Cost Center Planning
Cost center planning as discussed here involves performing one or more activities for the benefit of two or more business units. Departmental planning as defined here (for completeness) is when a department performs one or more activities for a single business unit, a fairly straight-forward process. Cost centers should have a set of plans to support the appropriate business units, but these plans, or “statements of direction” should not be confused with a business strategy.
The Cost Center Statement of Direction document should be used by a horizontal unit performing one or more activities for the benefit of two or more strategic business units. A horizontal unit is sometimes called a cost center, functional area, department, resource center, utility area, and countless other names.
It is just as useful for the centralized information systems area, legal department, human resource department, controllers area, sales force, marketing department, customer service function, or any other cost center. The examples used throughout the web pages cover many different horizontal units. No horizontal unit should feel slighted.
Caution: It is logical and appropriate for the strategic business units to clearly define their strategies before the horizontal units formulate their statements of direction. In practice, this is not always the case. Some horizontal units live in a state of frustration trying to serve the unspecified needs of the businesses they serve. Although each SBU has a strategy, it is often unclear, not written down, and frequently changing.
If desired, however, a horizontal unit can effectively develop its plans based upon the perceived needs of the businesses. The only really critical input the horizontal unit needs prior to developing a statement of direction is an accurate list of the company’s SBUs. Everything else can be estimated and changed at a later date with little problem. But the list of the company’s SBUs provides the foundation of the horizontal unit’s plan. In some companies, especially those in manufacturing, identifying the company’s businesses is obvious. In other companies, especially in industries related to information services and financial services, identifying the company’s SBUs is not always obvious. Too often the corporate organizational structure of the company masks the true identity of the corporate businesses. If a horizontal unit develops its plans based on serving the departments of the corporation, rather than the strategic business units of the corporation, then the planning effort is likely a waste of time.
It is very important that 100% of the people and expenses of the horizontal unit are allocated to the Corporate SBUs, and not to any other horizontal unit. A common problem in many corporations is inter-departmental cost allocations. These systems attempt to count beans, split beans, mush and then move beans around until the beans stick on an unprotected department that has a budget not yet smothered by other beans. In short, it’s a mess. It is also the primary reason why resources are not aligned with the needs of the organization.
The answer to this huge problem is relatively simple. The head of each horizontal unit (cost center) must allocate all resources directly to one or more of the existing corporate business units (or to a potential new business unit). The allocation should be rational, based, for example, upon time actually worked. The business unit should agree to the allocation. If the work performed was for another horizontal unit then it might require a discussion with that horizontal unit manager to determine which business units benefited from the work performed. In practice, there are many reasons given why this allocation can’t be done. But it can be done; and it should be done. Even ball-park estimates are far better than not doing this exercise at all.
For example, if a centralized information systems (I/S) department develops a telemarketing system for the centralized marketing unit, then a conversation between I/S and marketing may be required to properly allocate the I/S resources to the corporate SBUs that will benefit from the new telemarketing system.
In practice, it is not uncommon for a business unit manager to discover people supporting the business heretofore unknown. In some cases it’s the business unit manager who gains valuable insight into support functions performed behind the scenes. In many cases, it becomes obvious that resources are not aligned with the needs of the business, and the people are quickly re-allocated (and the budget is changed accordingly).
The number of people applied generally refers to the number of full-time employees applied to each business. In some cases, it might be appropriate to differentiate between full-time and part-time employees, as well as consultants. The overall goal, however, is to clearly indicate how many people are working for each business
The Cost Center “Statement of Direction”
Table of Contents
EXECUTIVE SUMMARY
Strategic Business Units Supported
Mission Statement and Supporting Information
Statement of Direction
Business Objectives Supported, by Corporate SBU
Activity Baseline and Analysis
Linked Horizontal Units & Similar Horizontal Units
Competitive Information & Benchmarking
Tactical Action Plans and Major Programs
Opportunity Identification
Critical Success Factors
Financial Reporting & Human Resource Management Issues…
..Expense Allocation by Accounting Classification
..Expense Allocation by Corporate SBU Supported
..Expense Allocation by Activity
..Supplier Analysis
..Human Resource Allocation by Business Unit & Activity Performed
..Organization Chart
..Staffing and Training Analysis
Information Technology Issues
Audit and Control Issues & Backup and Recovery Plans
What-If Analysis
Progress Report
Glossary & Abbreviations
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