Equal helpings: the desire for cost-efficiency is the principal reason why business units decide to share non-core services, but managing the cost of shared services creates a number of accounting and administrative challenges. Ernest Glad explains the intricacies of transfer pricing and its effect on the general ledger.
| Author | Glad, Ernest |
| Position | How To Shared Services |
The concept of shared services has surfaced recently as a way for business units to pool their resources and infrastructures in order to cut costs and improve the level of delivery. Shared services are not central to a unit's operations, but they may represent a large proportion of its spending. They may meet basic HR or finance requirements or more advanced information technology needs, for example, but it's also not uncommon for business units in organisations developing multiple delivery and marketing channels to share part of the primary supply chain.
Shared services providers are often independent entities that operate separately from the business units they serve. It's therefore crucial that all stakeholders in their services incur a fair slice of the cost--and that the provider is encouraged to reduce this cost--which gives rise to the concept of accounting for shared services. Support costs comprise as much as 30 per cent of the total costs incurred by some organisations, and they have often been considered "out of control". Accounting for shared services is designed to manage them from the bottom up. Transfer pricing is the first step in understanding the effects of shared services and deciding whether or not to outsource.
It is customary for organisations establishing a shared services operation to draw up a charter beforehand to give the participants some guiding principles. It is essential that this charter is properly debated before it is introduced, because it will drive the relationship between provider and purchaser in conceptual terms. This relationship is formalised in a service-level agreement (SLA), which should at least provide for the following:
* the specification of the services to be provided, including quality criteria;
* the normal charges for such services and a sliding-scale fee structure according to the volume of services used;
* penalty clauses;
* the duration of the SLA and notice periods for both parties;
* the volumetric, delivery or qualitative factor that drives the cost of the service.
The task of handling the cost of shared services or transfer pricing brings with it several accounting and administrative challenges. These include:
* The determination of a fair price. The transfer price can be determined on any full absorption costing basis, a market price basis, a dual-pricing basis or simply an agreed price based on specific capacity levels or a required return on investment.
* The administrative...
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