Shared Services Pricing Models - Drive Desired Behavior with the Right Pricing Models
7 likes7,308 views
The pricing model chosen for a company's shared services has a significant impact on how the business units that consume those services behave. An effective pricing model that is buyer-driven will enable competitive pricing, deliver needed services, drive innovation, and properly allocate organizational resources. In contrast, a supplier-driven model where the business units have little input into services and pricing is bureaucratic and will not promote innovation or cost leadership. Careful consideration of pricing options is needed to select a model that creates the right incentives and speaks to the needs of stakeholders.
Shared Services Pricing Models - Drive Desired Behavior with the Right Pricing Models
- 1. Global Finance 360 SHARED SERVICES PRICING MODELS DRIVE DESIRED BEHAVIOR WITH THE RIGHT PRICING STRUCTURE Author: Stephen G. Lynch The method through which a company prices its Shared Services has a significant “The pricing 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 model chosen rendered are typically inefficient and costly. However, when an organization treats impacts the 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. behaviors of the Business Units 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 that consume 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 these services. 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 An effective stakeholders that interact with Shared Services and drives the correct consumption behavior. model will enable Exhibit 1: Key Attributes of Supplier-driven vs. Buyer-driven Shared Services competitive pricing, deliver needed services, drive innovation and properly allocate organizational resources.” 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. Global Finance 360 | Copyright 2011 | All Rights Reserved 1
- 2. About Global Finance 360 Typical Pricing Models for Shared Services Global Finance 360 covers the world of corporate finance and There is no one pricing structure that is right for every organization, and the pricing accounting and how these model that is ultimately chosen should meet the objectives of that particular activities are impacted by organization. Pricing models range from no cost allocated through a market-based globalization. Focus areas charge-back mechanism that considers the range of external options and pricing include Finance Delivery structures. Strategy, Shared Services, Business Process Outsourcing, Process Improvement and Exhibit 2: Typical Shared Services Pricing Models 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 No charge-back of costs. This is the most basic model and is often employed experience advising global by companies just starting on the journey to Shared Services. There will be a companies on their service move to centralize support services in the corporate group. This centralized delivery strategies and has support group doesn't have a separate identify or a separate budget. served over 60 clients in a Consequently, its costs are simply part of the broader corporate organization. variety of industries including Perhaps the costs are ultimately allocated back as part of a corporate allocation, consumer product and industrial but the costs of the service organization itself are not directly allocated back to the manufacturing, aerospace & defense, transportation, Business Units. Consequently, no signal is sent to the Business Units about the technology, entertainment and true cost of the services they're consuming. financial services. He has also served as a Controller in private Fixed price charge-back. Among the charge-back models, this one is the industry and as an auditor in simplest. An estimate of volume is made and a price is set based on that public accounting. 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 Mr. Lynch is an active content message to the Business Units that they are in fact paying for these services, but contributor on the topics of ultimately it isn't based on actual volume. Consequently, the Business Units Finance Transformation and won't have a vested interest in reducing its consumption of services or partnering globalization and has presented with the SSC to optimize processes and reduce costs. at various forums including the IQPC Shared Services & Outsourcing conference. He can Variable pricing structure based on actual volume (e.g. invoices processed) be found on the web at and cost. This model charges back costs based on an activity drivers so that the www.globalfinance360.com. 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 Contact Information: and no profit margin is built in. The SSO acts as a true cost center without a profit motive. Steve Lynch Toll-free: +1.800.216.2512 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 Office: +1.719.481.2599 margin. The SSO acts as a profit center; however, it only sells its services 1042 W. Baptist Road internally and does not attempt to sell its services to customers outside the Suite 194 organization. This pricing model can have the effect of distorting a Business Unit’s Colorado Springs, CO 80921 cost structure if it results in an above market rate for the services rendered. slynch@globalfinance360.com www.globalfinance360.com Global Finance 360 | Copyright 2011 | All Rights Reserved 2
- 3. About Global Finance 360 Variable pricing structure based on competitive market offerings. In the market pricing model, services are priced to reflect the actual value of the services Global Finance 360 covers the in the open market. If you think of the Business Units "outsourcing" their support world of corporate finance and services to a separate entity, the choice is between a captive service unit accounting and how these providing those services or an independent organization providing them. In effect, activities are impacted by the captive unit and the independent supplier are competitors. The market pricing globalization. Focus areas model reflects that reality. Ultimately, if a captive service organization can't include Finance Delivery Strategy, Shared Services, provide the services at or near market, the company should consider outsourcing Business Process Outsourcing, that service to an outside party that may specialize in the process (e.g. Payroll) Process Improvement and and has the ability to perform more efficiently than the captive service center. Organizational Design. Drive Desired Behaviors through the Pricing Model Global Finance 360 is run by Steve Lynch. Mr. Lynch is a The pricing model chosen will have a profound impact on how an organization uses Principal in the Finance shared services. When the Business Units and other stakeholders consume services Transformation practice of a without consideration for cost, they typically waste resources by consuming more than global consulting company. He they actually need. When a variable pricing structure is introduced, managers is responsible for the marketing, presumably make intelligent and informed decisions about capital allocation and are sales and delivery of Finance more judicious in their use of corporate resources. Every company should consider Transformation services in North the behaviors they require of their stakeholders before deciding on the appropriate America and serves as a key pricing model. liaison for his company’s global Finance practice. He brings Choosing a Pricing Model for your Organization more than 15 years of experience advising global The two models that should be considered are the variable cost model and the market companies on their service pricing model. Companies often choose a captive model over outsourcing because delivery strategies and has they believe they can provide those services more cheaply than an outsourcing served over 60 clients in a arrangement over the long-run. This lower cost will provide an additional advantage to variety of industries including the Business Units as they price their own goods and services for the external market. consumer product and industrial manufacturing, aerospace & Market pricing can make sense, particularly if the company intends to sell to external defense, transportation, customers. Genpact, the former captive GE service unit, it a good example of a technology, entertainment and previous captive that became its own business. If the Shared Service Organization financial services. He has also has become so efficient that it can price at market and still make a profit, it doesn't served as a Controller in private distort the Business Unit pricing mechanism since they would have to pay that market rd industry and as an auditor in price regardless of whether that service was bought from a captive service unit or a 3 public accounting. party service provider. Mr. Lynch is an active content contributor on the topics of Pricing as an Element of Governance Finance Transformation and Regardless of the pricing model chosen, it is critical that the Business Units be globalization and has presented involved with the pricing decision. In a properly operating governance model, the at various forums including the Business Units will be an integral part of the Shared Services evolution from inception IQPC Shared Services & Outsourcing conference. He can to its continuous improvement. The consensus reached should be based on a number be found on the web at of factors, including the overall corporate objectives of establishing the Shared www.globalfinance360.com. Services Organization. Additionally, the Business Units should work with Shared Services to optimize processes and reduce cost over time. Contact Information: It is important to keep in mind that the pricing model in effect could very well change Steve Lynch 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 Toll-free: +1.800.216.2512 Organization continues to improve and mature, it could move to a market pricing Office: +1.719.481.2599 mechanism. 1042 W. Baptist Road Conclusion Suite 194 Colorado Springs, CO 80921 The pricing model chosen impacts the behaviors of the Business Units that consume slynch@globalfinance360.com these services. An effective model will enable competitive pricing, deliver needed services, drive innovation and properly allocate organizational resources. www.globalfinance360.com Global Finance 360 | Copyright 2011 | All Rights Reserved 3