Tuesday Apr 02, 2013

Shared Service Costs: Are They Adding or Destroying Company Value?

Recently, Oracle published a very interesting podcast on shared service costs and whether shared services were adding or destroying company value. The information provided was extremely enlightening.

I had the pleasure of interviewing Bart Stoehr, Senior Product Management Director for Oracle Hyperion Profitability and Cost Management (HPCM), and Tom Gargas, a Principal Solutions Manager from Edgewater-Ranzal, an Oracle Partner. Here, I will summarize a few of the key points from the interview. 

According to Bart, shared services are really a concentration of company resources performing like activities, but they are spread out across the organization to service multiple, internal partners at a lower cost and providing higher levels of service. Most organizations have shared services, but often do not understand the value that they add to a company or the value that they can destroy. What are the goals for shared service centers? Bart explained that the goals are “To delight external customers and enhance corporate value”. These centers provide economies of scale and act much like centers of excellence. Examples of shared service centers mentioned by Bart include IT, Human Resources, Finance, Legal Services, Facilities and Communications.

We also discussed why it was so difficult to understand shared service costing. Bart revealed that it was really an aggregation issue. Organizations can see the total cost of a service that is shared, but not necessarily what the business units are consuming and therefore how they relate to products and customers. Understanding how each service is consumed by each part of the business will enable organizations to account for the services and charge back accordingly. But it is not only the financial aspects we are worried about. Understanding the costs of each shared service can help the company see how the costs of the service compare with the value of the service. If a service does not add value, then the company needs to take a hard look at why they are still performing it.

Tom gave us excellent information about a practical implementation approach for shared service costing which includes the FAST characteristics:

Flexibility  (in analysis and cost methods as shared services change)

Audit and Control (ensuring compliance and approved regulatory controls)

Shared Methodology (everyone uses consistent allocation methods which ensures accurate comparisons)

Transparency (details of allocations are provided to all)

Other details in the conversation covered how better understanding shared service costs can lead to organizational and management changes; becoming aligned on allocation methods and improving internal customer service levels. It can lead to excellence in business practices -- finding and exploiting core competencies, partnering with the strategic business units to help them increase their ability to create revenue, and adding value to the organization instead of destroying it through duplication of efforts and misalignment.

Tom indicated that Oracle Hyperion Profitability and Cost Management is an excellent tool for calculating shared service costs, and that these calculations can help in the financial planning process as well.  Shared service centers must plan both for the consumption of services (which services SHOULD they provide, volume of services, cost of services, etc.) and the supply side (workflow, accountability and what actually transpires). Being able to properly calculate service center costs and report against chargebacks by business unit just makes good sense. Being able to calculate and include service charges during budgeting and forecasting cycles makes forecasting more accurate.

“Using Hyperion Profitability and Cost Management with Oracle Hyperion Planning (and possibly Oracle Hyperion Workforce Planning) to manage the supply and consumption of shared services helps ensure that organizations are right-sized”, said Tom.

Bart and Tom convinced me that having well run shared service centers, understanding true shared service costs, and using those costs to plan for the future adds tremendous value to a company. Understanding these costs and using them to make sound business decisions can certainly make the difference between company financial profitability and loss.

To listen to the entire podcast, click here.

For more information about Hyperion Profitability and Cost Management, click here.

Thursday Jan 31, 2013

Profitability – the Proof is Deep Inside the Pudding

Recently, Oracle published a very interesting podcast on how the ability to view and analyze detailed costing is enabling us to better see the impact of costing on organizational success. To listen to the podcast, click here.

Bart Stoehr, Senior Product Management Director for Oracle Hyperion Profitability and Cost Management (HPCM), was interviewed by Nigel Youell, Director of Product Marketing for Oracle Performance Management Applications. Here I will summarize some of the key points. 

Bart started off by explaining why detailed costing is more important now than it has been in the past. More and more organizations have the need to understand costing and/or profitability on a granular level due to extreme competition, or due to inflexible regulation by governing bodies. For example:

- Financial institutions such as banks have to compete on a daily basis to keep a customer. For this reason they need to understand cost and profitability by customer for each of the products and services they consume: checking accounts, savings accounts, mortgages, loans, etc.

- Healthcare providers need to better understand the cost for each patient by the treatments they receive (DRGs) and types of services they consume.

- Transportation organizations (e.g., airlines, trains, etc.) have to understand costs by route, segment, seating class, etc. Without this crucial information, companies in these types of industries might not survive. Competition and regulation prevent them from jacking up price, so they instead must understand costs, how they are consumed, and therefore which products, services and customers are profitable and which are not. The ultimate business goal of detailed costing is to be able to manage the profit creating and profit destroying customers and parts of your business.

Applications like Oracle Hyperion Profitability and Cost Management enable our customers to analyze their customers, patients and subscribers (often counted in the millions) and to differentiate themselves through their sales, service and marketing functions.   These tools help managers find the “proof in the pudding” , and figure out what and who work(s) well and what and who does not.

When asked how most organizations currently perform this type of detailed analysis, Bart explained that most companies don’t attempt to do it because it is SUCH a daunting task despite the unprecedented insight into profit creation and profit destruction. Bart went on to explain that Oracle Hyperion Profitability and Cost Management has introduced detailed costing (available to the business user) to enable analysis and reporting at granular level, and to potentially enable 100’s of millions of allocations in a reasonable timeframe.

The podcast closed with the following thought – given the economic climate of today, is it enough to understand the average unit costs for an average customer, patient or subscriber? To stay competitive, or to convince a governing body that a service rate is unfair or unrealistic – you need to understand highly financially accurate and detailed records reflective of specific consumption. In other words, what each customer, patient or subscriber is REALLY costing you.

To replay this podcast, click here.




« March 2014