HR Chargebacks: An important step in HR’s journey

Businessman in Conference Room

Posted by Art Mazor and Gary Johnsen on October 23, 2014

As HR finds its seat at the business table, it faces increasing scrutiny to demonstrate, like its counterparts around that table, how HR contributes to the business strategy and objectives.This scrutiny is good for HR in that it moves the function further from a purely transactional cost center to a strategic business partner. It also forces HR to be more accountable for how it manages the business of HR and aligns the cost of its operations and programs to business objectives. A chargeback process is a common “go to” approach for providing visibility into internal or shared costs and increasing accountability for cost management, yet can bring a mixture of benefits and pitfalls if not designed and implemented properly.

Done well, chargeback programs can offer a number of benefits:

  • HR service clarity. When business units pay for HR services, they will be clear about which services matter and which might be redirected, prioritized differently, or eliminated.
  • HR efficiency. Regular tracking and reporting of HR expenses pushes HR to design and implement repeatable, scalable, and sustainable processes and programs.
  • Critical need identification. Tracking where HR resources are applying their focus can allow the organization to identify the hot issues and manage funds allocation accordingly.
  • Cost control. The need to win funding approval drives HR and the business to create solid business cases, while budget management meetings and reports help identify processes and programs that require leadership attention to determine if course correction is required.
  • HR-Business partnership. When HR and business can work together to plan, budget, allocate, and track HR funds, there is a greater likelihood that a true working relationship will be formed and better solutions developed.
  • HR value. When a business can see the tangible value a HR program brings in terms of financial impact, the business is more likely to keep HR as a strategic partner during times of budget constraint.

In a Shared Services setting, chargebacks to the business for HR and other back-office functions tend to be fairly common. Chargebacks for HR CoEs (Communities of Expertise) are far less common and often fraught with challenges. In many cases, CoE chargebacks can actually drive the opposite behaviors and ways of working than desired. Consider these common issues:

  • Business units resist paying for support functions they’re used to taking for granted. Trying to get the business to identify the type and level of HR service needed, and assign a price to it, is a huge hurdle to overcome.
  • Businesses believe they’re paying too much and the chargeback rate appears to be inflated and inequitable. So they refuse to “play fair.”
  • Businesses decide to circumvent the system and get their own HR resources because they see value in have total control over what they’re paying for and think they can buy HR services for less than the “corporate” HR rate. The result: multiple HR “departments” and redundant services.
  • Businesses feel like they own HR services because they are paying for them, and start to directly manage the HR resources.
  • Many HR resources are not accustomed to reporting time and costs. When the chargeback process is complex, reporters quit using the process or don’t take it seriously.
  • Inaccurate tracking and reporting process, covering data points that do not accurately reflect the daily operational costs.

Realizing benefits and avoiding pitfalls takes appropriate up-front planning and care to avoid common mistakes. In our next post, we’ll look at the qualities of effective chargeback programs, walk through practical implementation steps, and share some lessons learned.

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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