HR Chargebacks: Avoiding the pitfalls, realizing the benefits

HR Chargebacks

Posted by Art Mazor and Gary Johnsen on October 30, 2014

In Part I of our discussion of HR chargebacks, we noted that chargebacks are a natural step in the evolution of HR from a purely transactional function to a strategic partner with the business. Done well, chargeback programs can offer a number of benefits — HR clarity, efficiency, cost control, and more. Done poorly, the desire to add accountability and alignment to HR costs and programs can backfire. Here in Part II, we explore some of the ways to execute chargebacks effectively.

Chargebacks can be calculated in a number of ways, based on any of the following: business unit revenue generation, headcount, or number of transactions or services provided; HR time spent on business unit activities; a budgeted flat rate; or a hybrid of headcount and activity-based charges. Regardless of the method, the chargeback fees should be market competitive and the process and system should be:

  • Fair, accurately distributing the costs across all business units.
  • Scalable and reliable to work for all HR services and reflect the unit costs agreed upon.
  • Valid, measuring and reporting the intended data.
  • Easily grasped and easy to navigate.
  • Efficient, not administratively or fiscally burdensome.

Achieving these qualities, realizing benefits, and avoiding common pitfalls can be helped with thoughtful, up-front planning. Some steps to consider:

  • Complete a “voice of the customer” exercise to identify business strategy, expectations, and requirements for HR services.
  • Build or update the HR service catalog to clearly describe what HR is able to offer.
  • Validate the service catalog with customers. Use the catalog as the basis to confirm what the business values from HR.
  • Decide what metrics to capture as chargeback variables. Partner with the business to formalize the list. Define chargebacks metrics thinking about three distinct categories:
    – Infrastructure costs. Determine monthly costs for workstations, printers, and other common services that are used throughout HR.
    – Operational costs. Track the number of hours HR spends for ongoing support work.
    – Project costs. Track time allocated to projects. Projects have a start and end date and are not related to ongoing operations/support.
  • Define chargeback unit costs. Partner with the business to finalize unit costs. Remember to benchmark chargeback costs — HR costs should be market competitive or the business will likely go elsewhere for services.
  • Develop how the metrics will be captured and reported. Keep it simple, straightforward, and embedded in normal process flow. Involve finance and IT.
  • Validate the metric capture process and costs with the business before going live.
  • Implement a governance structure between HR and the business to regularly review, monitor, and manage HR’s chargebacks and costs.
  • Implement a reporting process. Determine how the results should be aggregated, who should be receiving the reports and how often, actions HR needs to take, and what business units can expect.

Finally, based on our work with clients to help establish effective chargeback systems, we offer the following lessons learned and tips for HR:

  • Be cautious in considering chargebacks outside of HR Shared Services.
  • In cases where chargebacks will be attempted for CoEs, focus on establishing baseline expectations of service and chargebacks at the start of year and aim for annual, baseline allocation with project-based chargebacks as the exception when unanticipated needs arise that can’t easily be met within the planned allocation.
  • Act in partnership with the business and finance from the start.
  • Avoid complicated chargeback mechanisms and calculations. Keep it simple.
  • Separate operational costs from project-based costs.
  • Involve decision makers early in the design phase — delegating the design is a recipe for an elongated process.
  • Apply discipline and rigor around planning, business case development, defining the value HR brings, operations, and project management.
  • Be ruthless — everything HR does should be good for business or it needs to be purged.

Art Mazor is a principal in Deloitte Consulting LLP’s Human Capital practice. He leads the firm’s HR Transformation Strategy capabilities and collaborates with complex, global clients across industries to transform Human Resource strategy, service delivery, and organizations with a business-driven focus.
Gary Johnsen is a specialist leader in Deloitte Consulting LLP’s Human Capital practice. He has a passion for building the intersection between business and people strategy, helping organizations design and implement HR operating models, practices, structures and processes that drive meeting business strategy.

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