Research: Why do so many organisations struggle with cost allocation?

Why do so many organisations struggle with cost allocation?

In large organisations typically about 30-50% of their total costs are allocated (i.e. moved to another location or cost centre from which they were originally booked). Most of these are the costs of corporate functions (IT, Finance, HR, Risk etc) and these are rarely allocated just once, but rather allocated and re-allocated (on average 4.2 times) before being charged eventually to a business unit. The process of cost allocation divides organisations as business units seek to protect their profitability by avoiding corporate charges.


Improvement attempts


On average global organisations revisit their end-to-end operating model every 2-3 years with the objective of making radical simplifications and resolve ongoing disputes around fairness of cost allocations. However, allocation improvement projects typically encounter stumbling blocks as complex inter-dependencies emerge, and the many different stakeholder groups each have their own requirements. We present here a list of five reasons why cost allocation environments fail, with an accompanying Deloitte view on what can be done to avoid failure.

5 reasons for cost allocation failure

Approach to cost allocations


Cost allocation is not a standalone activity and should be applied within the wider framework of financial forecasting, planning and analysis. When thinking about improving cost allocations, a range of factors should be considered. There needs be a shift away from the mindset of ‘what allocation method is best?’ to a more holistic thinking around ‘how can support functions provide the greatest value?’ When business partnering operates well, support functions are able to understand and anticipate business needs, to ensure that the services they provide align with corporate objectives… and the cost allocation ‘noise’ fades away!

How we help our clients


At Deloitte, we are experienced in designing and implementing low cost, low complexity, cost allocation environments that support all stakeholder groups. Our approach revolves around:

  • Performing rapid current state diagnoses to identify pain points and establish their underlying root causes
  • Defining allocation objectives, priorities and principles, and ensuring they are in alignment with corporate strategy
  • Implementing new systems and operating models (processes, governance, roles and responsibilities etc.)
  • Financial modelling the impact of change and managing the communication with business units

Outcomes
 

  • A coherent end-to-end environment that aligns support functions with the needs of business and corporate strategy
  • Materially improved cost allocation processes – fewer disputes, less cost and resources required to operate them
  • Freeing up management time to spend on business-critical matters by reducing time-consuming disputes around allocation methods

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