Solving the “Profit-follows-Employee” Challenge
Last week I visited a customer in the professional services area. They are structured in profit centers, conducting projects with customers. Sharing team ressources across profit centers is a common way. So – ByDesign seemed to be the first solution, but they were complaining about a missing piece. They don’t assign employees to projects and get a standard cost rate on employee’s cost center / profit center, but have the full (external) revenue there.
Profit Center A is responsible for a project, but needs ressources from profit center B. Default behaviuor in SAP Business ByDesign would be, to post all revenue to proft center A and to allocate a cost rate for the employee’s hours from B to A (B is debited, A credited). What they want is to have no default cost rate, but to allocate the revenue share of B’s employee posted to profit center B.
Arguments from a business perspective are:
- “Our business is profit driven – we are not looking at cost, margin is only controlled at a higher level, not at a project or profit center level.” – this is a paradigm also referred to as “profit sharing”.
- A profit center manager should be motivated to employee people. Getting only a default rate would motivate him to borrow employees from other profit centers and to hold as many projects as possible.
So – how to solve this with a solution focusing to deal with standard rates, enabling project margin and a totally different view? We discussed this some rounds, but finally found a way to do this with SAP Business ByDesign. Here are key elements of our solution:
- Don’t maintain a single default rate, but maintain a service cost rate. Create a bunch of services with different cost rates. Before, identify what are your external prices. E.g. your external prices are 85$/h, 84$/h and 102$/h, two services with cost rates 83 and 100 could do it. In general, they will be little bit lower than the external price, but it will create only a little difference and not a real, large profit on the profit center and the project.
- Employees are getting staffed and recording times with servcices reflecting the external prices. We came to the point that each service can handle a certain range of external prices, e.g. a cost rate of 83$ can handle external prices from 89$ to 83$ without causing larger differences.
- Also, for transfer prices between different companies, these service rates can be applied.
- No ressource cost rates must be maintained.
Our approach replaces profit contribution by a set of service cost rates getting to the same objective. It is causing some disadvantage, but every alternative approach trying to create a reporting parallel to system’s postings might create differences and even systematical errors as well.