The article discusses the issue of determining responsibility for support functions within organizations. Traditional methods of allocating support function costs have not proven effective, leading to dissatisfaction among senior executives. The main problem lies in the methods used to allocate these costs, which often either oversimplify or overcomplicate the process.
Simplistic approaches involve applying a single, top-down method to allocate costs based on a percentage of enterprise revenues or headcount, which does not encourage cost consciousness. This method results in little incentive for business units to reduce spending on support functions, as the only way to do so would be to decrease revenues or headcount. This approach can also lead to resentment among units that feel they are paying more than their fair share, and can overspend due to a lack of reflection on actual usage.
On the other hand, overly complex methods that align costs closely with usage can be problematic, especially in labor-intensive functions. Tracking costs in this manner can consume a significant amount of time and effort, potentially outweighing the benefits. Most organizations use a blend of allocation methods, but this approach can still be resource-intensive and lead to a lack of transparency and accountability.
The article suggests alternative approaches to improve cost allocation:
- Focus on compliance: Ensure that allocations meet tax, accounting, and regulatory requirements. Scrutinize other internal allocations that might not be necessary for external compliance.
- Create incentives for functional leaders to control costs: Rather than allocating costs that business units cannot change, provide incentives for functional leaders to manage costs effectively. This avoids adding unnecessary administrative burdens on business unit leaders.
- Allocate costs based on usage: Cost allocation should be driven by actions that business units can control, such as usage of services like IT service desks or customer call centers. Standard pricing, such as a charge per call, provides managers with a clear incentive to reduce costs by reducing usage.
In conclusion, the key to effective cost allocation lies in finding a balance between simplicity and responsiveness to actual usage, while also focusing on compliance and incentivizing cost management. By addressing these issues, organizations can improve transparency, accountability, and cost consciousness among business units and functional leaders.
