Service-based Cost Management is an innovative management approach. It adds a customer centric perspective by providing a lens on how services are produced and consumed between internal service providers and consumers.
 
Service providers and consumers jointly take the responsibility to foster mid- and long-term optimization of service demand and supply along the entire corporate value chain. They provide transparency on service costs, quality and consumption to make precise forecasts and increase productivity by investing in services that create business value while reducing those that don’t.
 
With this, the corporate value chain becomes a joint venture that optimizes demand and supply interfaces between internal functions in order to make the enterprise efficient, agile and competitive.

Drivers for change — The company was restructured into separate business with own business models and a shared services unit. This created a need to determine the full costs per business unit for internal management and external reporting. Profitability of the separate businesses was diverse with some being more cost sensitive than others. Costs have traditionally floated upwards and some businesses were considered expensive compared to competitors. There was no transparency on service costs and knowledge on how to effectively steer costs which ultimately led to a lack of cost ownership among managers. They were rather seeking additional funds instead of wisely reviewing and reallocating existing funds.
 
Project objectives — Develop a repeatable method to determine and agree on the full costs per business unit. Create transparency on services, their full costs as well as demand and supply along the enterprise value chain. Establish cost ownership for direct as well as indirect costs among managers. Provide a sustainable framework and process for managing costs by reviewing demand and supply of services.
 
Project approach — The project established cost management capabilities in the entire enterprise by …

1. Defining service catalogues together with all internal functions in back, mid and front offices.
2. Allocate functional direct costs to their services using drivers like time spent, technology consumption or depreciation.
3. Develop a group-wide cost model that reflects how internal functions consume services from each other and contribute to the enterprise value chain in order to allocate indirect costs based on service-2-service relationships using drivers like office workplaces, time spent or process transactions.
4. Calculate profit center and ultimately business unit full costs based on the group-wide cost model.
5. Perform service reviews between function heads and business COOs in order to explain, refine and agree full cost results.

Achievements — The transparency on demand and supply of services was used to agree on business full cost results and increase productivity of the corporate value chain. Managers are now able to understand and steer their full costs. A governance has been established in order to create strategic service plans and make decisions on costs and investments on a yearly basis. Meanwhile, customer centricity and commercial behavior of internal shared services has been matured through multiple add-on initiatives. The group-wide cost model evolved into a cutting-edge service cost accounting module in the financial core system which fully integrates the company’s management accounting and financial accounting.