Utility consulting. > > Operate as a quasi-standalone business with its own profit center > > Focus solely on internal customers

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1 Shared services utility accounting How using a service company approach can help with cost allocations for multiple utility departments Cost allocations can strain a relationship Cost allocations are a loaded topic. Ha, excuse the pun. Seriously, the cost allocation process is fraught with political pitfalls as departments fight over paying their fair share of allocated costs for services that benefit multiple cost centers in your organization. This paper discusses some common approaches to the cost allocation process and some common allocators that have been developed for cost allocators to mimic the behavior of their cost causation factors. What is fair? Cost allocators that are the most fair and easiest to share within an organization are those that allocate cost based on cost causation, i.e., what are the cost driver behaviors behind the cost and who is driving that cost? The first rule of cost allocations is to first direct charge all costs that can be specifically identified with a department or activity to the area or activity driving the cost. Amounts left over in the unallocated bucket are the costs that will need to be allocated across departments using some type of cost allocation methodology. What are shared services? Shared services are an innovative approach to delivering high-quality internal services efficiently and effectively. They: > > Are centralized units with consolidated, dedicated resources > > Provide process or knowledge-based services to several organizations or departments within an organization > > Operate as a quasi-standalone business with its own profit center > > Focus solely on internal customers The functional characteristics of shared services can be described as follows: Nationwide energy practice. Our Energy and Utilities Group is focused just on utilities. More than 300 public and investor-owned energy and utility clients across the country are served by Baker Tilly. We are educators and thought leaders who provide strategic direction for the country s leading utilities. Functional characteristics of shared services High volume, routine transactions Specialized skills Company-wide information page 1

2 Analyzing and allocating shared services in a systematic manner can take out some of the give and take discussion that is inevitable when departments need and want the services but are concerned about their budget impact. Typical benefits Benefits of shared services can be felt across the organization in four main areas strategy, people, technology and process: 1. Strategy Your utility s strategy is most likely to provide reliable service at a reasonable cost, or something along those lines. This does not mean that all costs should not be recovered shared services make your mission possible and contribute to driving strategy. 2. People Dedicating resources to a shared services function allows for more focused personnel training and dedicated technical resources since the primary mission will be to serve internal customers with these services. This will allow for more effective allocation of resources across the departments of the utility. 3. Process Standardized processes will lead to greater efficiencies in delivery and ease of communication across departmental lines. 4. Technology Shared technology provides a single source of information and single point of technology solutions leading to a reduction in the need for multiple IT staffs and related maintenance costs. This can be depicted by the following: > > Allows for better sharing of information and resources across the utility > > Cross training provides added flexibility for workload peaks > > Environment with an improved ability to build functional excellence > > Dedicated personnel > > Clear focus on primary mission. Shared services focuses on transaction accuracy and throughput; services provided are improved through synergy and specialization page 2 People Strategy Process > > Standardize processes > > Ease of communication > > Reduces non-value added activities > > Shared services becomes a third-party supplier to the organization Technology > > Eliminates multiple maintenance staffs and costs > > Eliminates need for training and skill building on different applications or architectures > > Provides a single source of information > > Provides ability for common tools among many users > > Allows for real-time access to company-wide information, therefore better management decisions > > Facilitates the move toward common data architectures > > Allows for quick migration to new technology platforms with a single investment

3 Screening for candidates The assessment of shared services opportunities must look at how critical the business function is in achieving your business strategy, as well as the commonality versus uniqueness of the service offering. The following matrix looks at the difference between common and unique tasks and the critical vs. noncritical nature of each task. Shared services should possess common characteristics and be mostly non-critical in nature (although some common critical functions can also be included in the shared services bucket). Degree to which function is critical to success of business strategies Highly critical Not critical May be shared or unique Likely to be shared across businesses Likely to be unique to individual businesses May be shared or unique Common Potential areas to review for shared services Based on the previous discussion, think of your organization and the functions that are shared across departments or serve internal customers. Some departments that are prime candidates for inclusion in the shared services bucket include: > > Human Resources > > > Fleet Management > > > Warehousing and Inventory > > > Internal Audit > > > Central Maintenance > > > Procurement > > > Facilities, Mapping, Right-of-Way > Unique Degree to which service requirements are common > Safety > Information Technology > Customer Service, Billings and Collections > Meter Reading and Meter Shop > Finance (AP/AR/Payroll) > Base Control and Dispatch > Public Information Many of these areas have the cost characteristics of being common and non-critical in nature. As in any case, costs that are directly assignable in nature should be direct charged to a project or department, all others could be considered for a shared services allocation. page 3

4 Common cost allocation methods The Massachusetts formula The Mass Formula is an allocation method utilized when there is no direct or other reasonable cost benefit relationship that can be determined among multiple services offered in a single organization. In this case, the weighted average of the main drivers of the utility business in a multiple service utility are calculated and used to allocate administrative and general expenses. These drivers include: 1. Utility plant in service 2. Revenues 3. Direct labor distribution As shown in the example below, these drivers are calculated among electric, water and communication services provided from a single utility. The percentage of each calculation is added together and divided by three (e.g., for electric =250.23/3 = 83.41% of administrative and general costs allocated to the electric utility). Common Admin and General Cost Allocations Administrative and General Allocation Utility Plant in Service: xx % Electric 389,064, Water 20,577, Communications 25,954, Total $435,596,802 Revenues: 12.31xx % Electric 43,002, Water 4,197, Communications 9,601, Total $56,801,220 Direct Labor Distribution: 12.31xx % Electric 12,164, Water 870, Communications 1,242, Total Administrative and General Allocation: $14,276,833 Based on weighted average of above % Electric Water 6.07 Communications page 4

5 Other allocation methods Other common cost allocation methods can differ by area, but in general the driver is the activity. The following areas and their common cost allocation methods are: Allocation Area Financial Systems Accounts Payable Fleet Services Payroll Customer Services Shared Financial Services Information Technology Administrative and General Shared Office/Rent Allocation Shared Services Common Allocator Number of transactions by cost center Number of invoices by cost center Total of depreciable assets by cost center Employees by cost center Customers by service type (meter count) Massachusetts formula Total number of ID s assigned to employees by cost center Massachusetts formula Number of employees on site by cost center/ Square footage by cost center Massachusetts formula after direct allocation of cost specific items to benefiting cost center Rule #1 Direct charge expenses when possible to their cost causation then look to an allocation method. Summary This is a small subset of potential allocators. There are many more, some based on the cost drivers, others on internal politics. The key is to gain acceptance by all parties to ensure an effective foundation for departmental budgeting for shared services and a basis to make investment decisions in the area of shared services in personnel, technology and improved business processes. We d like to hear more about what your organization allocates and how it does it. Please send an to russ.hissom@, phone , or post comments, tips and ideas to our Utility Accounting Issues Forum on LinkedIn at page 5 Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan, or arrangement to any other party. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. The information provided here is of a general nature and is not intended to address specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought Baker Tilly Virchow Krause, LLP