shared services pricing models - drive desired behavior with the right pricing structure
DESCRIPTION
Global Finance 360SHARED SERVICES PRICING MODELSDRIVE DESIRED BEHAVIOR WITH THE RIGHT PRICING STRUCTUREAuthor: Stephen G. Lynch The method through which a company prices its Shared Services has a significant impact on the perception and usage of a Shared Service Organization (SSO). When Shared Services are treated as little more than a corporate department, services rendered are typically inefficient and costly. However, when an organization treats Shared Services as a true business, serviceTRANSCRIPT
SHARED SERVICES PRICING MODELS DRIVE DESIRED BEHAVIOR WITH THE RIGHT PRICING STRUCTURE
Global Finance 360 | Copyright 2011 | All Rights Reserved 1
Global Finance 360
The method through which a company prices its Shared Services has a significant impact on the perception and usage of a Shared Service Organization (SSO). When Shared Services are treated as little more than a corporate department, services rendered are typically inefficient and costly. However, when an organization treats Shared Services as a true business, services provided are more innovative, effectively meet the needs of its buyers, and are cost competitive with the external market.
Given the importance of the pricing model to the overall success of the Shared Service Organization, the decision to price services should involve careful thought and the full participation of all key stakeholders. The pricing model will heavily impact the behavior of the Business Units and will either enable or inhibit Shared Services from providing innovative and competitive services. Ultimately, the pricing model should create a Buyer-driven model that speaks to the needs of the Business Units and other stakeholders that interact with Shared Services and drives the correct consumption behavior.
Exhibit 1: Key Attributes of Supplier-driven vs. Buyer-driven Shared Services
In a supplier-driven model, stakeholder groups have to take what they’re given, and have little or no say in what services are offered or the price that they’ll pay. This is a very bureaucratic mentality and is not appropriate for any company that is looking for the Shared Services model to drive innovation and cost leadership.
In the buyer-driven model, stakeholders who will actually be consuming the services have a large role to play in the development and continued governance of the Shared Service Organization. In order to create a buyer-driven model, an organization must carefully weigh the possible pricing models.
“The pricing
model chosen
impacts the
behaviors of the
Business Units
that consume
these services.
An effective
model will
enable
competitive
pricing, deliver
needed services,
drive innovation
and properly
allocate
organizational
resources.”
Author: Stephen G. Lynch
Global Finance 360 | Copyright 2011 | All Rights Reserved 2
About Global Finance 360
Global Finance 360 covers the world of corporate finance and accounting and how these activities are impacted by globalization. Focus areas include Finance Delivery Strategy, Shared Services, Business Process Outsourcing, Process Improvement and Organizational Design.
Global Finance 360 is run by Steve Lynch. Mr. Lynch is a Principal in the Finance Transformation practice of a global consulting company. He is responsible for the marketing, sales and delivery of Finance Transformation services in North America and serves as a key liaison for his company’s global Finance practice. He brings more than 15 years of experience advising global companies on their service delivery strategies and has served over 60 clients in a variety of industries including consumer product and industrial manufacturing, aerospace & defense, transportation, technology, entertainment and financial services. He has also served as a Controller in private industry and as an auditor in public accounting.
Mr. Lynch is an active content contributor on the topics of Finance Transformation and globalization and has presented at various forums including the IQPC Shared Services & Outsourcing conference. He can be found on the web at www.globalfinance360.com.
Contact Information:
Steve Lynch
Toll-free: +1.800.216.2512
Office: +1.719.481.2599 1042 W. Baptist Road Suite 194 Colorado Springs, CO 80921
[email protected] www.globalfinance360.com
Typical Pricing Models for Shared Services
There is no one pricing structure that is right for every organization, and the pricing model that is ultimately chosen should meet the objectives of that particular organization. Pricing models range from no cost allocated through a market-based charge-back mechanism that considers the range of external options and pricing structures.
Exhibit 2: Typical Shared Services Pricing Models
� No charge-back of costs. This is the most basic model and is often employed by companies just starting on the journey to Shared Services. There will be a move to centralize support services in the corporate group. This centralized support group doesn't have a separate identify or a separate budget. Consequently, its costs are simply part of the broader corporate organization. Perhaps the costs are ultimately allocated back as part of a corporate allocation, but the costs of the service organization itself are not directly allocated back to the Business Units. Consequently, no signal is sent to the Business Units about the true cost of the services they're consuming.
� Fixed price charge-back. Among the charge-back models, this one is the simplest. An estimate of volume is made and a price is set based on that estimate. This pricing mechanism can be updated annually as part of the annual budgeting process or more frequently if desired. At a minimum, it sends the message to the Business Units that they are in fact paying for these services, but ultimately it isn't based on actual volume. Consequently, the Business Units won't have a vested interest in reducing its consumption of services or partnering with the SSC to optimize processes and reduce costs.
� Variable pricing structure based on actual volume (e.g. invoices processed) and cost. This model charges back costs based on an activity drivers so that the Business Units creating the most volume and consuming the more complex processes will pay more for their services. Only the actual cost is charged back and no profit margin is built in. The SSO acts as a true cost center without a profit motive.
� Variable pricing structure based on actual volume and cost plus a profit margin. This model is similar to the one above but adds in a pre-determined profit margin. The SSO acts as a profit center; however, it only sells its services internally and does not attempt to sell its services to customers outside the organization. This pricing model can have the effect of distorting a Business Unit’s cost structure if it results in an above market rate for the services rendered.
Global Finance 360 | Copyright 2011 | All Rights Reserved 3
About Global Finance 360
Global Finance 360 covers the world of corporate finance and accounting and how these activities are impacted by globalization. Focus areas include Finance Delivery Strategy, Shared Services, Business Process Outsourcing, Process Improvement and Organizational Design.
Global Finance 360 is run by Steve Lynch. Mr. Lynch is a Principal in the Finance Transformation practice of a global consulting company. He is responsible for the marketing, sales and delivery of Finance Transformation services in North America and serves as a key liaison for his company’s global Finance practice. He brings more than 15 years of experience advising global companies on their service delivery strategies and has served over 60 clients in a variety of industries including consumer product and industrial manufacturing, aerospace & defense, transportation, technology, entertainment and financial services. He has also served as a Controller in private industry and as an auditor in public accounting.
Mr. Lynch is an active content contributor on the topics of Finance Transformation and globalization and has presented at various forums including the IQPC Shared Services & Outsourcing conference. He can be found on the web at www.globalfinance360.com.
Contact Information:
Steve Lynch
Toll-free: +1.800.216.2512
Office: +1.719.481.2599 1042 W. Baptist Road Suite 194 Colorado Springs, CO 80921
[email protected] www.globalfinance360.com
� Variable pricing structure based on competitive market offerings. In the market pricing model, services are priced to reflect the actual value of the services in the open market. If you think of the Business Units "outsourcing" their support services to a separate entity, the choice is between a captive service unit providing those services or an independent organization providing them. In effect, the captive unit and the independent supplier are competitors. The market pricing model reflects that reality. Ultimately, if a captive service organization can't provide the services at or near market, the company should consider outsourcing that service to an outside party that may specialize in the process (e.g. Payroll) and has the ability to perform more efficiently than the captive service center.
Drive Desired Behaviors through the Pricing Model
The pricing model chosen will have a profound impact on how an organization uses shared services. When the Business Units and other stakeholders consume services without consideration for cost, they typically waste resources by consuming more than they actually need. When a variable pricing structure is introduced, managers presumably make intelligent and informed decisions about capital allocation and are more judicious in their use of corporate resources. Every company should consider the behaviors they require of their stakeholders before deciding on the appropriate pricing model.
Choosing a Pricing Model for your Organization
The two models that should be considered are the variable cost model and the market pricing model. Companies often choose a captive model over outsourcing because they believe they can provide those services more cheaply than an outsourcing arrangement over the long-run. This lower cost will provide an additional advantage to the Business Units as they price their own goods and services for the external market.
Market pricing can make sense, particularly if the company intends to sell to external customers. Genpact, the former captive GE service unit, it a good example of a previous captive that became its own business. If the Shared Service Organization has become so efficient that it can price at market and still make a profit, it doesn't distort the Business Unit pricing mechanism since they would have to pay that market price regardless of whether that service was bought from a captive service unit or a 3rd party service provider.
Pricing as an Element of Governance
Regardless of the pricing model chosen, it is critical that the Business Units be involved with the pricing decision. In a properly operating governance model, the Business Units will be an integral part of the Shared Services evolution from inception to its continuous improvement. The consensus reached should be based on a number of factors, including the overall corporate objectives of establishing the Shared Services Organization. Additionally, the Business Units should work with Shared Services to optimize processes and reduce cost over time.
It is important to keep in mind that the pricing model in effect could very well change over the life of the Shared Service Organization. In the early stages of the SSO, it could make sense to start with a variable cost model. As the Shared Services Organization continues to improve and mature, it could move to a market pricing mechanism.
Conclusion
The pricing model chosen impacts the behaviors of the Business Units that consume these services. An effective model will enable competitive pricing, deliver needed services, drive innovation and properly allocate organizational resources.