Some of my mailbag’s contents, and associated random thoughts:
The latest edition of Keep the Joint Running arrives. As you start to read it, you imagine you hear Amazing Grace playing on the bagpipes. You read that sometimes, it makes sense to view the rest of the business as your customer, and the music suddenly stops.
“NOOOOOOOOO!!!! Now I feel like the last (un-morphed) guy in Invasion of the Body Snatchers,” longtime reader Chris Dejardins reported.
In another letter, Jim Carroll offered this imagery: “Your KJR of Feb 21 caused a thought to pop into my head (a most unpleasant experience, I might add, at least until the caffeine kicks in). The image of business as bazaar got me thinking of what roles different departments would have in this new and wondrous marketplace — Finance department as moneychangers, complete with slightly inaccurate scales, etc. — when a powerful image came to mind: HR as slave marketeers.”
It’s a terrific thought which I’m going to do my absolute best to pursue no further.
Then there was this, from a correspondent who must remain anonymous:
“I have worked in the land of transfer costs and it was really an eye opener.
“In the business schools it sounds like a good way to keep cost and quality under control, but when it is actually executed things are very different.
“I have received junk three days from the end of the quarter because the supplier, an internal partner in another manufacturing plant, wanted to make their numbers and figured that they would make up the difference at the start of the next quarter. By junk I mean partially assembled, untested, defective and shorted units.
“When this was complained about we were accused of exaggerating, lying and making excuses. They made their numbers and we had no recourse.”
You can turn the music back on — Amazing Grace on the bagpipes, if that’s what you like, Amazing Grace (Used to Be Her Favorite Song) if you’re more of an Amazing Rhythm Aces kind of person. Last week’s column was about chargebacks (“transfer pricing” if you want to be Fully Buzzword Compliant) and their consequences, not about the internal customer as the idea has been promoted for the past few decades.
Your job still isn’t to make end-users happy. It also isn’t to deliberately make them unhappy, just in case you’re of the binary persuasion and were hopeful. In fact, nothing has changed, because your job is still to help the business, and the employees who work in it, be as effective as possible.
There are some businesses whose biggest challenge is the efficient allocation of internal resources. Take the systems integration industry: Accounts must be run as independent businesses anyway; treating internal resources, and other accounts, as suppliers and customers is as good a solution as any for making sure every account gets the resources it needs without some accounts subsidizing others, and without overhead charges from headquarters getting out of hand.
Speaking of overhead charges …
Every company that institutes transfer pricing eventually has to deal with corporate overhead — the cost of all those departments and expenses everyone else wants someone else to pay for: Accounting, Internal Audit, Human Resources, and, all too often, the company’s top executives. Nobody is going to buy their services voluntarily, which means nobody is willing to pay for business functions that are absolutely necessary to the company’s health.
Is it any wonder that in most companies, everyone outside headquarters calls overhead a tax?
Here’s a suggestion: Start calling it “rent” instead. Nobody really likes paying rent, but nobody expects to live in someone else’s building for free, either, nor do they expect the various features of their living space to be charged a la carte.
Let’s close this subject down. There are some situations in which transfer pricing makes sense. Not many, but some. When it makes sense, the company becomes a marketplace; everyone is everyone else’s customer. Done right (a rare event) the result is the efficient allocation of internal resources.
In most companies, though, transfer pricing’s unintended negative consequences vastly outweigh the benefit, which my partner, Steve, describes as full employment for accountants, but which is more commonly described as “Making cost center managers accountable.”
This is simply a different way to describe the efficient allocation of resources. But isn’t it striking that, stated this way, the point is personal and pejorative rather than organizational and about benefit?