Cost sharing is a process wherein two or more organizations work together to secure savings in one or more areas of business operations. Such partnerships may also be pursued to realize other business advantages—increased marketplace exposure, access to technology, etc.—but cost savings is usually a central component of these arrangements. Cost-sharing partnerships can be implemented in any number of operating areas, from marketing to transportation to research and development. It is a favorite tool of many small business enterprises that have limited financial resources.
Relatively few cost-sharing arrangements have been implemented for the actual manufacture of goods or execution of services. Instead, the majority of cost-sharing plans are in the area of marketing and advertising. "Today's direct marketing partnerships achieve impressive cost-benefit results," stated Myron Gould in Direct Marketing. He cited three primary advantages associated with cost-sharing partnerships in this operational area:
Gould cited the latter factor as particularly important for businesses seeking to engage in effective cost-sharing. "Computers have transformed [the marketing] industry and given birth to partnership opportunities. Today's computer-driven partnerships empower us to target qualified recipients and segment lists as never before. Many of our alternative direct marketing programs have traditionally taken a broadcast approach—reaching broadly defined segments. Now, partnerships offer qualified segmentation, targeting narrower, clearly defined lifestyle and demographic segments. Technical advances in imprinting and inserting also offer enhanced ability to customize the package and the offer."
"There are no rules, standards, or boundaries that should restrict your vision when seeking a partner. Rather, shared goals should guide your 'vision quest,' " wrote Gould. "Partnership can be formed in the profit and nonprofit sectors, in the same or different industries, within different divisions of the same company, and in similar market segments/demographics in non-competitive industries."
Many small business owners seek out allies for the exclusive purpose of registering savings in their operating costs. This is a perfectly legitimate course of action, but entrepreneurs should make certain that the final agreement is a fair one that explicitly delineates the terms of the agreement. Indeed, written partnership agreements that define each partner's spending obligations should be insisted on. In addition to discussing cost-sharing matters, these documents can also provide details on agreed-upon procedures and work flow, parameters for responsibilities, and mechanisms to measure results both during and after the project. As Gould observed, carefully crafted proposals "will help you mitigate concerns about loss of control and structuring the partnership for mutual benefit. When a partnership fulfills the consumers' needs with a new, exciting, or value-added offer or program, risks are minimized for all involved."
In addition to ensuring that cost-sharing agreements are sufficiently documented, small business owners should weigh possible other benefits associated with partner alternatives when making their decision. Gould noted, for example, that a larger company might be able to provide a small business with valuable access to technology and training, while a smaller business might be blessed with a much-coveted contemporary market image. Ideally, a small business owner will be able to find a partner who not only can help him or her secure savings in one or more aspects of business operations, but also provide additional benefits.
The Internal Revenue Service (IRS) maintains certain rules concerning how cost-sharing agreements within business groups should allocate costs. According to the IRS, a cost-sharing arrangement is defined as an agreement under which costs to develop intangibles are shared in proportion to reasonably anticipated benefits that each entity will reap. According to The Tax Advisor's Adrian J.W. Dicker, such arrangements must include two or more participants; provide a method to calculate each controlled participant's share of intangible development costs, based on factors that can reasonably be expected to reflect each participant's share of anticipated benefits; provide for adjustments to the controlled participant's shares of intangible development costs to account for changes in economic conditions and the business operations and practices of the participants; and be recorded in an up-to-date document that provides detailed information on specifics of the arrangement.
Dicker noted that the IRS also established a "safe harbor" for actual benefits that diverge from estimates, but only if the difference is less than 20 percent: "In allocating intangible development costs under a cost-sharing agreement, it is necessary to project the participant's share of anticipated benefits. That share is then compared to the participant's allocated share of the total costs. If these shares are not equal, the Service has the power to make adjustments. Benefits would include not only additional income generated but also costs saved by the use of the intangible. Timing of costs and benefits can be adjusted using discounting."
Finally, Dicker pointed out that businesses that take part in a cost-sharing agreement are required to make a buy-in payment if the partnership calls for any transfer of intangible property. These buy-in payments can take the form of lump sums, installment payments, or royalty payments. "Similarly, if a participants' shares change or a participant withdraws," wrote Dicker, "there are deemed disposals and acquisitions requiring buy-in or buy-out payments."
Clift, Vicki. "Small Firms Benefit from a Promotional Partner." Marketing News. September 23, 1996.
Dicker, Adrian J.W. "Final Cost-Sharing Regulations." Tax Advisor. May 1996.
Fitzgerald, Kevin R. "Proprietary Information—Should Suppliers Share It?" Purchasing. October 3, 1996.
Gould, Myron. "Partnering for Profit—How to Achieve Impressive Cost-Benefit Results." Direct Marketing. February 1997.
Kaplan, Todd R., and David Wettstein. "Cost Sharing: Efficiency and Implementation." Journal of Mathematical Economics. December 1999.
Solomon, Stephen D. "When You've Exhausted Cost-Cutting Measures: Sharing the Costs." Inc. December 1989.