Costing Shared, Outsourced and Central Services
Shared Services may be functions inside a single organisation servicing its Business Units or combined in a Shared Services Centre supplying outsourced services to a number of external commercial businesses. Activity Based Costing and modelling shows the relationship between the service providers and service receivers and creates a mechanism for charging and budgeting for services. Where Shared Services are supplied internally it is quite common to find the relationship to Business Units soured by the lack of transparency of the charges made to the Business Units. Claims of excessively high bills, low value for money and a tendency to go DIY all generate unnecessary costs and angst. Where the Shared Services is a business supplying services to external customers then the penalties for getting prices wrong are severe - you lose money or lose customers. In both cases, high unit costs of activities and using the wrong cost drivers compound the problems. This risk is averted through an Activity Based Costing analysis and model of the Shared Services. Purpose of the Activity Based Costing Model: • Provide a proper basis for charging Shared Services costs to business units based on real usage of services. (Typically the previous basis may have been business unit sales volumes) • Assist business units reduce the costs incurred by knowing how they are driving support services costs by forecasting demand volumes when budgeting • Enable managers of shared services to use process improvements to reduce the unit costs of activities and hence the costs of the services provided • Feed unit cost data into costing models when tendering for new business, and for re-pricing of existing contracts • Shared Services charges to business units can be used in the models of product and customer profitability in each business unit. • If services are to external customers then accurate costing is a necessity to avoid losing customers or losing money.