Chargebacks: A Double-Edged Sword
With economic pressures squeezing U.S. companies to find and eliminate every inefficiency, we are hearing more conversation around chargeback systems.
A chargeback system is a method of accounting that allows a creative executive to charge clients for the costs associated with their projects. (Opposed to the traditional method, which simply lumps the costs for all creative activities together into one “overhead” account that the corporation absorbs.)
There are several advantages to using a chargeback system. From the creative executive’s perspective, perhaps the single most important benefit is that it elevates the creative organization from a “cost center” to a “value center.” Armed with the data collected under a chargeback system, an executive can much more easily justify a shop's existence. This, in turn, raises the stature of the creative executive within the company. But there are other advantages:
- Shops can operate more independently – as a “business within a business.” In my experience, this insulates the organization from some of the corporate pressures on costs.
- Clients can see what their projects (and subsequent requests for changes) actually cost, which normally leads to greater discipline and restraint (hence the greater interest in such systems during economic downturns).
- Everyone can compare in-house costs with those associated with using local vendors, hiring freelancers, or embedding capability within business units. This leads to more rationale decision-making about when and what to outsource.
- Creative organizations can quickly identify and monitor the “big” clients.
- Creative executives can more quickly identify driving costs, leading to better budgeting and higher profitability.
- Executives can make a stronger business case for upgrades, new technologies, or increased staff.
That certainly sounds like a strong case. However, there are some significant disadvantages as well:
- Any chargeback system requires staff to consistently and accurately report data (such as how much time a graphic artist spent looking for an image or designing a brochure)
- This increases administrative costs and reduces the shop’s capacity over time.
- Sometimes it can be very difficult to identify the owner for a particular project, such as an annual report or corporate video.
- “Shared” projects can be challenging, as the allocation of costs are often negotiated up front on a case-by-case basis. Internal politics can often sabotage the most thoughtful of chargeback systems.
In an attempt to take advantage of the benefits and offset some of the disadvantages, companies have adopted several different approaches:
- Some will only allocate material costs or labor costs. Others will allocate all costs, including planned upgrades and staff training.
- Some will allocate to some customers and not others (such as corporate or marketing).
- Some will allocate to clients who bring in unplanned projects but assign planned projects to the overhead pool.
- Some will allocate a set price for a project based on its complexity or on its type (brochure, flyer, ad). Others allocate actual costs tracked for each project.
Chargeback systems are usually rolled out enterprise-wide, affecting IT, marketing, and even HR. A huge culture shift accompanies the institution of a chargeback system in that these embedded corporate organizations transform into classic service providers. They gain more autonomy but also greater responsibility. Clients directly paying for work have higher expectations of professional behavior and outcomes. They hold in-house staffs more accountable and expect restitution if expectations are not met. Ultimately, clients unhappy with customer service or quality are quick to push for greater latitude in either outsourcing work or hiring their own embedded staff to do it. Thus chargeback systems often mean only productive, efficient, customer-oriented organizations who emphasize best practices, project management, and proactive communications will thrive under this structure.
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Cella Consulting is a management consulting company specializing in optimizing operations at in-house creative organizations. Cella relies on the experience and knowledge of our exceptional team of consultants to create innovative solutions for our clients. Our team has been selected based on a specific expertise and their experience working in agencies and/or in-house creative organizations. Together, our teams offers a full range of functional skills—in strategy, funding models, technology, process, change management, marketing communications, and personnel development—and an remarkable ability to find practical solutions for optimizing operational performance and maximizing ROI.