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© 2024 N. Dean Meyer and Associates Inc.
Excerpt from www.NDMA.COM, © 2024 N. Dean Meyer and Associates Inc.

Analysis: Value of Departmental Product/service Costing to CEOs

10 reasons why CEOs should demand product/service costs from every department

by N. Dean Meyer

Why is it important to know the full cost of products and services in every department throughout an enterprise?

1. Save money.

Frugality 1:

Scrutinize costs within each group.

Make decisions based on absolute cost transparency.

Frugality 2:

Scrutinize internal support services that departments provide to others within the enterprise.

Drive non-value-added steps out of your cost structure (consistent with Lean Six Sigma).

Frugality 3:

Consolidate redundancies in the organization.

Clarify the organizational structure and determine precisely who sells which internal support products/services, and document both the resources and commitments that would be moved if you consolidate fragmented functions.

Frugality 4:

Objectively compare "make versus buy," and make optimal use of outsourcing vendors.

Provide a fact-based foundation for outsourcing studies, ensuring like-for-like comparisons (not falling for the fallacious pitch: "We'll do half as much for 80 percent of the cost, a 20 percent savings").

2. Ensure reliable delivery.

  • Fund entire projects/service-delivery teams, not just the internal "prime contractor" without critical support groups.

  • Don't set staff up to fail by expecting more than their resources will allow them to deliver (the fanciful "do more with less" demand).

  • Decide necessary budget cuts in a fact-based manner, eliminating projects/services of marginal value (not the unrealistic "take it out of hide" demand or "unfunded mandates" where impacts are unpredictable).

  • Coordinate capital investments with operating-expense budgets, so that capital is not wasted for lack of the expense budget to implement or sustain it.

3. Enhance shareholder value.

  • Optimize resource-allocation (budget) decisions by focusing budget discussions on the investment opportunities at hand (rather than arbitrary benchmarks like last year +/- a few percent or existing staff).

  • Decide budgets in a fact-based manner (rather than through political haggling or arbitrary top-down decisions).

  • Understand what the enterprise will get for various levels of funding (scenario-based budgeting).

  • Induce the primary strategy-delivery and product/service-delivery organizations to defend the enterprisewide budget for their initiatives (rather than expecting internal support organizations to independently defend their sub-contributions).

  • Fund internal service providers based on their internal clients' needs, with resource requests clearly tied to business results (zero-based budgeting).

  • Explicitly decide funding for "corporate good" activities like standards and policies (rather than leaving the costs buried in everybody's budgets).

4. Improve enterprisewide strategic alignment.

  • Improve strategic alignment throughout the enterprise by linking all budgeted resources to enterprise deliverables (such as strategies, internal sustainment, or the delivery of products/services).

  • When you fund a strategic initiative, fund everyone involved (not just the internal "prime contractor") to ensure that priorities are aligned enterprisewide.

5. Enhance organizational flexibility and response time.

  • Provide a foundation for internal "portfolio management" that adjusts priorities dynamically throughout the year as business conditions change, giving the business the opportunity to forego a marginal (albeit planned) deliverable in order to fund a newly discovered high-payoff product/service.

  • Preclude resistance to incremental work mid-year, since additional projects won't dilute resources slated for other projects if everyone gets incremental budget to cover the full cost of additional requirements.

6. Set prices based on a clear understanding of full costs.

  • Ensure that you don't inadvertently lose money on a product/service by knowing the fully burdened costs.

  • Provide a basis for accurate product profitability analyses.

  • Calculate rates for internal support products/services as a basis for benchmarking and outsourcing comparisons.

  • Use a consistent cost model organizationwide.

7. Calculate accurate business-unit profits.

  • Calculate allocations of internal-service costs based on the products and services each business unit actually receives.

  • Empower business units to control their internal-service allocations by changing the paradigm: Allocations create "checkbooks" owned by business units to buy internal-support services (rather than "Why is my allocation so big?").

8. Manage your business for sustainability.

  • Calculate budgets and prices with appropriate set-asides for training, product research, client relations, and other critical sustenance activities.

  • Explicitly manage funding for infrastructure and organizational improvements (rather than burying the costs of infrastructure in individual project proposals, which undermines enterprise capacity planning).

  • Document the cost of business growth (driver-based budgeting).

  • Build into budgets and prices the potential increase in average cost due to growth (which causes you to utilize a higher percentage of contractors and vendors).

9. Enhance internal teamwork.

  • Improve internal teamwork by funding entire enterprisewide project teams, not just the internal "prime contractor" department.

  • Define every group's deliverables (not just planned resources) within each team as a basis for project planning and clear individual accountability.

  • Ensure that, as the business grows, internal support services grow in proportion.

  • Provide a factual basis for internal contracts and SLAs.

10. Build a customer-focused, entrepreneurial culture.

  • Avoid having to ask internal service providers to judge their clients' ideas in the course of deciding what does and does not go into their budgets (which positions them as obstacles to the business units they're supposed to serve and undermines their customer focus).

  • Teach managers to think like empowered entrepreneurs by making each manager responsible for a business within a busines.

  • Develop a product/service catalog for each manager, and build a "results orientation" through clearly defined deliverables.

  • Reinforce customer focus by identifying the customers for all products/services, both external and internal.

  • Help managers plan how they'll deliver their products/services optimally.


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