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ProfitPlus Case Study

Implementing Charge-Back Systems
Business Issue
Almost every business contains some sort of shared service such as Information Technologies (IT), Engineering,
Accounts Payable and Payroll just to name a few. Often cost allocations charge-backs are made by finance and
accounting in an effort to improve control over spending with the consumers of the services being provided. Unless
these charge-backs are accurate (consumption based) they often become the source of a l ot of discussion and frustra-
tion for both sides of the equation, the service provider and user.

Many of our clients have seen a rapid expansion of IT related costs and are struggling to correlate these increases with
the appropriate cost controls. Several CIO’s (Chief Information Officers) have moved towards a shared service
charge-back environment in order to better manage their costs and hold internal customers fiscally accountable for the
increasing service demands. A charge-back cost control process can be effective, however, we have observed too
many charge back systems that are confusing, inefficient and without context to overall profitability. A well designed
charge-back system will provide the following benefits:

• Pinpoint the true total service cost
• Understand the cost to service internal customers
• Understand the relationship between consumption volume and costs
• Confidently apply transfer pricing and charge backs across business lines or business units
• Empower decision makers to drill down into their data
• Quickly perform cost and capacity what-if planning analysis on demand

ProfitPlus has both a method and a tool to satisfy these requirements along with an incredibly powerful list of analyt-
ics that can easily track resource consumptions, the key activities being performed and their associated cost, service
cost trends and the customer support demands variances. This sounds complicated but the process, tool and mainte-
nance is quite simple.

Introduction – Case Study
A technology based company had been growing steadily over the last couple of years, both in terms of revenue and
cost to generate this revenue. They are marginally profitable but realize that they need to improve. The major issue to
resolve immediately involves IT costs, allocations and process metrics. There are several key issues surrounding the
IT organization.

11757 W. Ken Caryl Ave #F-159 | Littleton, Colorado 80127-3719 | Phone: (303) 948-5996 | Toll Free: (877) 448-5996 | Cell: (720) 771-9151 |

The Approach With this company.) o Same team as 1 estimated these o Often a simple %. IT related costs have grown from 10% of the total businesses costs to 25% without a clear understanding as to why. • All parties want to better understand the IT costs. For each activity.000 75% Desktop Computer Equipment $55.ProfitPlus Case Study: Implementing Charge-Back Systems (cont. Determined the key activities or processes being performed by the IT organization o Level of detail was determined by what level the organization wanted to understand and track o Simple interview with key staff helped determine and define these activities 2. answer the following questions to build allocations o Who do you do this for? o If you could charge them for each occurrence or for the task. recorded help-desk tickets.) • Over the last 2 years. collection of new information was coordinated. • The IT allocation method has always been based off of percentages established years ago and these numbers have not changed. This has created tension between accounting. how would you do it? If the data did not exist for step 3 above.000 Calculated 73% 11757 W.profitplusabc. IT and all other departments due to increasing allocation costs in total while the allocation method has not changed. Determined how the activities defined in step 1 consumed the major groups of cost within the organization (salaries.000 90% Total Monthly Expenses $364. Colorado 80127-3719 | Phone: (303) 948-5996 | Toll Free: (877) 448-5996 | Cell: (720) 771-9151 | www. equipment…. Ken Caryl Ave #F-159 | Littleton.000 25% Legacy Maintenance Contracts $25. why they are what they are and how to better allocate the costs. The Analysis Results Existing Allocation Logic: IT GL Costs: Grouping of Cost Monthly Cost Estimated Variability Salaries/Wages and Benefits $250. 1. a quick study was completed to get an estimate and where .000 85% Network Infrastructure $34. to understand why IT cost what it costs and how to appropriately allocate these costs was achieved in 3 quick steps. FTEs by activities for others 3.

1% Engineering $32.631.870.5% 8.51 37.7% 15.67 6.4% # of Students in the Month By Dept 26 $480.000 $265.500 $9.4% $143.375 3.58 3.125 10.6% Sales and Marketing $137.1% Production $116.7% 4. and Allocation Methods Activity Name Cost Variable % of Total Allocation Method Total Qtys Cost Per Setup New Computers $80. Their Costs.00 Develop/Maintain Custom Reports $37.000 $18.5% Management $24.8% 5.2% Estimated # of Calls By Department 116 $538.7% $57.400 15.5% $67.000 20.0% 39.7% Totals 21.491 Production 8.0% # of New Hires By Department 19 $4.207.ProfitPlus Case Study: Implementing Charge-Back Systems (cont.6% Quality Control $19.875 17.300.568.407 Management 3.625 19.6% # of Networked Computers by Dept 55 $1.000 ProfitPlus Allocations Analysis Major IT Activities.6% $16.9% Consumption Percentage 100 NA Totals $364.296 Totals 21.750 8.000 18.1% $29.1% $29.600 11757 W.profitplusabc.000 $60.77 Support Legacy Servers $75.6% Consumption Percentage 100 NA Maintain Network $71.222 Quality Control 3.500 $46.) Results using the Existing Charge-Back Allocation Logic Department Square Footage % of Total Calculated Allocation Finance/Accounting 1.750 6.631.500 39.000 4.75 5.210.000 $65.500 22.500 8.70 5.3% Consumption Percentage 100 NA Support Marketing Website $25.200 5.4% IT $12. Colorado 80127-3719 | Phone: (303) 948-5996 | Toll Free: (877) 448-5996 | Cell: (720) 771-9151 | www.491 Engineering 1.500 $28.600 100% $364.200 IT Total Cost of Service By Department – Major changes denoted in red Department Cost Of Service New % Existing % Finance/Accounting $20.6% $20.241 IT 4.852 Sales and Marketing 1.500 $36.9% 8.5% 18.86 8.639.79 Provide Systems Training $12.53 Answer Phone Questions $ . Ken Caryl Ave #F-159 | Littleton.449.91 32.

ProfitPlus Case Study: Implementing Charge-Back Systems (cont.6% of the IT resources Company Changes Made as a Result It was recommended that the model be updated regularly and the per-incident and total costs be compared as metrics to look for improvements. The results are viewable here. • It is expensive in total and per incident to supply phone based IT support within the organization • It is relatively cheap per person to provide training yet IT is spending < 4% on providing service • Supporting the Legacy server is consuming 20.) The Numbers behind the Numbers and moving forward After completing the initial analysis. Colorado 80127-3719 | Phone: (303) 948-5996 | Toll Free: (877) 448-5996 | Cell: (720) 771-9151 | www. Ken Caryl Ave #F-159 | Littleton. It was deter- mined that the major driver leading to Sales and Marketing having such an incredible IT support cost was that they were the leading consumer of phone based IT support yet had very few people sitting in on training . The departments that had cheaper then expected support had fewer IT calls but tended to take advantage of training.profitplusabc. the details supporting the cost of service by department was immediately supplied. phone incidences dropped by 25% • IT headcount and thus costs were controlled and reduced due to idle capacity created by reduced “Non-Value add” activities 11757 W. The Major Findings and Moving Forward A quick review was performed to validate the methodologies. the quantities and results for this situation. • The Legacy server was decommissioned after a transition plan and the dedicated legacy resources were redeployed to provide training classes • Training classes were made mandatory and as a result.