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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


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


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