Selecting a future-fit chargeback model: an imperative for GCCs

GCCs have adopted a variety of chargeback models, depending on the nature of services being delivered. These chargeback models have evolved to reflect business complexities.
 

Why chargeback?

• Creates ownership: The mechanism enables the GCC to operate independently as a business unit, where it is accountable for managing costs, meeting service demands and maintaining service levels. By providing them accountability, the GCC not only handles operations but also creates value for enterprise.
• Influences behavior: The mechanism also assists GCCs to allocate the right resources and drive behavior, focusing on cost optimization and efficient resource allocation.

Types of chargeback models

The evolution of chargeback models in GCCs is closely tied to the maturity level of the GCC organization. As the GCC organization grows and matures, the chargeback model needs to become more responsive to the vision of the organization while being in line with its strategic goals. The available choices for chargeback models are:
 

1. Cost plus margin: The model allows a fixed percentage markup to be added to the cost of delivering services. It is easy to understand and communicate to stakeholders and offers predictability and flexibility to accommodate changes in cost or market conditions. However, if the markup percentage is too high or if the cost is not accurately estimated, there is a risk of overcharging. Setting the appropriate margin can also be challenging, making this model suitable when costs are uncertain and cannot be accurately budgeted.
 

2. Fixed price: Here, a fixed fee is charged for the delivery regardless of the actual usage in each business unit. This model is easy to administer, as there is no need to track or measure actual usage of GCCs. It can also encourage GCCs to operate more efficiently, reducing unnecessary or wasteful usage. However, forecasting cost and usage for a future period can be challenging, and it may not provide accuracy in cost allocation due to unpredictability in the actual usage and costs. This model is suitable when the services provided have a well-defined scope, standardized processes, and predictable costs.

3. Peer benchmarking: This is another model, where similar sized GCCs with similar offerings are identified and benchmarking is performed against their value proposition and price. This model provides objective criteria for evaluating the performance of GCCs to avoid biased judgments. It helps organizations identify best practices and areas for improvement, leading to better performance. However, focusing on cost benchmarks may lead to a narrow focus on cost reduction instead of performance improvement. There is also a chance of inaccuracy if the peer group has different business models, locations, or regulatory environments. This model is suitable when the GCC seeks to follow industry-leading practices and standards.

4. Full time employees (FTE): This model allocates costs to various business units based on the number of full-time employees that GCCs employ for each unit. This model facilitates ease of administration and aids in tracking the utilization of FTEs. It also makes costs predictable for business units, helping with budgeting and financial planning. However, it does not account for variations and complexity of services, and it does not give business units visibility on transaction-level costs. This model is suitable when cost allocation needs to be based on FTEs for simpler measurement and reporting.

5. Transaction: This model allocates costs to business units based on the transaction volumes processed by GCCs for that unit. It is perceived as fair by the business units due to transparent and accurate cost allocation. This model is suited for highly transactional processes. However, it can result in fluctuating revenue based on the demand from the business, and it can be difficult for the GCC to track the utilization of FTEs. This model is suitable when a more granular cost allocation is required based on the actual transactions processed.

6. Value: In this model, payments are made to GCCs based on the value of the services provided, rather than the volume or quantity of transactions. This model fosters continuous improvement in GCCs and encourages collaboration between the teams at GCC and business units to understand and deliver the value proposition of each service. However, heavy governance is required due to the complexity involved in estimating the value delivered, and there is a risk of cost overrun to achieve the value commitments. This model is suitable when the objective is to incentivize and prioritize value-adding services or initiatives delivered from the GCC.

Key considerations while selecting a chargeback model:

Organizations must carefully evaluate various factors while selecting an appropriate chargeback model for their businesses. Some of the key considerations are mentioned below: