Charge-Back Systems

• The most common charge-back arrangement is a flat fee, based on some metric-based proration of the operating costs of the centralized service, that is charged on a monthly, quarterly or annual basis. Less popular is a pay-as-you-go charge-back in which the servicing unit "bills" the operating units for their usage of resources or their requests for service. A flat-fee charge-back, common to many medium to large companies, charges the operating units an administrative fee for all centralized services prorated by sales dollars or the number of employees or customers. The pay-as-you-go charge-back system is mostly used for centralized IT services, but more often than not, these services are bundled into a flat-rate administrative fee.
  
  

Charge-Back Benefits

• The benefit of a charge-back system is that it allows the centralized cost center, a department with no revenue source, to fund its activities. Within a profit center (a unit that has a revenue source, such as sales), the operating costs of its cost centers (purchasing, accounting, human resources, IT, etc.) must be covered by its revenue. Centralizing these services, perhaps to the corporate offices, relieves the operating units of their cost. However, because there is no revenue stream to cover their costs as a central unit, the charge-back system "bills" the operating units for these services, often at a lower cost due to economy of scale, creating a "revenue" stream for the central services.
  
  

Administrative Charge-Back

• In simplified terms, an administrative charge-back is each operating unit's share of the total budgets of the central services. There are as many ways to calculate an administrative fee as there are companies which use charge back systems, but the key metric for this calculation is common to all units. The key metric may be sales dollars, units shipped, number of customers or employees or perhaps the number of divisions in the company. During budget preparation, each operating unit receives its administrative fee charges for the upcoming year to include in its budget.
  
  

Metric-based Charge-Back

• A charge-back system that uses volume, counts or amounts as the basis of its fee allows the servicing department to budget for only its own operating costs without considering whether demand for services will increase above anticipated levels. In metrics-based charge-back systems, the requesting or subscribing department pays for requested services on a pay-as-you-go basis. This allows the servicing department to recoup its operating costs and possibly generate extra revenue to fund new systems. The downside to a metrics-driven charge-back system is that the departments requesting services have the burden of forecasting their use and costs of the central service for a budget year.
  
  For example, a sales department depends on the corporate IT department for the support of its product catalog, incoming sales recording and customer resource management. The IT department charges back for storage space usage, database transactions and report pages produced. In preparing a budget for an upcoming year, the sales department must accurately anticipate the volume of the activities that translate into charge-back metrics.