasethe amount of maintenance requiredon a regular basis. Don’t turn yourgenera l ledger into a complicatedone.Exhibit 1 shows how we commonly

see cl ients address these problems intheir cost ing model at a high level.

The first step in this process wouldbe to allocate cost to LOBs. This allocationis typically accomplished through a com-binat ion of direct ass ignments (map-ping a cost center directly to an LOB) anddriver-based al locat ions (used for cen-ters that split costs between LOBs). Oncecosts have been al located from Stage 1to Stage 2, you would be able to identifyhow much of your total expense shouldbe charged to each LOB.

Stage 3 is the most important stage tounderstand as it ult imately portrays thebr idge be tween the GL dat a and thedesired results. In this example, we haveleveraged the fundamentals of act iv ity-based cost ing and introduced the act iv-ity dimension, which acts as the bridge.The idea is that this intermediary dimen-s ion a l lows you to a l locate f rom costcenters and LOBs to the particular activ-it ies that those centers support (eithervia direct assignments or using drivers).This dimension can be configured at ahigh level or down to a ver y granularlevel of detail, depending on the complexityof the organizat ion and how productsand customers are supported.

When you begin thinking about someof the core act iv it ies of your organiza-t ion, it should become clearer how youcan map costs from a part icular act iv-it y to one or more products and cus-tomers. Using the act iv ity dimension inthis example makes it a two-step processto allocate from the GL data to customersand products. This makes the al locationlogic and drivers more straightforwardand easier to maintain. Attempting toal locate directly from your GL dimen-sions to customers and products in one

29COST DIMENSIONALITY SEPTEMBER/OCTOBER 2015 COST MANAGEMENT

THE EXPENSES IN ASHARED SERVICES COST

CENTER TYPICALLYCANNOT BE “MAPPED”

DIRECTLY TO LOBS,PRODUCTS, AND

CUSTOMERS SIMPLY BYADDING ADDITIONAL

LEVELS INTO AHIERARCHY OR ADDING

NEW HIERARCHIES,BECAUSE THOSE

EXPENSES SHOULDRIGHTFULLY BE SPLIT

AMONG THEM.

step would typical ly require some verycomplex mappings and driver data, andit would be far less transparent to a con-sumer of the results. It is important tonote that the activity dimension was cho-sen as an example, and the dimension(s)used as the bridge dimensions wil l varydepending on the detai ls of your orga-

nizat ion and what your part icularmodel i s geared toward accom-pl i sh ing . As another example , amodel built specifically for the allo-cation of IT costs would follow a sim-i lar pattern to Exhibit 1, but theconcept of act iv it ies might not beas relevant in that realm. Instead,it of ten makes more sense to use anew dimension representing the IT

resources of the organization than the ITcost centers support (i.e., servers, tele-phones, data storage, Internet ser v iceproviders, etc.).

Let us assume Exhibit 1 represents a full-absorption model, in which each stagecontains the same total expenses as Stage1, which came from the GL. The idea isthat as you move from stage to stage, youhave acquired new informat ion aboutyour costs. If you received $1 million ofexpenses from the GL and ran it throughthe model, you could look at the resultsof any stage and see how that $1 millionis split across different pieces of the orga-nization. Not only does this design accom-pl i sh the goa l of f inding out LOB- ,product-, and customer-level detail, butit also al lows you to look at each stepalong the way to be able to justify/explainhow those results were produced.

Within the realm of shared serv icescosts , i t is common for dif ferent costcenters to mutually support each other.As a result, those centers should be charg-ing (or al locat ing) costs to each otherappropriately. Let us take HR and IT asan example: The HR department helpsprovide benefits, among other serv icesor act iv it ies, to the employees in the ITdepartment. Meanwhile, the IT depart-ment supports HR by providing the tech-nological infrastructure needed to carryout everyday business.

Building on this concept, let us imag-ine we had a s imilar model to Exhibit1, but rather than a l locat ing down to

the customer and product level, we aimedto a l locate expenses f rom the sourcecost centers ( in Stage 1) to the othercenters that those sources suppor t. Wewould leverage the same concept of allo-cat ing f rom the source cost centers tothe act iv it ies per formed by that center,but then we could a l locate f rom thoseactivities to the other centers that shouldbe charged for those ac t iv i t ie s . Thisanalys is leads to more detai led ques-t ions about how exact ly, and in whatsuccession, those shared serv ices costcenters al locate to each other. While thedetails of waterfall, reciprocal, and recur-sive cost ing methodologies are not thefocus of this ar t icle, it should becomeapparent how you could leverage theoutputs of a cer tain set of a l locat ionsand use them as inputs to an alternat iveset of a l locat ions.

It is important to do the fol lowing:1. Try to v isualize the dimensionality

of your costs and how they couldpotential ly f low from source to tar-get.

2. Think about the sets of driver dataused to al locate costs between thedimensions.

3. Re-evaluate the short-term andlong-term goals of the organizat ion.

4. If the driver data that you deem tobe the most accurate is not readilyavailable, choose another driver touse temporari ly to get your modelup and running. The beauty of thistype of model is that it is f lexibleenough to be able to change yourdriver select ions at a later t imewithout impacting the fundamentaldesign. You are st i l l al locat ing costsbetween act iv it ies andproducts/customers — you are justmoving those costs in a differentway.

Supporting the methodology with arobust IT solutionBy now you should have a better under-standing of some of the core ideologiesof defining a cost model and how thosemethods can be applied to solve some ofthe chal lenges associated w ith sharedservices costs. Now let us briefly discuss

30 COST MANAGEMENT SEPTEMBER/OCTOBER 2015 COST DIMENSIONALITY

WITHIN THE REALMOF SHARED

SERVICES COSTS, ITIS COMMON FORDIFFERENT COST

CENTERS TOMUTUALLY

SUPPORT EACHOTHER.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

how your methodology can be supportedby an IT solut ion.

In a time when enterprise performancemanagement (EPM) software for bud-get ing/planning and financial consoli-dat ion i s b ecoming a s t andard forcorporat ions looking to better analyzetheir financials and drive business deci-sions, the trend is also becoming increas-ingly prevalent in the area of costing andprofitability. Commercial cost ing/prof-itability solutions have become so robustthat they are capable of support ing al lof the methodological concepts coveredin this ar t icle, as well as al lowing you tocustomize your solution to the specificsof your organizat ion. For example, theOracle Hyperion Profitability and CostManagement (HPCM) solut ion offersdifferent model type templates, each ofwhich are tailored toward different typesof cost models. There is a customizablemodel t ype, much l ike we outl ined inthe earlier methodology sect ion, gearedtoward (but not l imited to) a t ypica lmult i-stage al locat ion model used foract iv ity-based cost ing.

If your organization has a large amountof data and metadata that you want to allo-cate to / f rom, HPCM of fe r s a moredeta i led model t ype focused on ef f i -ciently processing large data sets across

many dimensions. Lastly, if your modelapplies the concepts of recursive or rec-iproca l a l locat ions, or i f you want toel iminate some of the confines of thetool and def ine a l locat ions in a moref lex ible manner, HPCM a lso of fers amore free-form model, which allows youto define many different types of al lo-cat ions that can occur sequential ly orin paral lel. In short, there are not manycost-modeling concepts and designs thatcannot be suppor ted by modern-daycosting software, so start thinking abouthow to leverage these IT of fer ings inyour business today.

The ability to integrate an IT-enabledcosting solution with your GL, data ware-house, planning solut ion, etc. , and toautomate the movement of data betweenthese elements is one of the key benefitsof building an IT cost model. The abil-ity to execute automated interfaces toload your expenses and driver data intoyour cost model — and execute alloca-tions with one click of a button — can bea tremendous time-saver for any organi-zation. The “less time consolidating data,more time analyzing results” mantra is areturn on investment that in itself is worthconsidering, not to mention that an IT solu-t ion eliminates room for mistakes andproduces more accurate numbers.

31COST DIMENSIONALITY SEPTEMBER/OCTOBER 2015 COST MANAGEMENT

EXHIBIT 2 Shared Services Maturity Continuum

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32 COST MANAGEMENT SEPTEMBER/OCTOBER 2015 COST DIMENSIONALITY

EXHIBIT 3 Maturity Level Impact on Methodology, Technology, and Culture

Level Methodology Impact Technology Impact Culture Impact• Methods are nonexis-

tent.

• No clear path frombusiness unit man-agement (e.g., noclear direct ion onhow service centersdevelop and calculateunit costs for a helpdesk cal l within theIT shop).

• Rudimentary spread-sheet models areprevalent at thisstage.

• Lines are blurredbetween var iousbusiness units withinshared services.

• The shared centersare not f i rmly estab-l ished.

• Communicat ion l inesare st i l l being devel-oped, and manage-ment is disjointed.

Bl ind

• There exist f i rm andfocused methods foreach organizat ion.

• However, HumanResources and ITmight view simi larservices di f ferent ly.

• Processes exist andare fol lowed di l i -gent ly, but theyremain nonstandard.

• Database or othertechnology are usedto define, track, andrepor t on service levelagreements betweenorganizations.

• The systems are notconsistent and remaindisparate betweeneach siloed center.

• This technology solu-tion prevents organi-zations fromaggregating andrepor ting on a holisticlevel.

• This level is maturein nature.

• This level is Risk-averse.

• Service centersremain independentfrom both a del iveryand managementperspect ive.

• The economies ofscale do al low orga-nizat ions to gain costsavings by central iz-ing each center.

Si loed

• Methods and toolsets are harmonizedamongst the centers.

• For example, if HR isusing recursive or rec-iprocal costing todevelop unit costs, ITand Operations willfollow suit and providea consistent approachthat is understood andtransparent.

• Ut i l izes cost ing/prof-i tabi l i ty technology,such as HPCM, whichfocuses on businessuser transparency.

• Service level agree-ments are f i rmlyentrenched betweenshared centers andal l receiving centers.

• Clear and concisecommunicat ion existsbetween al l par t ies.

Integrated

• At this point of matu-r i ty, organizat ionsare using the har-nessed data to movefrom a react ionarymindset to a predic-t ive mindset.

• Methods l ike dr iver-based planning toforesee high and lowlevel service rangesprovide value instaff ing and other keymanagement deci-sions.

• Technology is simi larto the Integratedmatur i ty.

• Technology isdeployed to theGlobal team.

• Technology has theabi l i ty to suppor t theforward-looking meth-ods descr ibed above.

• Cost ing results canbe pushed direct lyinto a budgeting solu-t ion, and technologytoolsets with busi-ness intel l igencecapabi l i ty can lever-age those capabi l i -t ies to distr ibuterepor ts.

• Cultural ly, we cannow integrate thecost ing solut ion withthe planning/fore-cast ing process.

• Expanded user basebr ings budget andforecast individualsinto the fold.

• With expansioncomes education andtraining to ensure al lusers are workingtoward a singulargoal.

Global lyOptimized

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

So now you may be asking, “How doI take my organization from the point I’mat now to a place and t ime where I havea fully functioning cost model supportedby enterprise software?” Let us get intowhat we ca l l the matur it y cont inuumand address where you fit in that con-t inuum.

The maturity continuumMethodologies thrive in theory, not exe-cution. Methods are evoked in a f lavor-of-the-month approach, but in order totruly benefit from shared serv ices exe-cution you must understand how matureyour organizat ion currently is and howquickly you can accelerate the learningand adoption curve. Remember that ques-t ion you asked yourself a couple of min-ute s ago? “Is there t r u ly a de f inedmethodology that is capable of y ieldingthe r ight results now but is also flexibleenough to adapt over t ime?” Let us thinkabout that.• Do I have a shared serv ices modeldeployed today?

• If so, is the methodology applieduniformly throughout the organiza-t ion?

• Do my methods fit the needs of al lstakeholders?

• Are my methods quantifiable,usable, maintainable, and flexible tochange?In order to ace this test, it will be help-

ful to consider your baseline — where doyou fit w ithin the shared serv ices matu-r it y cont inuum? Whi le implement ingprojects, some clients attempt to go fromzero to 60 too quickly, and these pro-jects fai l the majority of the t ime. Tak-ing baby steps is the cliché, but it is themost effect ive pace for success.

Exhibit 2 lays out a basic continuumfor shared serv ices model maturity thatwil l help you find that pace. As with anymaturity model, it can be used as a self-awareness tool to help you determinewhere you reside in the spectrum todayand where you want to be in the future.Your organizat ion should be self-awareand not reach for the highest level if it

does not sat isfy a specific need from astakeholder. Stakeholders can take onmany forms, including executives, busi-ness l ine managers who receive sharedserv ices costs , as wel l as internal andexternal report ing customers.

As you move up the continuum, noticetwo primary goals: (1) increased v isi-bility and (2) increased ability to defend.If your shared services methods contain“black box” components (you can’t seehow they were calculated), which lacktransparency, they are not l ikely to betrusted by the receiv ing organizat ion.

There are four basic levels to the con-t inuum: bl ind, s i loed, integrated, andglobal optimizat ion. Exhibit 3 outlineshow each level of the continuum impactsthe method and technology used and theculture of the company. So at what levelare you?

ConclusionRegardless of whether or not you alreadyhave a methodology defined and an ITsolution supporting the process, there isalways room to improve. While readingthis article, you may have muttered to your-self, “I get the chal lenges and the con-cept s that a l low me to overcome myissues, but what are the next steps forme to truly improve my process?” Thereare many specific factors that influencewhat the appropriate next steps shouldbe in order to achieve shared serv icesnirvana, but identifying the current matu-rity level of your shared serv ices modelis cr it ical to get you star ted. If you canident i f y where your company s t andsmethodological ly, technological ly, andcultura l ly, and you cont inue to thinkback to the questions you asked yourselfat the beginning of this article, the direc-t ion in which you should move to get onthe road toward having a globally opti-mized shared s e r v ice s so lut ion w i l lbecome clear.

So now you know the secrets of cost-ing shared serv ices: al locat ion method,software, and the maturity continuum.Will you keep these secrets and use themto your competit ive advantage? n

33COST DIMENSIONALITY SEPTEMBER/OCTOBER 2015 COST MANAGEMENT