An exploratory study of recharging mechanisms in a shared service context

It is claimed that the transformation of business support services through some form of ‘externalization’ mechanism such as the shared service centre (SSC) model can drive down costs and enhance functionality. A key characteristic of the SSC’s rationale is its ability change by replicate the characteristics of third-party outsourcing, whilst also retaining overall management control within the boundaries of the organization. In such a market-oriented model, it should follow that a key feature of an SSC is the recharging of its costs to its customers, the business facing operational units. Yet, in offering a hybrid solution combining characteristics of market and hierarchy, it could be expected that the recharging for support services will seek to combine the tenets of both market-orientated transfer pricing with cost allocation methods traditionally associated with internal cost centres. The motivation of this study is the increasing prevalence of the SSC model amongst large organizations in the face of a relative paucity of contemporary literature on transfer pricing and cost allocation in new organizational forms, especially the SSC model. The central theme of this study is to explore the recharging mechanisms applied by different SSCs and their organizational effects in terms of balancing market coordination between the SSC and its customers and top management control. Three case studies were undertaken to explore how SSCs recharge the costs for the finance function as a business support services and the effects on managerial behaviours of both the SSC and business units. Drawing on theory of organizational structure, transaction cost economics (TCE) and agency theory, a conceptual framework was constructed to guide the analysis of the empirical evidence. The findings of this study include: 1) The choice of recharging method can be either transfer pricing approach (direct recharge) or cost allocation (indirect recharge), contingent upon; the governance orientation of each organization, asset specificity and extent of transactions, uncertainty and opportunism and bounded rationality. 2) Mandating the choice of recharging mechanism given the asymmetric bargaining power between the SSC and the head office could cause agency problems within the organizations, although this could be mitigated by transparency of information, appropriate coordination mechanisms, and performance measurement based on mutually agreed budget targets. 3) Recharging mechanism is fluid over time and in one of the cases (i.e. DHL Express) it is found that the transfer pricing can be used in the first stages of SSC implementation to drive change, but on maturity there is a reversion to broad brush cost allocation to better enable overall system optimization with reduced transaction costs.