Budgeting in Corporate Services has always been an approximate science. In some cases, very approximate. Because your services are far removed from the products that your firm sells to the outside world, it’s hard to know how and when to add costs or to change your budget. In a business, when sales go up, you need to spend more for people, equipment or consumables. In services, these changes rarely come from direct information. Instead we rely on proxy information. Let’s say you run a copy center in a law firm. When the volume of requests exceeds your capacity, you ask for authorization to buy/lease/use more resources. You may be refused because the increase in volume does not match an increase in new clients, or the work volume may be of a type that management sees as unnecessary. Likewise, just because you have a budget it doesn’t mean that you will be allowed to spend your entire budget without additional approvals. With all these changes in work volumes and in budgets, just having a bigger or smaller budget one year doesn’t mean that you are more or less efficient. How do you see past the budget “noise” to see what’s really happening to your budget? The answer is… use a unit price!
Identifying your unit cost requires just a bit of simple math and a whole lot of philosophy. In the past services only partially included costs. They more interested in creating a charge to limit the use of services (if it’s free, why not use as much as possible?), rather than fully accounting for costs. So, throw out any previous concepts you have, today you’re going to identify a real cost. You may want to charge for every separate feature of your service or you might want to load just one or two functions with all the costs. Let’s continue with the idea of a copy center. Copy centers often load up their costs into a single fee, usually a cost per page. A document center could charge per hour (for individuals performing edits or for editing and proofreading staff) or it could charge a price per page. A page is a pretty good unit measure. Of course you could charge by the hour, but still collect page information for the unit price (per page, per document, etc.). A Library might charge for time and for use of external databases, but still have a unit price per request; or if there are several fundamentally different products (looking up an article, downloading and formatting data into an Excel spreadsheet, preparing a Public Information Book) you could have a different unit cost for each product line. Of course with multiple products and unit costs, you also need to track how your service changes over time (does one service become more popular, does a drop in volume increase the cost for a specific product, etc.?).
That addresses variable costs, but what about your fixed costs? This is a bit trickier since not all corporate services even know what their fixed costs are. Do you know what your rent and power costs are? You may not get a bill from the firm for these costs, so they may be a bit of a mystery to you. Let’s clear up that mystery and look at all the costs that you need to account for:
Salary: Do you have a report from HR that gives you Salary costs? Does it include temp workers and overtime? Have you verified that everyone is on the report by name (assigning having to the wrong group is quite common).
Bonuses: In recent years, bonuses have been suspended in many firms. However, the economy is returning, and bonuses with them. Have you figured them into your cost structure?
Compensation costs: What about all the other costs for personnel? Does your report include social security, benefits, taxes (paid by both the employee and employer)?
Recruiting fees: Does the staff you hire come through outside recruiters? Typically, recruiters charge 20-30% of the first year’s salary. Are you tracking these costs?
HR costs: You probably don’t get a bill from HR, but even if they rely heavily on recruiters, you still have staff in HR working on your staffing requires. Depending on the size of your staff and your attrition, you may have several dedicated staff in HR working on your staffing needs (typically HR staffs 1 associate or every 70-100 employees). Ask HR how you should account for their costs in your model.
Space: This is a strange expense, in that people are divided over when it should be counted. It is often said that you can’t count this cost because if you could give up the space, the firm would still have the property/lease/sub-lease so nothing is saved. True, but over a larger time frame or in conjunction with a larger cost saving initiative, reduction of space may be on the agenda. Typically, an 8×8 cubicle costs about $10,000 a year in a major city; that includes power, common space (hallways, elevators, restrooms, etc.), cleaning, etc. If you have multiple shifts, having different shifts use the same desks can make a huge difference in costs.
IT: Every service group (even IT groups) uses technology, and therefore has IT costs. What are your costs? If you don’t get a bill from your IT department, internal cost allocations from IT usually average $5,000 to $15,000 per user per annum just for PC support and servers (but unallocated costs from other groups may be buried in these charges). Investment Banks tend to have higher costs than Law firms, and certain groups are heavier technology users. Make sure that you have some number, even if it is just an estimate, to account for IT costs.
Desk phones: What is your phone bill? Do you even see these costs? This could be minor or it could be very high, if you are a call center. If you saw these costs, would you demand VOIP phones or use Skype or other lower costs systems communication systems?
Cell phones and offsite tech: Does your staff charge back (or do you supply) cell phones and home Internet connections? What does this cost?
Equipment: All the other equipment in your group: computers, monitors, printers, chairs, etc. Typically, you would amortize the computers over three years and the furniture over five years.
Contracts: A corporate library needs to pay for market data contracts and subscriptions, IT pays for software licenses… do you have any external contracts?
That’s pretty much it. Many of these items have been left out of the discussions about the cost of service, but with the rise of the Regulators and the greater use of Outsourcing they can no longer be ignored. It’s time for everyone to get familiar with these costs… so that they can be better controlled. Not only do you need this information to develop a realistic unit cost, you also need this information to understand exactly what you’re getting when you look at an Outsourcing agreement. There is, however, one other item that you need to understand. The hours that your staff works. Which we’ll pick up on in the next Blog. But for today, that’s my Niccolls worth!