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Shared Services Cost & Performance Management Solutions

  • Do you have the uncomfortable feeling that your shared service departments are burdening your line departments with higher costs than are being reported?
     
  • Are line managers frequently protesting their shared service charge-backs?
     
  • Has your annual financial performance failed improve after you cut expenses?
     
  • Are you certain that the product and customer profits you're using for forecasting and investment plans are correct?
     
  • Has accounting avoided giving you and your line managers a full disclosure about the shared services cost allocation methodology they're applying?

We can help you:
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 Determine your true and precise shared services costs.
Ø  Thoroughly understand what's driving your shared services costs.
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Give your entire organization new more effective tools to trim and optimize shared services costs.
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Avoid erroneous financial reports and the failures they cause.
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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?

Sales
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.

Information Technology
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 and revenue allocations?

Customer Service
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 and customers.

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 arrange.

Some Other Considerations 

Ø   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.

Ø   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. 

Ø   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.

The Controller 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 him 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.

Ø   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.

Ø 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.

Ø 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 Information ModelingTM will give you shared services cost models.

Learn about the free evaluation pilot

 

A Shared Service Cost Story

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 Northeast.

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 successful acquisitions.

“Measurement turns vision into strategy and strategy into fact.”
                                Fredrick F. Reichheld, The Loyalty Effect

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