Inaccurate or unknown shared service costs can
easily misstate your
true product and customer profitability. Just a 5% cost error can
alter reported profits by 100%!
Check through this list. How many
shared service costs does your organization really know?
Do you know your sales costs for each product and customer
segment? Some products are ordered with little sales expense while others
require an expensive sales process. Most sales expenses are driven by the
customers, not the products or the revenue associated with the sale.
Billing and Accounts Receivable
Billing and A/R cost can vary widely.
We helped one client discover its billing and A/R cost for its Professional Services
segment (attorneys, doctors, etc) cost 5 times more, per revenue dollar, than
the same transactions for its manufacturing clients. Before their AIM Customer
cost model, they allocated billing and A/R expenses on a per-revenue-dollar base and
over-stated the profit for this customer segment. AIM discovered the problem and
predicted the value of various fee-based solutions.
What IT costs are directly caused by
individual products and customers and how do they vary? IT costs are not driven
by headcount or revenue but by the time IT spends delivering its services. Today it's
common for IT costs to vary from 2% to 20% of a product's total cost. Are you
allocating your IT cost with activity costing or are you still using a headcount
Do you have a service center that handles calls
from any customer about any product? If your cost allocation is based on revenue
like most companies, your products have false customer service costs and create
false profit margins. Studies consistently prove that low-volume, low-revenue
products for small customer segments incur the largest customer service costs!
If you guess that these few shared
service items total more than 5% of your product and customer cost… you
have a serious profit management problem. Your reported operating profit for
your products and customers could be wrong by 100%!
Smart companies know they need
precise shared services costs for every product and customer segment
if they're going to effectively manage their profits, accurately price, and
accurately forecast results. Shared service costs are usually allocated on the
basis of revenue or headcount. This is wrong and misleading because shared
services costs are driven by actual cost consumed by product operations
We Deliver Solutions
Until now it has been impossible to easily
and quickly determine the exact cost of shared services for products and
customers. We've changed all that and built a new solution. AIM-Activity
Information ModelingTM delivers the precise costs of shared services
within a few weeks. For the first time, our clients know the exact cost of each
shared service for every product and customer. Their P&Ls are accurate and they
make better decisions.
If you've been wondering how to
determine your true profits, call us and learn how AIM has helped others and
will help you too. We'd be happy to conduct a web meeting to
discuss your interests and show you some exhibits. Call us at (888) 444-2210 to
Some Other Considerations
Inaccurate shared service costing always misleads a company into
investing and growing the wrong business while withholding investment from more
profitable products and customers. They bet on the wrong products and can't
understand what happened when expected profits fail to materialize.
Inaccurate shared service costing makes some products less
competitive. Your prices reflect your costs to some degree. When a product's costs are
inflated, it is priced higher and less competitively than it could be priced and
the company loses its price advantage and competitive opportunities in the market.
Growth often occurs in products and customer segments that are
marginally profitable because management has mistakenly under-priced them based
on incorrect cost data. Their low prices make them attractive to customers.
Unfortunately for the company, its profit performance continues to deteriorate
and it doesn't know why.
Ø Poor or inaccurate shared
services cost allocations create an abusive
situation. Managers who are charged the same, regardless of actual cost
used, will ask for everything they can get. They will ask for new IT systems
they don't need and accounting services they can live without. There is no
incentive to use only what they need. When managers are charged for the actual
costs their products and customers consume they make cost-benefit and value-based decisions. They use only those services
that they truly need and find valuable.
A short poignant
story about free services
One of the country's largest banks
provided month-end budget analysis and forecasts to every one of its division
CEOs. This required a staff of business savvy MBAs and CPAs to be
dedicated to this analysis for five days. The problem was that these were the
bank's best financial analysts and were needed to evaluate acquisitions,
expansions, partnerships, etc. But every month virtually all of the bank's
special projects came to halt until the Controller's analysts were finished with
the month-end budgets.
implemented activity based costing and announced that there would be a
charge-back for the monthly reports and analysis. Ninety percent of the division managers told
to provide only quarterly or semi-annual reports… because they didn't ever use the monthly
reports! This single change saved over $1 million and the bank's most
important initiatives were never again delayed by budget analysis.
Determining outsourcing opportunities is difficult and often fails
to reduce costs. Without accurate cost information it is impossible to determine
if outsourcing options will actually reduce costs.
Ø Poor shared service cost allocation creates false profit
performance that affects people's bonuses and their decision to stay with the
firm. No one wants to work for a low profit business.
Without accurate charge backs, there is little incentive for
shared service managers to tightly control their costs. They're not discussing
cost/value options with the line managers and jointly making the best decisions
for the business.
Economies of scale often and mysteriously fail to materialize.
Consolidating a number of decentralized units will actually cause some line
departments' costs to increase. We've seen this often happen when accounting
departments are consolidated. Before consolidation, when line managers had
their own small accounting department, they were only incurring the costs of
their own work. After the consolidation, their cost allocation for consolidated
accounting services is frequently higher because they are now "incurring
and carrying" the accounting costs of other departments who may require more
accounting work… even though the unit's accounting work hasn't changed.
Don't wait for the shareholder suits and SEC
investigations... implement an accurate, guaranteed, costing system today.
We offer a no-cost pilot that allows you to evaluate how AIM-Activity
will give you shared services cost models.
Learn about the free evaluation pilot
A Shared Service Cost
In the late nineties there was a North
East regional bank we'll call Bank of Northeast that did not accurately cost its
shared services. Its CFO used headcount as its cost allocation basis. Thus, most
of its information technology expenses were allocated out to the branch
operations, not its credit card and lock box operations because the branches had
18 times more people than credit card and lock box.
Profits in the branch operations were
very poor, management continued to downsize and cut budgets, but had little
success. Meanwhile, they invested heavily in their credit card and lock box
business because these reported the largest profit margins. Both credit card and
lock box operations require massive computing technologies. Major banks spend on
average, over $30,000 per person on their technology to process credit card
transactions. Additionally, industry wide, lock box and credit card businesses
have very thin profit margins. And so for 3 years, Bank of Northeast invested
heavily in its lock box and credit card businesses and cut expenses in its
branches and the related branch products.
The Bank of Northeast's troubled
financial condition continued to worsen and it was finally forced to go on the
auction block. One of the interested buyers, who we'll call Smart Bank, had a
CFO who understood how to accurately cost shared services and he quickly
concluded that Bank of Northeast's headcount based IT cost allocation method had
caused major errors on their P&L. When he did some rough cost allocations based
on estimated IT time, it looked like their branches were more profitable than his
own. He and his bank immediately made a generous offer and purchased Bank of
They then implemented their own ABC study of IT costs by time
and consumption- not
headcount. They discovered the lock box business lost money, credit cards broke
even and the branches were highly profitable. They sold the lock box
business, outsourced the credit card system and merged their branches into those
they acquired. They beat all Wall Street profit estimates, and Smart Bank has continued to
be one of the country's most profitable regional banks.
Had Bank of Northeast's CFO allocated
its IT costs accurately using a consumption-based method
instead of his headcount based formula, he would have known they were actually
shifting branch profits to cover money losing businesses. No one doubts that with an
accurate profit picture of their services, Bank of Northeast could have been
successful and would still be here.
The CFO of Smart Bank is now
the CEO who still has one of the best shared services cost programs and continues to make
turns vision into strategy and strategy into fact.”
Fredrick F. Reichheld, The Loyalty
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See Shared Services cost management exhibits and case