Alternative Chargeback Systems for Shared Services at The Boeing Company: The

Case of Voice Telecommunication Services

Abstract

A multidivision corporation that uses a shared services organization to provide common services must
develop billing systems to charge the costs of these services back to using departments. This case
illustrates how a simplified system, based on a single chargeback rate, results in charges that are
unrelated to the use of services. An activity-based system is then shown to produce cost assignments
that reflect the actual consumption of services. The case illustrates the behavioral impact alternative
chargeback systems can have on users of internally-provided services. It also demonstrates how the
need for more accurate information must be balanced against the added cost of providing this
information.

William R. Ortega
Assistant Professor of Accounting
College of Business and Economics
Western Washington University
Bellingham, WA 98225-9071
Phone: (360) 650-7735
Fax: (360) 650-4844
bill.ortega@wwu.edu
Introduction
The grumbling had gone on for months. Managers kept complaining that their monthly charges

for voice telecommunication services didn’t reflect the amount actually consumed. Consequently, there

was a movement to reinstate detailed billing to support the monthly charges and the process to

implement an activity-based chargeback system was proceeding full steam ahead.

Mike Burton, Manager of Accounting Policy at The Boeing Company, wasn’t sure the new

activity-based system was the answer. He recalled that four years earlier Boeing had abandoned a

detailed activity-based chargeback system because too much detail was being provided and the cost

associated with providing the detail wasn’t justified. Although the consumption of voice

telecommunication services had increased dramatically over the past four years, Mike wasn’t sure

whether the increase was due to the use of the simplified chargeback system or whether it was due to

changes in technology.

Mike had more questions than answers: How distorted were the cost allocations generated by

the existing system? Were employees overconsuming voice telecommunication services because the

existing system failed to charge them for it? Would the added cost of the proposed activity-based

system be offset by reductions in consumption? What role should the chargeback system play in

influencing employee behavior?

The Boeing Company and the Shared Services Group

The merger with McDonnell Douglas (effective August 1, 1977) made Boeing the largest

aerospace company in the world. With 1997 revenues exceeding $45 billion, Boeing is the world’s

largest manufacturer of commercial and military aircraft, and is the nation’s largest NASA contractor.
Introduction
The grumbling had gone on for months. Managers kept complaining that their monthly charges

for voice telecommunication services didn’t reflect the amount actually consumed. Consequently, there

was a movement to reinstate detailed billing to support the monthly charges and the process to

implement an activity-based chargeback system was proceeding full steam ahead.

Mike Burton, Manager of Accounting Policy at The Boeing Company, wasn’t sure the new

activity-based system was the answer. He recalled that four years earlier Boeing had abandoned a

detailed activity-based chargeback system because too much detail was being provided and the cost

associated with providing the detail wasn’t justified. Although the consumption of voice

telecommunication services had increased dramatically over the past four years, Mike wasn’t sure

whether the increase was due to the use of the simplified chargeback system or whether it was due to

changes in technology.

Mike had more questions than answers: How distorted were the cost allocations generated by

the existing system? Were employees overconsuming voice telecommunication services because the

existing system failed to charge them for it? Would the added cost of the proposed activity-based

system be offset by reductions in consumption? What role should the chargeback system play in

influencing employee behavior?

The Boeing Company and the Shared Services Group

The merger with McDonnell Douglas (effective August 1, 1977) made Boeing the largest

aerospace company in the world. With 1997 revenues exceeding $45 billion, Boeing is the world’s

largest manufacturer of commercial and military aircraft, and is the nation’s largest NASA contractor.
 2

Boeing employs more than 238,000 people in 27 states and has three major operating locations: Puget

Sound area in Washington state, St. Louis, and Southern California.

The company has two main operating divisions. The Commercial Airplane Group (BCAG)

produces the jetliners that most people are familiar with (e.g., 737, 747, 757, and 777). As a result of

the merger, Boeing is now responsible for over 10,000 of the 12,000 commercial airplanes in operation

worldwide. BCAG’s 1997 revenues were approximately $27 billion.

The other division is the Information, Space & Defense Systems Group (ISDS). ISDS consists

of a broadly diversified collection of operations, including the production of: military aircraft and missile

systems such as the joint strike fighter; space transportation such as the space shuttle; and information

and communication systems such as the global positioning system. No single program accounts for

more than 15 percent of the division’s 1997 revenue of $18 billion.

Boeing provides common services to the operating divisions by utilizing a shared services

concept. By consolidating common functions under a common provider, Boeing has found that

redundancies are eliminated. This, in turn, lowers costs and increases customer satisfaction. The

Shared Services Group (SSG) within Boeing has the responsibility for providing a broad range of

common services to the operating divisions. Eighty-seven different services are provided, ranging from

mail service to voice telecommunication services (referred to as voice services, hereafter).

The voice services “family” provides all electronic communications throughout the company.

This includes the entire range of components from the infrastructure directly supporting voice services to

the end-user devices that attach to the network. Voice services is an end-to-end service that provides

requirements analysis in the beginning of the life cycle, carries through to the design, implementation,

operation, and maintenance of voice services, and concludes with the retirement of all voice-related
 3

components. The elements of the service are shown in Table 1. The cost to provide voice services

exceeded $87 million in 1998.

1995 Billing Simplification

In 1994, a companywide movement to simplify the billing processes between SSG and its

internal customers was undertaken because it was widely believed that too much detail was being

provided at too low a level within the organization. Consequently, beginning in 1995 the chargeback

procedures used for SSG’s services were reviewed and many of them were simplified.

Prior to 1995, voice costs were billed to 421 different organizational units (e.g., budgets) using

29 different rates. Each voice service had its own rate that was calculated using a separate cost pool.

The result of billing simplification on voice services was to combine the 29 voice-related cost pools into

a single pool. These costs were then allocated to internal customers on the basis of salaried employees.

Salaried headcount was chosen as the allocation base because it was viewed as the most significant

“driver” of voice telecommunication costs. In the new system, voice costs were billed at a high level,

with 24 organizational units receiving monthly voice cost allocations. In 1995, the rate was $76.84 per

month. By 1998, the rate had increased to $91.84 (see Table 2 for the 1998 Voice Telecommunication

Budget and the calculation of the 1998 rate).

The simplified billing procedure for voice services saved Boeing several million dollars a year in

labor and non-labor costs. Within SSG, the new billing procedure eliminated some of the computer

systems needed to track end-users’ budget numbers and eliminated over 50 percent of the routine

reporting currently being done. The savings for SSG were estimated to be $1.4 million a year.
 4

Similarly, internal customers were believed to save from billing simplification. Most of these savings

were considered “soft” and were estimated to be $2.7 million for ISDS and $4 million for BCAG.1

During the simplification process, many managers raised concerns regarding the lack of detailed

reporting associated with the simplified system. They believed that if voice costs were billed at one

average rate customers would overconsume voice services. For example, some managers were

concerned that everyone would buy cell phones and pagers because it would not affect their monthly

cost allocation. Other managers were concerned that eliminating the detailed long distance call records

would result in increased usage because employees would conduct personal business at work.

The problem of overconsumption of services was to be controlled by establishing a

companywide Voice Standards Board that developed uniform standards and policies for the use of

voice services. These policies were based on “business needs” and were to alleviate superfluous

consumption of voice services. For example, a person could have a cell phone only if there was a bona

fide business reason to have one. To curb the possible abuse of long distance services, detailed phone

records could be generated, but only on an exception basis.

The philosophy of the simplified chargeback system was that SSG was responsible for

managing the cost of telecommunication services as a whole (i.e., providing the required level of service

at the lowest cost) and the customer was responsible for managing the consumption of services.

However, the consumption of services was managed through standards and policies, rather than by

detailed reports generated by the accounting system.

1
Cost savings were viewed as either “hard” or “soft.” Hard savings were savings items that could be easily
measured, such as headcount and computer time reductions. In contrast, soft savings were productivity-
improvement items that were more difficult to quantify. For example, attending fewer meetings, reducing the time
spent reviewing reports, and answering fewer questions from customers.
 5

When the simplified system was adopted, it was widely believed that the cost savings (both hard

and soft) outweighed the fact that the new system was a reversion from an activity-based system that

assigned costs on a causal basis to a simplified system that allocated costs using one average rate.

1999 Voice Billing Changes – A Return to Detailed Billing

The conversion to the simplified chargeback system went smoothly. Unfortunately, it did not

take long before the complaints started. Many complaints centered on the belief that charging voice

services at one average rate per salaried employee has led to the overconsumption of services.

Managers with this viewpoint feel that the standards and policies developed by the Voice Standards

Board have not worked as originally intended and that the consumption of services has gone

unimpeded. They point to the growth of voice services consumed during the last four years as support

for their opinion (see Table 3). Other managers view the growth in voice services as being related to

changes in technology. They suggest that it’s normal to see significant growth in pagers and cell phones

because these are tools, just like personal computers, that employees now use to conduct their jobs.

Managers who believe the existing system has overcharged them have leveled complaints too.

Many of these same managers are also under pressure to reduce costs. They are dissatisfied with the

inability to reduce their monthly voice charges by reducing their consumption of services. For example,

Jim Ryan, Manager of Boeing’s Huntsville Operation, has been furious with the magnitude of his voice

charges. He contends the existing system overcharges him by at least 200 percent. Ryan is also

attempting to slash his 1999 operating costs and has set aggressive consumption reduction goals for the

upcoming year. He would like to see a chargeback system implemented that would translate reductions
 6

in services into reduced charges (see Table 4 for the current and proposed consumption levels of voice

services by the Huntsville Operation).

The complaining has resulted in the development of a proposed chargeback system that will

assign costs on a cause-and-effect basis using multiple “activity-based” rates. Customers will be billed

based on the quantity of the specific services used. The quantity of each voice service consumed will be

multiplied by the chargeback rate per service to obtain the total cost of the specific service.

Consequently, customers will pay for the voice services they actually consumed. The proposed activity-

based system will look as follows:

 Companywide pools and rates for basic dial tone service. Two rates (analog and digital)
will be used. Costs will be assigned on a per-phone-line basis.

 Companywide pools and rates for long distance charges. Two rates (domestic and
international) will be used. Costs will be assigned on a per-minute basis.

 One companywide pool and rate for voice mail. Costs will be assigned on a mailbox basis.

 Companywide pools for pagers. Different rates for three pager types (standard,
alphanumeric, and national). Costs will be assigned on a per-pager basis.

 Regional pools and regional rates for add, move, and change services. Separate rates will
be used for each service offered. Costs will be assigned based on the number of service
orders for these services.

 Regional pools with regional rates for cellular phone service. One rate will be used and
costs will be assigned on a per-phone basis.

 Services that are unique or nonstandard will be billed directly to the using department at the
cost of the service plus administrative charges. Fax machines are an example of items
included in this category.
 7

Table 5 shows the proposed activity-based rates using the 1998 budgeted costs and the 1998

annualized level of the activity drivers.2 The rates shown in Table 5 are preliminary rates developed to

help assess the impact of adopting the activity-based system. All of the rates shown in Table 5 are

calculated on a companywide basis, even though the final system will use both companywide and

regional rates, as noted above.

The philosophy of the activity-based chargeback system is that SSG will be responsible for

managing the unit cost of the individual voice services and the customer will be responsible for managing

the consumption of services. The consumption of services will now be monitored through detailed

reports generated by the chargeback system. In contrast to the simplified chargeback system, users will

now be charged for the services actually consumed.

Unfortunately, this new philosophy cannot be implemented for free. Many of the savings (both

hard and soft) that accrued from billing simplification would be eliminated. For SSG, the cost to

develop and implement the detailed billing system is estimated to be $700,000. Ongoing support of the

developed systems, including maintenance of charging accuracy is estimated to be $1,200,000 per year.

Similarly, the cost savings enjoyed by BCAG and ISDS from billing simplification will be eliminated

when detailed billing is resumed.

2
To develop rates, activity-based cost systems must translate the organization’s general ledger into the cost of
activities performed. In this case, the activities performed correspond to the various voice services provided. Many
of the costs associated with these services were already captured in Boeing’s accounting system by budget code
(see Table 1). This facilitated the development of the service cost pools shown in Table 5.
 8

Table 1

Voice Telecommunication Services

Voice Processing:

 Voice mail
 Voice response units/interactive response
 Call management systems

Voice Networking:

 Basic telephone service

 Access to local telephone service
 Long distance service

Component Products:

 Station telephone products

 Audio conferencing equipment
 Secure products
 Telephone directories

Personal and Independent Products:

 Cellular services
 Pager services
 Emergency satellite
 Facsimile machines
 Calling cards

User Services:

 Operator services
 Call assistance
 In-flight emergencies
 Teleconferencing support
 Add, move, and change for new and existing service
 Voice consulting
 9

Table 2

1998 Voice Telecommunication Budget

and Chargeback Rate

1998 Voice Telecommunication Budget:

Local Service Lines $17,643,517
Voice Mail 2,144,597
Voice Equipment 4,634,000
Pagers 3,156,000
Facsimile Machines 976,741
Cellular Phones 1,757,115
Domestic Long Distance 5,045,496
International Long Distance 3,900,000
Other Toll Services 1,440,000
Telecommunication Services Support 708,909
Design and Build 1,533,277
Add, Move, and Change 18,347,355
Operate, Sustain, and Repair 4,688,082
Common Product Support 10,836,152
Use and Occupancy 701,629
Taxes 4,791,939
SSG Administration 2,385,184
Other Administrative Costs 2,758,934
Total $87,448,927
1998 Salaried Workforce:
Annualized Basis 952,188
Monthly Rate Per Salaried Employee:
$87,448,927 ÷ 952,188 = $91.84
 10

Table 3

Salaried Workforce Levels and Voice Telecommunication Services

Provided From 1995 Through 1998

Panel A: Salaried Workforce and

Services (Volume Measure) 1995 1996 1997 1998

Salaried Workforce (Number) 69,548 72,780 72,801 79,349

Phone Lines – Analog (Number) 114,096 122,329 129,449 135,068
Phone Lines – Digital (Number) 11,277 12,085 13,402 15,412
Voice Mailboxes (Number) 36,100 52,369 75,118 86,515
Domestic Long Distance (Minutes) 58,751,676 63,697,616 71,254,928 75,052,500
International Long Distance (Minutes) 6,160,670 6,472,006 6,742,060 7,299,221
Cellular Phones (Number) 913 1,556 2,458 2,950
Pagers – All Models (Number) 14,400 21,400 34,641 40,355
Add/Move/Change (# of Orders) 119,211 146,040 185,880 217,187
Facsimile Machines (Number) 2,180 2,319 2,684 2,713

Cumulative
Increase
Panel B: Percent Increase 1995-1998 1995-96 1996-97 1997-98

Salaried Workforce (Number) 14.09% 4.65% 0.03% 8.99%

Phone Lines – Analog (Number) 18.38% 7.22% 5.82% 4.34%
Phone Lines – Digital (Number) 36.67% 7.17% 10.90% 15.00%
Voice Mailboxes (Number) 139.65% 45.07% 43.44% 15.17%
Domestic Long Distance (Minutes) 27.75% 8.42% 11.86% 5.33%
International Long Distance (Minutes) 18.48% 5.05% 4.17% 8.26%
Cellular Phones (Number) 223.11% 70.43% 57.97% 20.02%
Pagers – All Models (Number) 180.24% 48.61% 61.87% 16.49%
 11

Add/Move/Change (# of Orders) 82.19% 22.51% 27.28% 16.84%

Facsimile Machines (Number) 24.45% 6.38% 15.74% 1.08%
 12

Table 4

Current and Proposed Consumption of Voice Telecommunication Services

by the Huntsville Operations

(All Data on a Monthly Basis)

1998 1999
Actual Proposed
Salaried Workforce 796 796

Phone Lines – Analog 814 814

Phone Lines – Digital 101 101
Total Phone Lines 915 915

Domestic Long Distance 187,332 89,206

International Long Distance 1,892 901
Total Minutes 189,224 90,107

Voice Mailboxes 796 637

Cellular Phones – Number 150 15

Pagers – Standard 698 228

Pagers – Alphanumeric 12 4
Pagers – National 145 47
Total Pagers 855 279

Add, Move, and Change 66 33

Facsimile Machines 52 26
 13

Table 5

Proposed Activity-Based Rates for Voice Telecommunication Services

Service Annualized Level

Telecommunication Service Cost Pool Of Cost Driver Monthly Rate

Phone Line – Analog $38,488,444 1,620,816 lines $23.75 per line

Phone Line – Digital $6,414,739 184,444 lines $35.68 per line
Voice Mailbox $2,711,124 1,038,180 mailboxes $2.61 per mailbox
Domestic Long Distance $7,412,085 75,052,500 minutes $.10 per minute
International Long Distance $4,671,503 7,299,221 minutes $.64 per minute
Cellular Phone $2,015,485 35,400 cell phones $56.94 per cell phone
Pager – Standard $876,439 254,856 pagers $3.44 per pager
Pager – Alphanumeric $1,661,278 196,404 pagers $8.46 per pager
Pager – National $1,126,327 33,001 pagers $34.13 per pager
Add, Move, and Change $20,840,927 217,187 service orders $95.96 per order
Facsimile Machine $1,230,576 32,556 fax machines $37.80 per fax machine
Total Annual Voice Budget $87,448,927