Do many of your managers spend more time arguing about the amount of costs received through the charging system than they do managing those costs? Many organisations use cross-charging as a way of managing costs, but wonder how efficient their system is.
Is it just a way of allocating costs from one area of the company to another or does it actually help the managers to understand how much cost is incurred in the day-to-day activities?
Some analysts estimate that as much as 5% of the IT and Finance budgets can be consumed in sorting out charging systems (calculating usage, settling disputes between departments, negotiating budgets etc.). This can translate into millions of dollars in large organisations.
Yet shared services functions — such as Finance and IT — can account for more than a third of an organization's total costs. Effective costing and cross-charging are vital to successful performance management. But how can you help business units make the right decisions about shared-services use? What's the most cost-effective way to monitor, reforecast, and realign resources and capacity?
Activity based costing and driver analysis can make the cross-charging calculations more accurate and more understandable. Analysis and use of the factors which drive the costs can help the the planning and budgeting processes, so that regular forecasts and updates that drive shared-services demand can help with business management. By enabling department managers to engage in meaningful discussions, shared services functions can constantly fine-tune resources to meet the changing needs of their internal customers.
Understanding how costs are incurred and how they change as the drivers change is important in helping managers to understand profit dynamics - particularly with big step costs such as IT.
There will always be some costs which are incurred because the business exists at all. Costs of the audit and the financial ledgers are one example but these do not normally change very much as business volumes change and are therefore easier to manage. It is important to identify the costs that do change and the factors that make them change and to manage these things more carefully.
It is also important to link the cross-sharing to the performance management system in the most efficient way. The performance of individuals should only be measured on things that they can control and that only includes costs that they can influence not costs that are imposed by decisions from other parts of the company.
Cross-charging systems should motivate managers to manage cost not to focus on the tools used to create the charges.