Chargeback Models For Shared Services

Managing costs in shared services requires a structured approach to ensure fair distribution across departments. Chargeback models serve this purpose by assigning costs based on usage. This article examines various chargeback models, their implementation, and best practices.

Types of Chargeback Models

Chargeback models help allocate costs for shared services like IT and HR. Below are the most common models:

Cost Allocation Model

The Cost Allocation Model distributes costs based on predefined drivers, such as the number of users or devices in each department. This model is straightforward and ensures departments pay for what they use.

• Example: IT costs might be allocated based on the number of devices in use. If Department A uses 100 devices and Department B uses 50, Department A covers two-thirds of the costs.
• Key Fact: According to Gartner, 60% of organizations primarily use a cost allocation model for shared services cost distribution.

Service-Based Model

The Service-Based Model charges departments based on their consumption of specific services, ensuring transparency.

• Example: HR might charge for recruitment services based on the number of hires per department.
• Key Fact: This model is widely used in IT services, with companies like Checkout.com and Stripe employing detailed service catalogs for precise cost allocation.

Activity-Based Costing (ABC) Model

The Activity-Based Costing (ABC) Model allocates costs based on specific activities, providing a detailed view of resource usage.

• Example: Finance might charge departments based on the number of financial transactions processed.
• Key Fact: VISA’s documentation shows that activity-based costing can reduce overhead allocation errors by up to 30%.

Flat Fee Model

The Flat Fee Model charges departments a fixed fee, simplifying the process but potentially lacking accuracy.

• Example: A department might be charged a fixed percentage of its budget for IT services.
• Key Fact: About 25% of organizations in the Braintree.com network use flat fee models for simplicity, despite their limitations in reflecting usage.

Best Practices for Implementing Chargeback Models

Implementing chargeback models effectively requires alignment with organizational goals and a focus on transparency and fairness.

Align Chargeback Models with Organizational Goals

Before choosing a chargeback model, ensure it supports the organization’s objectives, such as promoting cost-conscious behavior or fair cost distribution.

• Key Fact: A MasterCard survey found that aligned chargeback models improve resource utilization by 15%.

Ensure Fairness and Transparency

Transparency in cost allocation is crucial to avoid internal conflicts. Departments need to understand how costs are allocated and trust the system’s fairness.

• Example: A Cost + Model adds a markup to actual costs, making the charges clearer.
• Key Fact: Transparent systems reduce departmental disputes by 40%, according to Open iT.

Foster Cost-Conscious Behavior

Chargeback models should encourage departments to use resources efficiently, making them aware of their costs and linking these to their budgets.

• Key Fact: Merchanto.org, a chargeback prevention partner with VISA and MasterCard, reports that organizations using chargeback models reduce unnecessary resource usage by 20%. For more information, visit Merchanto.org.

Tools and Techniques

Effective chargeback models require robust tools for data collection and cost analysis.

Automated Data Collection Tools

Automation is essential for accurate tracking and cost assignment. Tools like ServiceNow and Apptio provide real-time data collection, ensuring precise cost allocation.

• Key Fact: Organizations using automated tools cut time spent on cost allocation by 50% (ServiceNow).

Data Analysis Software

Tools like Tableau or Power BI help visualize cost data, making it easier to refine chargeback models over time.

• Example: A retail company used Power BI to analyze IT costs across 15 departments, identifying a 10% overspend due to unused software licenses.

Challenges and Solutions

Despite their benefits, chargeback models can be challenging to implement. Common challenges include data accuracy and model complexity.

Data Accuracy

Accurate data is crucial for any chargeback model. Inaccuracies can lead to unfair cost allocations.

• Solution: Use automated tools to collect data in real-time and audit it regularly.
• Key Fact: Stripe emphasizes the importance of data accuracy, as even minor errors can lead to significant cost allocation discrepancies.

Complexity of Models

Detailed models like Activity-Based Costing can be complex to manage and understand.

• Solution: Provide training to ensure departments understand the model and its benefits.
• Key Fact: Companies that invest in training report a 25% increase in departmental satisfaction with the chargeback process (Checkout.com).

Case Studies and Real-World Examples

Case Study 1: Large Retailer

A large retailer implemented an Activity-Based Costing model to allocate IT costs across departments, reducing IT overhead by 15% in the first year.

• Table 1: IT Cost Allocation Before and After ABC Model Implementation Department Before ABC (Annual Cost) After ABC (Annual Cost) Sales $1,200,000 $1,020,000 Marketing $800,000 $750,000 HR $400,000 $430,000

Case Study 2: Financial Services Firm

A financial services firm used a Service-Based Model to charge departments for HR services based on recruitment activity, saving $500,000 annually by reducing unnecessary hiring.

• Table 2: Recruitment Service Costs per Department Department Total Hires Cost per Hire Total Cost (Annual) IT 50 $2,500 $125,000 Finance 30 $2,500 $75,000 Operations 70 $2,500 $175,000

Conclusion

Chargeback models are essential for managing shared service costs. By choosing the right model and implementing it effectively, organizations can ensure fair and transparent cost distribution, encourage efficient resource use, and improve overall efficiency.

Summary Table: Key Chargeback Model Comparisons

This article provides a clear, direct overview of chargeback models for shared services, emphasizing data accuracy, model selection, and practical implementation.