Expert Opinion – The Magic Behind Improved Business Efficiencies
Cost transparency in a shared services environment can help increase efficiencies and reduce wastage across the enterprise.
By Blake Davidson, Head of Delivery at Magic Orange.
When it comes to business operating models, most companies either adopt a federated/distributed model, or a shared services one. The latter brings together common functions across multiple business units and consolidates these resources into a single, centralized model, allowing the business to standardize processes across these resources.
This, in turn, should lead to an increase in efficiencies. This is achieved through a boost in productivity, increased speed of delivery and enabling the business to focus its limited resources on activities that support its core competencies. Committing to the shared services model will ultimately allow an organisation to develop it into a center of excellence, as bringing together core shared service competencies and like-minded experts will help drive improvement and innovation.
Challenges nonetheless remain, one of the biggest of which is that a disconnect between shared services and the business may occur, either operationally or financially. Operationally, a shared services center that does not provide the required service levels may end up restraining business functioning. Meanwhile, a financial disconnect can occur if the business fails to pay for its use of the shared services.
When it comes to the latter issue, cost allocations and cost transparency are some of the best practices to counter this. Firstly, cost allocations are about assigning costs to the different services or tools utilized by business units, divisions, branches, or even applications, products and customers. There are easily identifiable direct costs, such as those specifically associated to a business unit, and then there are indirect costs, which are typically allocated to an activity based on a consumption basis. A good example is that of the IT department supplying connectivity to various business units – while the total cost of use can be determined, deciding how much was used by each department can be much tougher.
Secondly, there is cost transparency, which is all about tracking the total cost used to provision and maintain products and services for the benefit of an organization. In essence, it assists in establishing what different products and services exist, what they cost, and how they relate to each other as well as how much each area of the business pays for each service.
Looking at cost allocation, it is vital to be able to trace costs accurately, to ensure the business is making wise choices and to more effectively be able to complete the Profit and Loss for a specific business unit, by figuring out the cost of the shared service usage that the unit consumes.
Effective cost transparency is also key to increasing efficiencies and reducing wastage. Consider, for a moment, how most people consume goods and services that are free – they use these without restraint, because there is no value, price or consequence attached to them. On the other hand, as soon as you attach a value to something, the efficiency of your resource usage improves significantly. And this is the real value of cost transparency: it is a two-way street that creates a positive tension between shared services and the rest of the business, with both sides actively seeking value for money.
In a similar vein, cost transparency is vital in helping enterprises to articulate what products and services are being purchased, and even what capabilities are being bought. It should be remembered that these capabilities, products and services will often use each other, blurring the company’s understanding of the actual costs. This is why there is a trend towards adopting leading cost transparency tools like Magic Orange, as these afford a business much deeper insight into its IT and other Shared Services spend.
The Magic Orange solution is designed to deliver true cost transparency by taking into account all of these issues, and others that even the deepest of thinkers may not have thought of, while providing cost transparency across a wide variety of shared services across the enterprise.
When looking at the above, it is clear that the benefits of a shared services environment, coupled with an accurate and effective means to determine cost transparency are such that it is no longer a question of whether or not to undertake such an approach, but rather, one of ‘when to start?’
When you make that decision, consider Magic Orange with its dedicated professional team consisting of Chartered Accountants and technology experts with a successful track record in implementing cost transparency solutions at large enterprises internationally.