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How should our chargeback system handle indirect
costs?
"Our company recently put a chargeback system in place that
was supposed to allocate support costs to individual product
groups. Now the product managers are arguing that we should
only charge them for direct labor costs, while I say we
should add an overhead factor (about 50%) that captures all
of our indirect costs. How do other companies resolve this
problem?"
—Oswald from Ottawa
Dear Oswald,
Several people offered advice on this question:
"We've been allocating our support costs to our product groups
for about two years. The methodology we use is first to allocate
costs that can be tied to a specific product group. These include
costs for our outsource vendor and internal labor costs. We then
allocate some of the remaining costs, which we call operations,
using a percentage model. So if a group is consuming 15% of the
direct costs, we charge them for 15% of the operations or indirect
costs. Our indirect costs primarily include management and
administrative labor costs, vendor charges for quality surveys,
and telephony costs. The indirect costs which we do not allocate
to the product groups include our costs to maintain our support
Web site and support tools.
"When we first moved to this model, we also faced a lot of
resistance from the product groups. It took education and time to
get them to embrace it. Another challenge with this model is that
product groups will begin to question the costs more and want to
understand in detail what is included in the indirect costs. The
benefit was it forced us to really look at how we were running our
business and forced our managers to become more knowledgeable on
the financial side of our business."
—Name withheld
"It makes sense to charge back direct costs that managers are
supposed to control. In your case, the product groups have a clear
way to reduce their direct support costs--they can fix bugs and
improve usability.
"But chargebacks for indirect costs are a different matter. The
product groups don't control these costs, so by adding them into
the equation you make the whole chargeback system less responsive
to cost-cutting efforts by the product groups. Worse, you focus
their attention on your own overhead costs. Lobbying for cuts in
*your* budget becomes an easy way to improve their own P&Ls. I
don't think that's what you want.
—Michael Gonnerman michael@gonnerman.com
Michael Gonnerman Inc. www.gonnerman.com
978/443-1340
"In any organization, the PFM rule generally applies: Power
Follows Money. The reason that too many support groups wind up
holding the short end of the stick is that they don't pay
attention to the financial aspects of their operation. As a
result, most 'chargeback' or 'allocation for support cost'
schemes are generalizations produced elsewhere in the company by
people who have no real idea of what it takes to set up and run
a support group. Under that scenario, it isn't a question of
whether or not the support costs are being understated--the only
question is by how much.
"Start your counterattack by working with your company's
accounting staff to develop an accurate set of figures on all of
your department's costs. You've got to be hard-nosed about
identifying every last entry in the chart of accounts, and the
blessing of the accounting professionals on the final result is
vital. Pay close attention to two major areas: support technology
infrastructure and staffing--especially including training.
"The purchase costs for your support technology infrastructure
are likely to be substantial. The bean counters should find these
costs pretty easy to determine. Make sure, however, that the
ongoing maintenance costs are also included in the picture
together with the fees for phone, internet access, allocations
for maintenance of the support pages of your Web site, etc.
"When it comes to determining your labor costs, pay special
attention to training expenses, which all too often tend to be
overlooked. It takes time to equip people with the knowledge that
they need in order to provide quality support for a product. The
more people that you have to dedicate to the product so that you
can consistently meet your agreed-upon service level, the greater
your investment in training inventory. And don't overlook an
allocation for turnover: Remember that when an employee leaves,
the training inventory resident in their heads leaves too, and
must be replaced.
"The product manager is always going to want to minimize support
costs associated with their product. After all, their performance
evaluation is typically based on the profits their product
generates for the company. If you don't have the data to defend
your charges for support, the odds are good that you will lose
the battle. If you really want to win, however, don't stop with
just identifying the costs. Start selling the benefits you can
provide as well. For instance, are you actively marketing the
support data you develop to the product manager as part of the
deal? If not, why not? Solid data on how the product can be
improved and support costs reduced can make both of you look
good. How about ongoing market research? Instead of paying some
outsourcer to call people and ask a couple of questions, why not
have your staff do it at the end of some of or all of the
incoming support calls? That's more data that you can sell to the
product manager."
—Mikael Blaisdell mikael@mblaisdell.com
Mikael Blaisdell & Associates, Inc. www.mblaisdell.com
510/865-4515
[Other comments and suggestions about this topic? Send me an
email and we'll post your
feedback.]
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