Culture, trust, and vocabulary are all intertwined, something that’s on full display every tax season.
Not the taxes you paid last week, although that is what brought the subject to mind. I’m talking about the corporate overhead every cost center manager has to pay.
In most large companies, managers call this a “tax” or, maybe, a “tithe.” For most of us, “tax” implies coercion by a remote, implacable authority. “Tithe,” while more benign, still has overtones of compulsion. Either way, like real taxes, those who pay the headquarters tax have no expectation they’ll get any benefits from it, and a strong expectation that headquarters’ wasted efforts will be wasted inefficiently.
With actual taxes we all know we do receive benefits, and could even enumerate some of them if pressed: Not only national defense, a diplomatic corps to make national defense less necessary, a system of criminal and civil justice, and the so-called social safety nets, but also basics like potable water, sewage handling, road maintenance, and, here in Minnesota, snow removal. These are benefits we take for granted until, as the citizens of Flint discovered, they don’t happen.
Our distrust of government long ago became cultural. Neither evidence as a driver nor nuance in our thinking affects the certainty of our conclusions. Propose that any branch of government is valuable and efficient and you’ll become an object of immediate ridicule.
If you collect or are funded by corporate overhead, beware the risk of guilt by association. If managers call it a tax, then a tax it is, with all the cultural freight the word hauls with it.
The parallels get worse. Some of the taxes we pay supports government’s regulatory responsibilities. Most of us recognize the reason for regulations when they’re taken one at a time, whether it’s an EPA regulation that prevents corporations from releasing toxins into the water supply or a zoning ordinance that prevents your neighbor from turning his backyard into a junkyard. But taken as a whole we all know government regulation is bad and imposes unfair burdens.
The taxes cost center managers pay to corporate headquarters support a regulatory regime as well, from Internal Audit to workplace safety to enforcement of IT’s information security standards.
Taken one at a time and properly explained, much of headquarters-imposed regulation makes sense, too, but that doesn’t mean anyone appreciates Compliance as a collective noun any more than we appreciate government regulation as a collective whole.
Right about here the parallels start to break down. The federal government is, as someone once explained it, the world’s largest insurance company, protected by the world’s largest armed force: Social Security, Medicare, Medicaid, and the Departments of Defense and Homeland Security account for something like 90% of the federal budget. Whether these are valuable or not is a matter of personal philosophy.
One hopes headquarters’ spending on security and internal insurance services is more restrained, and that the value of the services headquarters provides is, once listed, commensurately less controversial.
Or not. As is the case with the services we receive from our various levels of government, ask your fellow cost center managers if the value they receive from headquarters justifies the overhead charge they and you pay and they’ll express the same doubts citizens express about government services — doubts about both value in principle and efficiency of delivery.
Ten or twenty years ago I might have recommended that everyone at headquarters should just develop a thicker skin and ignore the grumbling. But I think it’s fair to say that at a societal level the question of government taxes vs value has contributed to the toxicity of our political dialog.
It isn’t much of a stretch to anticipate that grumbling about the “headquarters tax” in your company can poison relationships between headquarters departments and the business areas they support in ways that damage the company’s overall effectiveness, not to mention its ability to adapt to changing marketplace conditions.
What’s to be done?
First, make sure you can enumerate the benefits you provide. If you don’t understand what they are you probably don’t provide any.
Second, make sure you provide them efficiently and effectively. If you aren’t sure (and you aren’t sure), ask the departments you support, or hire consultants to ask for you.
And third, encourage everyone to stop calling their corporate overhead a tax. For that matter, don’t call it “overhead” either. Instead, choose a term that has some connotation of value.
Call it rent.
Corporate function is Direction, Oversight, Coordination, Support, Investment, and Accountability (DOCSIA [or something like it]). It’s not a tax, as employees can’t vote any part of it in or out, unless the business is a cooperative, but it is necessary, or else – no jobs!
I think your idea is a great way to reduce top management salaries back to realistic levels, as well as improve company moral and productivity.
But, calling DOCSIA a tax sounds like the okay-doke to me.
So corporations are rent seekers?
We call it a management fee for our subsidiaries. That includes all the things you mentioned Bob plus HR, IT, Finance support and a few other things. We do not do chargebacks, instead we estimate the amount of time resources spend each year on each subsidiary.
Speaking for IT, this system has been a demotivator since one of the subsidiaries likes to show their profit without the management fee. Almost like they could live without it. In reality, they are paying for a small portion of the massive amount of infrastructure that they could not get for the price on the open market.
The other side is the subsidiary that wants to increase profits by running cheap. Backups offsite? Not needed. Solid internet service to move data safely? Too expensive. Instant culture clash since the mothership has reasonable standards for data safety.
Solutions? I really have none other than everyone understanding that running a business in the current environment is expensive. It’s not just government regulations, it is also constant security threats, lawsuit concerns, and basic Enterprise Risk Management.
I get some of the complaints if executives are making 100x times normal staff. That isn’t the case for us, just seems to the challenge of splitting out portions of a business and giving them their own P&Ls.
Bob, as usual, a very thoughtful and useful piece, but I have two caveats.
One, I am afraid rent is also a loaded word. The word landlord is all too often preceded by the word greedy, and most people are no more aware of the value landlords provide than citizens are of government.
Two, all too often the central organization fails to understand the relationship between the cost of central services and the cost of the product. How many make/buy decisions attribute overhead to purchased goods the way they do to goods created in house biasing the decision in favor of purchasing things that are actually cheaper made internally? In how many labor negotiations does management assume that the overhead rate will remain constant when wages increase, instead of diminishing?
It’s true that “common knowledge” is that government, taxes and regulations are bad. But the fact is and it bears repeating: government is too small, taxes are too low, and regulations are too few.
Thanks for the information and insight. I can see why this approach might be attractive to large companies that bought smaller ones, but wanted keep a sense of independence for the purchased unit. And, I can imagine other useful scenarios where the “tax” paradigm is useful for accounting purposes.
But maybe how the relationship is viewed for accounting purposes needs to be re-imagined. Once purchased or created within a company, it seems to me that these units have a parent-child relationship with the corporation, when the child is living at home. Perhaps looking at ways different kinds of parent-child relationships have been handled accounting-wise in the domestic world might be useful in the corporate world.
Maybe membership fee?
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