P&L or Cost Centre – How to Account for Your Global Shared Services?

One of the advantages of outsourcing versus having a captive shared service centre (SSC) is that someone else can do the financials. The supplier will send you an invoice for the work done – and if you are a global organisation, they will send an invoice per country, and no one has to worry about cost allocations, cross charging or any of the other financial manoeuvrings that can occur when you have a captive SSC. Something you might want to include in a business case for outsourcing versus in-house.But, if the decision is to keep the SSC in-house, then how to account and financially manage the centre needs to be part of the governance process.Health warning – there are tax, investment credits, revenue and cost recognition rules, to name a few, that apply to most if not all SSC operations. Please make sure you seek appropriate tax and legal advice before you implement financial management and controls in your SSC. And how you set the KPI’s and measures for your SSC could be different than how you do the statutory and legal accounting.With the health warning out of the way, one of the first things you will want to consider is whether you run your SSC as a profit centre or a cost centre. There are good arguments both ways. A few examples below.Definition – for this article, the word customer is used to refer to the part of an organisation that would use the SSC. A customer could be a function such as HR, Finance, Procurement or whatever other processes are in the SSC, it could be a country or even a business unit. Profit CentreCost CentreTransparency of the costs to the customerAs an element of profit will be charged, full transparency might not be achievableComplete transparency is required as each customer will be paying for the costs of the centre.Investments in areas such as automationCould be easier to achieve as the centre would have its profit pool to invest in improvements.Might be more challenging to get agreed investments especially for those that cross customer.PeopleIncreased ability to pay and reward for specific KPI’s out of a profit poolThere is the potential that the customers would want to influence pay and rewards in a more direct manner.Cost reduction and controlPotentially easier to influence cost reduction as the leaders of the centre have their P&L and are paid based on P&L achievements.SSC becomes an extension of the customers costs (e.g. HR), and if there is a 5% cost reduction target issued the SSC would get the same target.Customer Satisfaction – especially in respect to cost charge for service receivedIf it is mandatory to use the SSC, customers might not be happy that it is a profit centre, and constantly be looking at “benchmarking” the price chargedGreater acceptance of the cost, as it is an extension of the owners cost base, and they feel they have more “control” over those costs.These are a few examples of the areas that would be different if the SSC is set up as a profit versus a cost centre. Which direction your organisation chooses will establish for the SSC, at the top-level, rules for how the internal financial management and controls operate. Recharging or cross charging is another significant financial management process that needs to be set-up for the SSC (and please don’t forget the health warning above). If the SSC is treated as a cost centre some of the potential options for charging include: -Flat fee charging – if the SSC costs X per month, and it has Y customers, then X divided by Y = the amount charged back to each customer (see definition above)Charge per person – if the SSC has 100 employees and the cost of SSC is X – then X is divided by 100 to get the cost per employee. Each person is allocated to a customer, and that is what is charged out at the end of the month (average cost per person x number of persons = charge out)Unit charging – take the total cost for a process and divided by the number of units going through that process and charge that per unit. As an example, if the cost of processing the accounts payable activities is $1200 for a year, and that team can handle 100 invoices per month, the cost per invoice is $1. So each customer that sends in an invoice gets charged $1, so if one country has 75 invoices to process they will get charged more than a country that has 10.“Ownership Charging” – while I don’t personally recommend this method, it is possible to say “these people, IT systems, desks, telephones, etc. belong to a particular customer and therefore the customer pays the cost”. In this model, there is no sharing of resources as the customer owns their resources. There are other cross charging and allocation methods which include using techniques such as Activity Based Costing (ABC), full overhead cost absorption, incremental unit pricing and for an SSC that is a profit centre things like benchmark pricing and individual service pricing. Recharging and cross charging can get extremely sophisticated and complicated, and if it is a captive SSC, the caution would be to keep as simple as possible, while at the same time supporting the culture of the organisation along with the SSC’s targeted KPI’s and measures. When picking a method for your own SSC, some things to consider: -Flexibility – if the amount of work going into the centre could go up or down, or the number of customers will frequently change then having something that will flex easily with the demand changes could be the best way to go. This might drive you to pick something like cost per person or even straight flat charge out until the centre stabilises and there is the ability to move to complicated charging processes (such as unit charging) which require a more forecastable level of work to determine the appropriate unit charge.KPI’s and Measures – as in all parts of the business, what gets measured gets done, so if you use “ownership charging” as your recharge method, you will get siloed behaviour inside the SSC. Only the customer (owner) of the resources will manage the costs, and there will be little to no sharing between customers.Experience – the KISS (keep it simple) works well for cross charging out of an SSC. Sophistication can be added later when both the centre and the customers have the appropriate level of experience to handle the complexity of charging and the potential behavioural that results from different charging methods. Whether your centre is a profit or cost centre, and how you recharge, are only some of the areas that a captive SSC governance process needs to establish, manage and monitor. From a business perspective, you will want the customers to put more work into the SSC. Creating the right charging mechanism will help, but at the same time you want the SSC to have incentives to leverage assets and people between customers and to look for opportunities to improve quality and productivity.Getting the right balance between these two is essential for success. [inlinead]

P&L or Cost Centre – How to Account for Your Global Shared Services?

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