Prove Your Value: Charge Back

WHILE WAITING at the Baton Rouge airport following the Southeastern University Printing and Digital Managers Conference (SUPDMC) last month, I had the opportunity to sit down with two university in-plant managers. We discussed their chargeback systems, and the benefits of developing a fully loaded budget.

Not surprisingly, Mary Ruesing from the University of Texas-Arlington and Greg Steiner from the California State Chancellor’s Office have dramatically differing models. The fact is, there’s no single standard that in-plants adhere to. In-plants unite under a common banner of supporting their parent institution in a variety of ways, all having something to do with communication. But that’s where the similarities end with regard to how product and service charges are constructed.

In general, the way in-plants charge back for their services originates from one of two approaches. The first is the mind-set of basic cost recovery—budgeting down to a mandated zero balance at the end of the fiscal year. At the other extreme is fully amortized cost accountability, which is what this article will examine.

WHY CHARGE BACK?

First, let me express my viewpoint of why I firmly believe a full chargeback system, at least on paper, is a necessary part of running a successful in-plant.

Among the top proprieties of in-plant justification is cost savings. Being competitive with outside vendors is one of the more popular missions in in-plant land. I pose this first question in the context of being able to quantify your financial value to your parent.

How can you profess savings if you don’t know all of your costs? The most visible cost is, of course, direct materials, followed by direct and indirect labor. But what about equipment amortization and the rest of your fixed costs, which many times are either buried inside of some kind of formularized administrative fee, or if itemized, do not usually reflect the full burden of resources consumed by the in-plant?

COMPUTING ECONOMY OF SCALE

One of the most common statements I hear about the benefit of having an in-plant is the economy of scale concerning G&A (general and administrative) costs. True, functions such as HR, AR/AP, legal, purchasing, infrastructure support (facilities services) and accounting support (financial services) are economized versus a commercial vendor, but my question is, do you know how to compute those expenses accurately?

The same can be said for footprint value, both in terms of physical space and environmental costs (HVAC, utilities, etc). Can you place a number on this?

And then, of course, there’s equipment. Oh sure, you can put in a budget request and hope and pray your wishes for new equipment gets granted. But more often that not there’s already an eight-ball waiting to get in front of you because of improper capital budget planning.

Another question I hear is this: Why is this so important if my administration is perfectly happy with our current chargeback structure? After all, we are valued highly enough to be viewed as a strategic function, so why complicate matters? The answer lies not with the current support mind-set, but with the potential for new questions to be asked by unknown or unseen stakeholders who may affect your very existence. I’ll give you my favorite.

“Why should we keep the print shop around? After all, there are plenty of outside vendors just waiting to do their work.” Do you have your answer ready? There are two primary danger signals that usually give rise to this question.

I’ll start with number two. It spans the gamut from ignorance of any accepted value proposition, whether promoted or not, to ulterior motives and vested interests. Sometimes there’s nothing that can be done about the latter, but you may be able to combat the former through communication, promotion and marketing.

That said, let’s move on to number one. The mind-set should be that you can compare your charges for your services on an apples-to-apples basis with outside vendors. How can you do that without a fully-loaded budget? The answer is: you can’t. That’s it in a nutshell.

It’s not my intention to guide you through the intricacies of how to develop a fully loaded budget; anyone in your organization with a CPA should be able to assist you with that. But I am going to make a few suggestions for finding the (sometimes unseen) costs.

THE VALUE OF YOUR FOOTPRINT

Your business and administration department, or whoever oversees your physical space, may or may not charge an administrative fee for facilities and building maintenance services. If they do, you need to ensure those fees are realistic for what you’re getting.

The value of your footprint is directly tied to the logistical location within your organization. Is it a desirable space? Do others covet it? If so, you should place a relatively high cost-per-square-foot value on it. Compare commercial space costs in your area. Be sure to add building maintenance and janitorial costs into the equation.

Next calculate utilities costs. If you have a segregated operation that pays for actual costs of power and water, this is easy. If not, you should have an audit performed to determine actual use over a realistic sampling of months, and then apply commercial rates.

Administrative overhead is probably the hardest thing to figure accurately. Business services, insurance, environmental health and safety services, human resources, legal, IT and purchasing services are just some of the things you may not pay for directly, but without your institutional support infrastructure, you would.

The rest should be relatively straightforward: indirect departmental labor, office and general shop costs (computers, furniture, office supplies, etc.) and communication networks, are hopefully already allocated to your current cost accounting method; if not, they should be. Also, production-related supplies, general labor (administrative, customer service, delivery), and anything else not costed directly against any particular job will round out your indirect costs in order to establish your BHC (budgeted hourly cost).

Production supplies can be viewed for the most part as fixed costs, however you may want to treat some of the more variable elements as a job-level charge, such as ink.

Then comes the issue of equipment amortization. For each piece of equipment, you should have a monthly amortization base, not only for actual payments, but on replacement value for equipment that’s paid off as well. The final calculation that should be added to your BHC includes all service costs.

It should be noted that both lease (whether dollar buyout or FMV, or in the case of outright purchase, an amortized proration) and service, should be calculated separately for each revenue center within your department.

With this model, it is then possible to calculate an accurate BHC for each piece of equipment or groups of similar equipment types within your operation. Hand labor will include everything except for lease and service costs.

Now you can total up your costs on a monthly, quarterly or annual basis. Your BHC is the total of all indirect (and some static direct) costs divided by your number of available production labor hours. This should be integrated into your MIS for, at the very least, internal reporting purposes, even if you use a pro forma for direct chargeback.

THE DIRECT COSTS

Finally, there are your direct costs. These are the costs directly attributable to each job including paper and any other job-level chargeable materials. If you use an MIS (management information system) that either estimates time and materials, or better yet, has job cost collection through purchases ties to jobs and shop floor reporting, cost reporting will be an easy task.

Skilled versus unskilled labor falls into the direct cost category and therefore will be reflected through a skill-level specific labor cost. Don’t forget to account for FICA, taxes and employer-paid benefits (insurance, pension, disability, workers comp, etc.) even if your department is not assessed these fees.

YOUR ACE IN THE HOLE

Now I realize this is a lot to throw on the shoulders of an already thinly stretched manager, but that original premise—the one about being able to quantifiably compare your department to the outside world, and to have a defensible, undeniable and accurate model with which to compare—may just be the ace in the hole you need some day.

If nothing else, you should know where you really stand. By developing a BHC, you’ll know if you’re really competitive or not. And if your mission statement includes cost savings and you find that’s not true, you now have a benchmark and a goal to strive for.

One last point I’ll make is that all the building of a realistic cost model will be for naught if you don’t know where your competition is. Benchmarking is an art, but that’s best left for another time. Just be sure you fully understand what your advantage is; don’t whitewash the issue just because the real costs of doing business are not requested from you.

The worst thing you can do is promote your prices as being a certain percentage below the outside, only to have one of your stakeholders (i.e. customers, competitors, administrators or policy makers) call you to the carpet to prove it.

If it’s not true, your credibility is gone.