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Knocking on the door of Shared Services….increased scrutiny?

June 9th, 2009 Comments off

     There’s an interesting article this morning on CFO.com, which outlines recent court rulings and the issue of “Cost Sharing” pacts.  I am not going to go into the details of the case, which involves Xilinx and their treatment of ESO expenses, since this is a very unique area and I am not qualified to address it. However, it does raise a very interesting question regarding Shared Services arrangements, particularly those that are international in nature. Specifically, I worked with a France-based company, that implemented, what we believed in North America was a very agressive Shared Services structure.

     During the almost 4-years that I was with the company, we were constantly being “reminded” that our EBIT results were not on par with our France counterparts. It wasn’t until the beginning of my 3rd year that we chose to conduct an EBIT improvement project and bridge the differences between our performance in North America and France. I spent weeks onsite in Grenoble reviewing operations, cost structures, and the operating expenses for the respective organizations. In the end, there was never a silver bullet that could be identified. The primary differences were in the product mix being offered within the respective markets and the consolidated operating expenses, which I will explain further. For the product mix, we were heavily focused on closed bid, large projects, aimed at the financial services and government sectors. Our counterparts were higher margin offerings aimed at consumer and small business. However, where were argued and differed in our view was in the consolidated operating expenses.

     The France and U.S. markets, as a percentage of global sales, were extremely high. If I recall correctly, well over 50%. The strategy adopted by the corporate office was that corporate overhead would be allocated to the entity level according to their respective percentage of global revenues. This was not a situation of allocation according to actual usage or needs. In fact, where we argued, was that our North American entity was entirely self-sufficient in every aspect. The only areas that we could say that there was a true “sharing” of services was in the areas of service providers such as insurance and auditing. That was all. We had an entirely self-sufficient R&D, Engineering, QA, Finance, and Marketing organization. If we had the ability to spin-off as a separate company we could have easily done so and not miss a beat. We did receive some parts from the Grenoble facility, but any overheads would have also been addressed through our Transfer Pricing Policy. When we asked where we could better utilize corporate resources and perhaps cut some expenses on our side in North America, there were no options available. So essentially, we received a 7-figure corporate allocation and received nothing in return.

     In the end, I certainly didn’t mind the allocation, as long as the published results weren’t viewed as an accurate picture of what our financial productivity meant for the global results. I am not a tax expert so if our tax experts at the global level determined that this was the best strategy for the company then I was willing to participate within that structure. However, don’t taint our performance through gamesmanship.  Bring this single example back full-circle to the recent ruling against Xilinx and there is potentially serious consequences for firms that may be participating in a Shared Services structure for which there is no basis. It’s an interesting discussion to have, especially when it comes to accurately measuring contribution margins at the entity level and the development of tax strategies.

Thanks for reading . . . .

Jeffrey Ishmael