Food for thought: Budgeting for internal consultancy services

Who should hold the budget for internal central service functions? In my time, I have come across:

• the central IT function of a global company that provided such a poor service that it was cheaper and easier for managers to source their computers directly from local shops
• the business division that spent none of its development budget, thereby reducing costs and improving the bottom line - a distinctly short-term strategy
• the training function treated as a profit centre that charged internal clients far more than the open market rate for training courses

Budgets are intended to drive behaviour but there may be unintended consequences, as these examples illustrate.

So, should an internal consultancy function:

• be funded centrally? Should it then be free to pursue projects at will? Or should it work only on projects that fit a pre-determined agenda? How then can you tell if the consultancy unit is too large or too small?
• be funded via budgets allocated to consuming businesses? How then should the budget be allocated among businesses? Should the internal consultancy then have to compete with external providers for these funds?

An interesting route addressing these difficulties is indicated by Thomas W Malone in the April 2004 edition of Harvard Business Review. His article "Bringing the Market Inside" starts by recounting the example of BP which met its goal of reducing the company's greenhouse gas emissions nine years ahead of schedule by allowing business unit heads to buy and sell emissions permits among themselves using an electronic trading system.

Malone promotes the concept of an internal market as a means of sharing knowledge; a market value is the result of the expectations of those involved in it, based on their knowledge.

But I wonder if this concept can be extended to the pricing of internal consultancy services? Suppose, for example, each business division was allocated a number of "internal consultancy units" (these might be denominated in - say - consultant days) which they could use only to "buy" internal consultancy services.

The units would have a budget value at the start of the financial year and a value of nil at the end of the year. A business unit head would be free to buy or sell these units according to need. If they hadn't been used or sold by the end of the year, they would be worthless. If you needed more than your allocation, you would have to buy them from another business unit. If units are scarce, you will need to pay more for them than their budget value.

This concept could also be applied to other centrally provided services.

But has anyone yet tried it and would it work?

Let me know what you think.

Calvert Markham