Thought Leadership – How Cost Transparency Enables the Shaping of Business Demand and Influences Correct Behavior

Cost Transparency solution has the power to democratize the responsibility for costs and to empower people across the business to manage their costs and therefore drive the desired behaviours leading the enterprise to improved profitability.

By Blake Davidson, Head of Delivery at Magic Orange.

What is Cost Transparency?

To put it simply, Cost Transparency is a term used to describe the tracking within the organization of the total cost required to provision and maintain products and services for the benefit of the enterprise. It is also about establishing what different products and services exist, what they cost and how they relate to each other and to the business.

If one considers that a Shared Services unit provides a range of administrative and support services, along the lines of IT, HR and finance to the entire organization, it has never been more important for both the unit delivering and those receiving such services to completely understand the costs associated with this.

Cost transparency is the answer, as it is designed to provide business, finance and shared service owners with detailed and meaningful insights into their respective areas. It creates both visibility and understanding of the costs and volumes of their entire shared service product and service portfolio, enabling the organization to make informed and fact-based strategic and tactical decisions concerning its shared service investments.

What are Shared Services?

Typically, shared services encompass operations like HR, IT, Finance, Procurement, Legal Services, Marketing, and Sales. Business operations that used to be shared by several units within the business are consolidated under the Shared Services umbrella in order to eliminate redundancies and inefficiencies, with individual business units effectively becoming internal clients.

As the complexity of an enterprise increases, so does the requirement for a unified solution that is able to deliver clear visibility into the time and cost spent on services, as well as itemized breakdowns to individual internal clients. This provides these business units with granular clarity around the costs they have incurred, and exactly where and why these costs exist. This means they are able to quickly discover bottlenecks and inefficiencies, which means that measures to mitigate these issues can quickly be taken.

What is Business Demand?

Business demand is the requirement that revenue-generating business units place on their shared service providers – both internal and outsourced external ones – to enable their business operations. This could encompass any number of services, including such diverse ones as real estate from which to conduct business, through to IT platforms or other products and services that allow business to operate and transact.

Business often tends to think demand is one sided, as it is the entity ultimately footing the bill, and Shared Services simply needs to deliver on all requests. However, the reality is that all areas within the enterprise, including Shared Services, have a fixed capacity and a limited supply from which to meet all these demands. However, Shared Services departments are best placed to know the business ins and outs, and are thus well positioned to choose which technologies or services they can contribute to enable their internal customers business strategies, while still remaining agile and flexible enough to accommodate business needs.

 How can shared services influence business demand and behaviors while satisfying the business and its strategic aspirations?

The simplest and easiest manner to achieve this is to utilize the laws of supply and demand, and just like any good market place, both of these factors will need to come into play to reach a dynamic constantly evolving equilibrium. This should be a driving force when creating pricing around Shared Services.

It is necessary that those services that are used are felt by the consuming business, and the best way to ensure this is by instituting a meaningful, trusted and accurate chargeback or show-back model to establish commercial awareness and incentives linked to consumption. The old adage that there’s no such thing as a free lunch is very true in this context.

Creating a commercial awareness means allowing consumers to choose service alternatives based on service level agreements (SLAs) and pricing, which in turn allows them to choose exactly what they order and how much they pay for the lunch bill!

When consumers start paying for what they use, it has a positive effect on the entire business, because it immediately changes employee behavior, since the items can no longer be used as if they were free. Studies show that feedback around cost implications on consumption delivered in a timeous fashion is effective in changing consumer behavior on an ongoing basis.

Of course, setting the correct price point is just as vital when it comes to influencing business demand. As with all markets, there will be times when a subsidy or tax is the best tool to drive the correct, holistic organizational behavior, and this is often the case within Shared Service organizations.

For example, setting up a new data center may be expensive for the first adopters, as start-up costs are high and require economies of scale to see true benefits. The question that needs to be answered then is how can cost transparency be used to influence this behavior?

The answer is to subsidize the price of the data center, with the goal of encouraging adoption until the economies of scale kick in. This is done by artificially lowering the price point as a way to initially make the data center attractive to newcomers.

Naturally, this places a high level of responsibility on shared services to educate its customers on the services it performs, the results delivered and the opportunities for improvement. Cost transparency clearly enables such education relatively easily and – when coupled with a solid understanding by shared services around what its customers do with the services they buy, and how well these products meet the customers’ needs – should help shared services to accurately gauge customer requirements and estimate the impact of these on business performance. Once this is achieved, shared services should also be positioned to reliably identify the next form of leverage to pursue.

Once these initial objectives are successfully met, the next step for shared services is to expand the portfolio of services offered, after which it needs to begin leveraging knowledge-based expertise. It needs to look beyond what it does currently, linking its plan to overall company goals and assessing how it can optimize its contributions on behalf of all parties.

In the end, as shared services strategies mature, the next step in their evolution may well see them move to the core of the business, where they will no longer just be focused on driving cost savings, but on performing business-critical processes that contribute a much higher level of organizational value.

Conclusion

Shared services allow for costs to be reduced through the economies of scale from centralization of services, but when it comes to truly understanding costs, the shared services environment is extremely complex. This is exactly what the discipline of cost transparency is designed to address: enabling enterprises to attribute costs more accurately, while also enabling those people responsible for specific areas of the business to understand which costs they are able to control and which levers they can pull to effect changes in these.

Ultimately, Cost Transparency as a solution is designed to help businesses to reduce, consolidate and standardize expenditure. After all, if you are able to effectively unpack the cost of shared services, you can use this knowledge to drive improved savings. Cost Transparency is designed to give business access to the levers it needs to make truly informed IT decisions, unlocking greater value from existing IT investments and delivering increased savings with regard to future investments.

Magic Orange is seen as a highly progressive Cost Transparency offering, one that can position enterprises perfectly to undertake their digital transformation successfully.

Magic Orange has been successfully implemented at numerous enterprise clients. Should you wish to learn more about how this progressive cloud-based Cost Transparency solution can help unlock optimization opportunities of your business, please visit or contact us at:

  • magicorange.com
  • info@magicorange.com
  • United States: +1 954 740 0159
  • South Africa: +27 (0) 87 350 8870