5 Shared Services Pricing Approaches

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

Shared services organizations face a choice of pricing models, each offering a different level of influence on business-unit customer behavior. None is perfect, so it’s important that shared services leaders understand the pros and cons of the different approaches.

“Shared services leaders must have a detailed discussion with business-unit customers about their needs and objectives, and based on those discussions, determine the level of transparency and flexibility needed in their shared services pricing arrangement,” says Cliff Struhar, VP Advisory, Gartner. “Use the pricing model as a tool to encourage optimal behavior from business unit-customers.”

No model is best in all situations, so it’s important to select the one best suited to your maturity level

“Each of the models has its own strengths and weaknesses. Regardless of which model is chosen, there will always be room for debate about which is the most efficient,” says Struhar. “No model is best in all situations, so it’s important to select the one best suited to your maturity level, and then make sure everyone understands both its benefits and its shortcomings.”

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Pricing Model No. 1: Cost center model

Organizations typically use this model when shared services is a centralized support group without separate budget. Therefore, the cost is typically the responsibility of the broader organization and isn’t 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.
  • Does not provide detailed
  • understanding or visibility of the costs incurred for each process/service.
  • Does not influence customer behavior, which can lead to deviations from best practice.
  • Portrays shared services as a corporate entity.
  • Does not accommodate volume fluctuations, leading to an underutilized or overutilized setup that can impact service levels.
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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 not particularly sensitive to usage volume or type of service consumed.

Pros

Cons
  • Provides a simple basis for allocating costs to different business-unit customers.
  • Easily updated annually 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.

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 a higher price than others.

Pros

Cons
  • Provides business-unit customers an incentive to control their use of services.
  • As pricing is influenced by the demand side, it is easier to define accountability.
  • Enables customers to easily determine how changes in volume will impact costs.
  • Requires shared services to diligently keep track of the significant amount of information on services consumption.
  • Shared services leaders may have to prove the robustness of this model to business-unit customers by answering questions on how the volume and complexity (and therefore cost) of the services are determined.

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

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 while ensuring the market price taken into consideration is related to similar services.
  • Costs that are not billed to internal customers must be absorbed by a corporate overhead department.

Pricing Model No. 5: Cost-plus model

This model is similar to the previous market model, but also 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.
  • 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.

Learn More: 13 Key Activities for Shared Services

This article is based on insights that are part of an in-depth collection of research, tools, templates and advice available to Gartner clients.

 

Gartner for Finance Leaders clients can read more in Shared Services Pricing Mechanisms.

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