ProfitPlus Case Study:

Implementing Charge-Back Systems

Business Issue
Almost every business contains some sort of shared service such as Information Technologies (IT), Engineering,
Accounts Payable and Payroll just to name a few. Often cost allocations charge-backs are made by finance and
accounting in an effort to improve control over spending with the consumers of the services being provided. Unless
these charge-backs are accurate (consumption based) they often become the source of a l ot of discussion and frustra-
tion for both sides of the equation, the service provider and user.

Many of our clients have seen a rapid expansion of IT related costs and are struggling to correlate these increases with
the appropriate cost controls. Several CIO’s (Chief Information Officers) have moved towards a shared service
charge-back environment in order to better manage their costs and hold internal customers fiscally accountable for the
increasing service demands. A charge-back cost control process can be effective, however, we have observed too
many charge back systems that are confusing, inefficient and without context to overall profitability. A well designed
charge-back system will provide the following benefits:

• Pinpoint the true total service cost

• Understand the cost to service internal customers
• Understand the relationship between consumption volume and costs
• Confidently apply transfer pricing and charge backs across business lines or business units
• Empower decision makers to drill down into their data
• Quickly perform cost and capacity what-if planning analysis on demand

ProfitPlus has both a method and a tool to satisfy these requirements along with an incredibly powerful list of analyt-
ics that can easily track resource consumptions, the key activities being performed and their associated cost, service
cost trends and the customer support demands variances. This sounds complicated but the process, tool and mainte-
nance is quite simple.

Introduction – Case Study

A technology based company had been growing steadily over the last couple of years, both in terms of revenue and
cost to generate this revenue. They are marginally profitable but realize that they need to improve. The major issue to
resolve immediately involves IT costs, allocations and process metrics. There are several key issues surrounding the
IT organization.

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ProfitPlus Case Study: Implementing Charge-Back Systems (cont.)

• Over the last 2 years, IT related costs have grown from 10% of the total businesses costs to 25% without a
clear understanding as to why. This has created tension between accounting, IT and all other departments due
to increasing allocation costs in total while the allocation method has not changed.
• The IT allocation method has always been based off of percentages established years ago and these numbers
have not changed.
• All parties want to better understand the IT costs, why they are what they are and how to better allocate the
costs.

The Approach
With this company, to understand why IT cost what it costs and how to appropriately allocate these costs was
achieved in 3 quick steps.

1. Determined the key activities or processes being performed by the IT organization

o Level of detail was determined by what level the organization wanted to understand and track
o Simple interview with key staff helped determine and define these activities

2. Determined how the activities defined in step 1 consumed the major groups of cost within the organization
(salaries, equipment….)
o Same team as 1 estimated these
o Often a simple %, recorded help-desk tickets, FTEs by activities for others

3. For each activity, answer the following questions to build allocations

o Who do you do this for?
o If you could charge them for each occurrence or for the task, how would you do it?

If the data did not exist for step 3 above, a quick study was completed to get an estimate and where significant,
collection of new information was coordinated.

The Analysis Results

Existing Allocation Logic:

IT GL Costs:
Grouping of Cost Monthly Cost Estimated Variability
Salaries/Wages and Benefits $250,000 75%
Desktop Computer Equipment $55,000 85%
Network Infrastructure $34,000 25%
Legacy Maintenance Contracts $25,000 90%
Total Monthly Expenses $364,000 Calculated 73%

11757 W. Ken Caryl Ave #F-159 | Littleton, Colorado 80127-3719 | Phone: (303) 948-5996 | Toll Free: (877) 448-5996 | Cell: (720) 771-9151 | www.profitplusabc.com
ProfitPlus Case Study: Implementing Charge-Back Systems (cont.)

Results using the Existing Charge-Back Allocation Logic

Department Square Footage % of Total Calculated Allocation
Finance/Accounting 1,000 4.6% $16,852
Sales and Marketing 1,200 5.6% $20,222
Quality Control 3,500 8.1% $29,491
Engineering 1,750 8.1% $29,491
Production 8,500 39.4% $143,241
IT 4,000 18.5% $67,407
Management 3,400 15.7% $57,296
Totals 21,600 100% $364,000

ProfitPlus Allocations Analysis

Major IT Activities, Their Costs, and Allocation Methods
Activity Name Cost Variable % of Total Allocation Method Total Qtys Cost Per
Setup New Computers $80,000 $65,500 22.0% # of New Hires By Department 19 $4,210.53
Answer Phone Questions $62,500 $46,875 17.2% Estimated # of Calls By Department 116 $538.79
Provide Systems Training $12,500 $9,375 3.4% # of Students in the Month By Dept 26 $480.77
Support Legacy Servers $75,000 $60,000 20.6% Consumption Percentage 100 NA
Maintain Network $71,500 $36,625 19.6% # of Networked Computers by Dept 55 $1,300.00
Develop/Maintain Custom Reports $37,500 $28,125 10.3% Consumption Percentage 100 NA
Support Marketing Website $25,000 $18,750 6.9% Consumption Percentage 100 NA
Totals $364,000 $265,200

IT Total Cost of Service By Department – Major changes denoted in red

Department Cost Of Service New % Existing %
Finance/Accounting $20,639.75 5.7% 4.6%
Sales and Marketing $137,449.51 37.8% 5.6%
Quality Control $19,870.70 5.5% 8.1%
Engineering $32,568.86 8.9% 8.1%
Production $116,631.91 32.0% 39.4%
IT $12,631.58 3.5% 18.5%
Management $24,207.67 6.7% 15.7%
Totals 21,600

11757 W. Ken Caryl Ave #F-159 | Littleton, Colorado 80127-3719 | Phone: (303) 948-5996 | Toll Free: (877) 448-5996 | Cell: (720) 771-9151 | www.profitplusabc.com
ProfitPlus Case Study: Implementing Charge-Back Systems (cont.)

The Numbers behind the Numbers and moving forward

After completing the initial analysis, the details supporting the cost of service by department was immediately
supplied. The results are viewable here.

The Major Findings and Moving Forward

A quick review was performed to validate the methodologies, the quantities and results for this situation. It was deter-
mined that the major driver leading to Sales and Marketing having such an incredible IT support cost was that they
were the leading consumer of phone based IT support yet had very few people sitting in on training sessions. The
departments that had cheaper then expected support had fewer IT calls but tended to take advantage of training.

• It is expensive in total and per incident to supply phone based IT support within the organization
• It is relatively cheap per person to provide training yet IT is spending < 4% on providing service
• Supporting the Legacy server is consuming 20.6% of the IT resources

Company Changes Made as a Result

It was recommended that the model be updated regularly and the per-incident and total costs be compared as metrics
to look for improvements.

• The Legacy server was decommissioned after a transition plan and the dedicated legacy resources were
redeployed to provide training classes
• Training classes were made mandatory and as a result, phone incidences dropped by 25%
• IT headcount and thus costs were controlled and reduced due to idle capacity created by reduced
“Non-Value add” activities

11757 W. Ken Caryl Ave #F-159 | Littleton, Colorado 80127-3719 | Phone: (303) 948-5996 | Toll Free: (877) 448-5996 | Cell: (720) 771-9151 | www.profitplusabc.com