Finance keeps revising how overhead is allocated, moving shared costs off favored projects and onto rivals, so the favored work looks cheaper and the rival's returns shrink with no change in operations.
An example
Two division presidents at a publicly traded industrial manufacturer were the leading candidates to succeed the chief executive, and the chief financial officer had made his preference clear in private. Over three planning cycles, his controllership team revised how shared costs were spread. IT moved from a per-user to a per-revenue basis. The new ERP rollout was charged by headcount. Internal audit support, compliance reporting, and cross-unit coordination were assigned to the older flow-control division, while the newer automation unit was exempted as a growth business. Each change came with a technical memo, and none restated prior years. The flow-control president watched her division's return on capital fall from fourteen percent to nine with no change in plants, prices, or volumes, and the portfolio review recommended cutting its capital budget. Then an activist investor took a stake and asked for segment returns on a consistent basis. The gap closed to a point.
Why it works
Changing the allocation basis makes the favored work cheaper on paper: shared costs come off its books, internal service rates are set low, and its overruns disappear into a central pool. Those costs have to land somewhere, so the rival carries a heavier burden it did not incur, plus administrative duties the favored unit is spared, and its margins and payback look costlier with no operational change. Discretionary control of the method is the foundation, with a technical justification for each revision, reviewers who compare periods without restating them, and changes frequent enough that none looks large alone. The trail always exists in the controllership's own change logs, for anyone who asks.
The thinking behind it
Thomas C. Schelling Schelling's Arms and Influence (1966) describes salami tactics: a line can be defeated by crossing it in slices, each too small to justify a response. A run of allocation changes, each with a technical memo and none restated, works the same way. No single change provokes an objection, and the cumulative shift decides the comparison. Restated baselines and a cumulative table turn the slices back into one visible move.
Jeffrey Pfeffer The External Control of Organizations: A Resource Dependence Perspective (1978) argues that whoever controls a critical resource gains power over those who depend on it. Units that must buy internal services and accept the allocation method depend on whoever sets the prices and the keys. External benchmarks of internal rates give those units an outside reference, which reduces the dependence and exposes rates set for political ends.
Warning signs
Allocation methodology is revised repeatedly, each change with a technical rationale, and prior-period costs are never restated on the new basis. Bases switch among per-employee, per-user, and per-revenue, whichever helps. Changes cluster just before a capital review or a comparison that reaches the board. Older units pick up compliance, audit support, and coordination duties that favored units are exempt from. Internal service rates differ across units for equivalent service, with no published method.
How to defend yourself
No single change looks large, so make the cumulative effect visible.
- Ask for restated baselines whenever the methodology changes, the same discipline accounting rules impose on external reporting.
- Trace each change to who it helps and who it hurts, and set out the effect over several cycles in one table.
- Build the counter-case in the accounting language the review uses, with your operating results on a consistent basis.
- Compare internal service rates with outside providers where you can.
- Take the analysis to the audit committee, internal audit, a new finance leader, or a numerate director.
A board member who asks to see the allocation method can undo the comparison in one meeting.
How a leader shuts it down
Require that methodology changes be restated for prior periods and reported with their effect on each unit. Give unit heads the right to see how allocations and internal rates are set, benchmark internal service rates externally, and apply the same cost treatment to old and new units. Review how often methods change as well as what changes, and keep allocation decisions away from anyone with a stake in the comparison.