5 Shared Services Pricing Approaches

Shared services organizations can choose from several pricing models. Here’s an outline of the pros and cons of each.

“How should I charge internal customers for the services offered?” There is no single answer to that question, so it’s important for shared services leaders to select a pricing model based on the balance between efficiency (how costs are charged out) and its effectiveness in influencing customer behavior (i.e., accuracy).

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Recent research from the Gartner Finance research team offers guidance to shared services leaders on weighing the pros and cons of shared services pricing models.

This article recaps their key points, edited for clarity and length.

How shared services organizations charge

Some shared services organizations (SSOs) don’t charge, while some use a simple allocation methodology. Others use elaborate activity-based costing to determine variable-based models. One of the main reasons to charge customers is to encourage them to “do the right thing” for the enterprise and fund process improvement.

Certain pricing mechanisms can ensure that customers are vested in forecasting or managing their demand for services and supplying the quality inputs required for shared services to do its job. They prevent customers from overutilizing or underutilizing services.

Some pricing models provide a basis for accurately reflecting the cost of services and enable comparisons to external pricing. However, other models can also trigger resistance and lead to “I’ll do it myself” behavior by customers, leading to reduced customer commitment to working with shared services.

Gartner research highlights five different shared services pricing models.

Learn more: Shared Services Strategy and Structure

SSO Pricing Model No. 1: Cost center model

This is the most basic model, generally used when shared services is a centralized support group without separate budget. As a result, the cost is typically borne by the broader organization and not allocated to business-unit customers directly.

Pros

Cons

  • Simplest, easiest model with no pricing strategy to maintain

  • Good option for starting up or for the short term until processes are stable

    • Doesn’t provide a granular understanding or visibility into the costs incurred for each process/service

    • Doesn’t influence customer behavior, which can lead to deviations from best practice

    • Portrays shared services as a corporate entity

    • Doesn’t accommodate volume fluctuations, leading to an underutilized or overutilized setup that can impact service levels

SSO Pricing Model No. 2: Fixed allocation model

This is usually one of the simplest models to implement. Business units are charged a flat rate or a percentage of costs depending on a predetermined metric (for example, the number of full-time employees using the shared service). Price is calculated irrespective of the volume or type of service.

 

Pros

Cons

  • Provides a simple basis for allocating costs to different business-unit customers

  • Easily updated as a part of the budgeting process

  • Helps send business-unit customers a message that they are, in fact, paying for the service

  • Provides limited information on the true cost of the services provided

  • Does not provide business units an incentive to review their demand for services or partner with shared services to optimize processes and reduce costs

  • The complexity of the services rendered is not accounted for, possibly penalizing some customers and subsidizing others

SSO Pricing Model No. 3: Variable model based on actual volume

With this model, pricing for each business unit varies based on the volume and complexity of services consumed. Customers requiring a higher volume of service or complex practices that deviate from the norm pay more than others.

Pros

Cons

  • Provides a simple basis for allocating costs to different business-unit customers

  • Easily updated as a part of the budgeting process

  • Helps send business-unit customers a message that they are, in fact, paying for the service

  • Provides limited information on the true cost of the services provided

  • Does not provide business units an incentive to review their demand for services or partner with shared services to optimize processes and reduce costs

  • The complexity of the services rendered is not accounted for, possibly penalizing some customers and subsidizing others

Read more: 3 Ways to Show How Valuable Shared Services Can Be

SSO Pricing Model No. 4: Market-based model

In this model, price is decided or influenced by external competitive market rates for a similar service.

Pros

Cons

  • Business-unit customers feel comfortable that they are charged appropriately for the services they receive

  • Transparent and easy to understand

  • Encourages shared services to be competitive

  • Can be difficult to source the market price and determine which best suits shared services, making this model time-consuming to implement and maintain

  • Shared services can get trapped into unfair comparisons

  • Costs that aren’t billed to internal customers must be absorbed by a corporate overhead department

SSO Pricing Model No. 5: Cost-plus model

This model is similar to the previous market model, but adds a profit margin. The shared service organization therefore acts as a profit center, aiming to reinvest revenue to improve service, technology or infrastructure.

Pros

Cons

  • The profit margin enables shared services to focus on improving their services and the customer experience

  • As business-unit customers are required to pay over and above the cost, they have a vested interest in how the profits are being utilized to improve shared services

  • There may be no incentive for shared services to be cost-efficient

  • Business unit customers typically don’t appreciate paying a profit margin for shared services’ internal agenda

Learn More: 13 Key Activities for Shared Services

This article has been updated from the November 2019 original to reflect new events, conditions or research.

Recommend Gartner client* reading:
  • Shared Services Pricing Mechanisms
  • Shared Services Outsourcing Trends
  • Process Scope Determination for New Shared Services Organizations
  • *Note: Some documents may not be available to every Gartner client.

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