Why cost allocation strategically elevates the finance function

Why cost allocation strategically elevates the finance function

Photographic portrait of Ronald Wong
Ronald Wong

EY Asean and Singapore Financial Accounting Advisory Services Leader; Partner, Assurance, Ernst & Young LLP

5 minute read 27 Nov 2024

Effective cost allocation is critical in driving the finance function’s transformation into a strategic business partner. 

In brief

  • The finance function is evolving from a scorekeeper into a strategic business partner, driven by the need for financial accuracy and actionable insights. 

  • Effective cost allocation improves cost visibility, supports strategic decision-making and promotes cross-functional collaboration.

  • To build a robust cost allocation methodology, organizations must address challenges, such as data silos and human resistance to change. 

Traditionally viewed as a scorekeeper, the finance function is undergoing a significant transformation into a strategic business partner in today’s rapidly evolving business landscape. This is driven by the need for finance teams to not only achieve financial accuracy but also support operational excellence and provide actionable insights to the organization. Therefore, transforming the finance function to use various strategic levers to drive key business decisions is critical.

Among these levers, cost allocation stands out for its pivotal role. An effective cost allocation process markedly improves the visibility of cost information and empowers organizations to make informed and strategic decisions. Furthermore, the cost allocation process inherently requires collaboration across different functions within the organization, thereby promoting a deeper level of business partnering. 

To achieve effective and efficient cost allocation, finance teams must establish a robust framework and develop appropriate KPIs that consistently lead to the delivery of actionable insights. This framework should be designed to promote efficiency and clarity while guiding the organization toward improved financial health and strategic agility. 

However, the journey toward effective cost allocation may be fraught with challenges. Many organizations struggle with issues stemming from data silos, inconsistent terminologies and outdated manual processes, which hinder accurate and timely financial reporting. Furthermore, resistance to change can complicate efforts to implement more sophisticated and efficient systems.

A joint EY-Chartered Accountants Australia and New Zealand (CA ANZ) report, Driving finance transformation: tackling key challenges in cost allocation for strategic success, delves into these complexities and provides points of view on the way forward. The report covers the views of more than 90 finance leaders of large organizations in Hong Kong, Malaysia, the Philippines, Singapore, Thailand and Vietnam on finance transformation and cost allocation. It explores the multifaceted challenges around cost allocation, emphasizing the crucial roles of process, data integrity, technology integration and people aspects in navigating these complexities.

Driving finance transformation: tackling key challenges in cost allocation for strategic success

This EY-Chartered Accountants Australia and New Zealand report provides insights for finance leaders seeking to strategically elevate cost allocation practices to drive sustainable growth and profitability.

Request a copy

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Shift in strategic priorities highlight importance of finance transformation

The EY-CA ANZ report notes a shift in finance leaders’ strategic priorities in recent years. Prior to the COVID-19 pandemic, there were three key priorities for finance leaders: drive cost efficiencies, focus on revenue growth, and manage enterprise and regulatory risks.

Disruptions arising from the pandemic brought about a change in these priorities. Fifty-three percent of respondents state that their top priority is now revenue growth. The need for resilience and sustainability has become paramount, prompting finance leaders to pivot toward a greater focus on growing revenue and supporting overall business agility, with a reduced emphasis on risk and regulatory management. 

Transforming the finance function is crucial in addressing the evolving priorities of finance leaders. However, only 31% of respondents are in the process of undergoing minor or bold finance transformation. This may indicate that even though finance leaders acknowledge the importance of finance transformation, most are still in the early stages of evaluation in their transformation journey or feel that the changes they have undertaken so far have not made a significant impact.

This can be attributed to several factors. Change management is cited as the biggest challenge when embarking on the finance transformation journey (39%). Other key factors include finding the right implementation partner (26%), creating a business case to obtain funding (25%) and securing leadership buy-in (10%).  

Change management is a crucial aspect of any transformation. Without proper change management, transformation efforts, whether small or large, will likely fail. Effective change management bridges the gap between the business’s need for change and people’s natural resistance to change, ultimately increasing the likelihood of transformation success and favorable business outcomes. However, change management is complex as it needs to achieve a lasting and sustainable impact. 

Finding the right implementation partner can also be challenging. Organizations need to consider values that the implementation partner can bring to the table. Experience is arguably the most important driver for values as it would have a direct impact on how the transformation is executed. Without proper experience, the implementation partner may not be able to execute the transformation well.
 

Cost allocation as a critical lever of finance transformation

Cost allocation is a crucial component of finance transformation, especially in the context of shifting priorities toward driving revenue growth. The EY-CA ANZ report notes that 55% of respondents rate cost allocation as important in supporting current priorities. Effective cost allocation provides transparency on the true costs associated with various business activities, allowing finance leaders to better identify areas where profitability can be improved. By gaining a deeper understanding of cost drivers, finance leaders can make strategic decisions that support revenue generation and operational efficiency.

An efficient and effective cost allocation methodology balances cost and accuracy — focusing efforts on areas of greatest importance and value while providing transparent, trusted and actionable insights. Finance leaders must therefore enhance the sophistication and maturity of their cost allocation framework so that they meet these requirements, thereby generating results that users can trust and rely on. 

Effective cost allocation is particularly important as organizations focus more on driving revenue growth because it allows finance leaders to better identify areas where profitability can be improved.

While cost allocation is crucial for helping organizations to optimize resources and enhance profitability, building and executing a robust cost allocation methodology is a challenging process. Organizations often face challenges with data silos, inconsistent terminology or understanding of the same outdated processes and technologies, and human resistance to change. As the finance function tackles some of these challenges and evolves from a scorekeeper into an invaluable business partner, it can reframe its contribution to the organization and become a leading contributor of superior outcomes. 

Ultimately, cost allocation is not only an administrative task but also a critical and foundational element that supports profitability analysis, resource allocation and the overall finance strategy. As finance leaders look to the future, understanding the nuances of cost allocation is essential for enhancing operational efficiency and driving sustainable growth and profitability.

Summary

Transforming the finance function is critical to address the shift in finance leaders’ strategic priorities toward a greater focus on revenue and business agility. Building and implementing a robust cost allocation methodology is a crucial part of finance transformation that requires the organization to address various challenges. Doing so would help the finance function become a strategic business partner in today’s rapidly evolving business landscape.

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Ronald Wong

    About this article

    Photographic portrait of Ronald Wong
    Ronald Wong
    EY Asean and Singapore Financial Accounting Advisory Services Leader; Partner, Assurance, Ernst & Young LLP
    Financial accounting advisory professional with deep accounting and reporting knowledge in SFRS, IFRS and US GAAP. Vast finance and accounting transformation consulting experience.
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    Financial accounting advisory services
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