Allocations? Know what you’re signing up for.

Allocations are an odd duck in the finance world.

Everyone knows that they are always wrong (and often heroically so), but the lure of having an accurate P&L for a business unit that otherwise might have its true costs obscured by shared services…I get it.

This post is just to say: really, really think about what you’re doing, and whether it’s worth it. Allocations get very political, very fast.

Because while we all pretend to be rational, calculating people - we’re not. We’re emotional, and we hate unfairness.

And unfortunately, allocations often become unfair. Classic example: department head wakes up one morning to find that her “costs” are higher, and her margin is lower - and now her bonus is at risk.

She didn’t do a single thing: but another department terminated someone, and there are costs allocated out by headcount, and she suddenly has proportionately more.

I cannot overstate the potential issue here: if people think a process is unfair, they will simply check out of it.

One suggestion I sometimes make is to snapshot the driver (ie headcount) and allocate off that snapshot for a period of time. More predictable, but then the danger is the department who’s had to make redundancies gets bitter about their share of headcount costs. But at least the goalposts don’t move unexpectedly.

If you must allocate, then the best advice I can give you is to decouple the allocations from the departmental/whatever review. Sure, allocate as you want for top level reporting - but when you assess performance at the lower level, you must allocate costs based on what is under their control.

In reality: extremely difficult to balance.

But as long as you’re looking at it through the right lens, and considering the circumstances, and communicating, it is possible to walk the line where the lower levels understand what you’re doing, and the upper levels are happy with their view.

Just don’t sleepwalk through it.