IT shared services

Perspectives

Demand for transparent IT shared services costs

Opening the allocation black box

The “black box” of allocated shared services costs can cause many issues within organizations. As a result, business units may consider looking for alternatives to using internal IT services, which can end up costing the company more in total.

June 7, 2017

A blog post by Colleen Whitmore, principal, Deloitte & Touche LLP*

I recently sat down with one of my clients, a business division manager for a global industrial manufacturing company, and asked them point blank “what items are included in your allocated IT costs?” As it happened, they had a hard time answering the question. They’re not alone. Many companies I’ve worked with really don’t know either.

But that is starting to change, primarily because IT costs are rising, making them a legitimate target for scrutiny. Unfortunately for the BUs being charged, IT shared services costs are often billed with minimal information about what those services are or how they have been allocated.

This “black box” of allocated shared services costs can cause many issues within organizations. First, it gives rise to feelings of mistrust between the business units, corporate, and the IT shared services group. BU owners may feel that the charges are unfair and that they don't reflect their actual consumption. This, in turn, creates concerns about who should be accountable for these costs, and whether IT or the business should be responsible for improving service or cost efficiencies. As a result, business units may consider looking for alternatives to using internal IT services, which can end up costing the company more in total.

Consumption-based costing: The RATE approach

Generally speaking, organizations that provide their BUs with more insight into their allocated IT costs use consumption-based costing models, as opposed to more traditional costing models that use static or generic metrics to allocate costs. A consumption-based approach allows the organization to define and standardize the services offered by their IT shared services group, including such information as the level of effort for each service, how costs for the service will be allocated, and the cost per activity/service. Companies can also identify if and when business divisions use incremental services above standard levels and calculate the resulting additional cost.

Specifically, these models offer the following benefits:

  • Relevancy: BU owners derive true insights into their consumption patterns that they can then use to make strategic decisions.
  • Accountability: BUs take responsibility for the level of services they consume and have an incentive to reduce costs and improve efficiency.
  • Transparency: BU owners understand the services they use and their associated costs.
  • Equity: BU owners better understand the basis for IT service costs charged to their BU.

Consumption-based costing models provide a happy medium between the often complex activity-based models popular in the 1980s and overly simplistic traditional models.

Unpacking the black box: A note of caution

Bridging the information gap between the IT department and business divisions is at the heart of opening the allocation black box. But there are sometimes pitfalls with the delivery of that information. For example, many companies address questions about IT shared services costs by assuming more information is better. On the contrary, what BUs need is not a data dump, but rather transparent, insightful information that will enable them to evaluate their use of IT shared services.

Another potential hiccup can occur with the development of the IT service catalog. The development and pricing of the services should be a joint effort between IT and the BUs. Developing the service catalog in terms of the service buyer’s perspective provides more meaningful information to BUs and will provide cost information at the level of detail they need for decision-making. On the other hand, if the IT organization decides to make changes to its allocation methodology without teaming with BUs, the result can be confusion and a renewal of mistrust.

Equipping organizations with more transparent IT services cost information can lead to significant percent reductions in company IT spend, facilitate service improvements to BUs and provide senior management with the transparent reporting they require to evaluate the effectiveness of their overall IT strategy.

Learn more about the cost of IT shared services.

*Note: The views expressed in this blog are those of the blogger and not official statements by Deloitte Touche Tohmatsu Limited or any of its member firms, including Deloitte & Touche LLP.

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