TSA Renegotiation
Paying allocation dressed up as cost? Renegotiate the terms.
Fixed-fee proposal in 48 hours. Senior team on day one. The first conversation is always free.
The difference between TSA cost allocation and actual cost is where much of the silent overcharge in a transition agreement lives. Actual cost is what it genuinely costs to provide a service to the carved out business. Allocated cost is a share of parent overhead assigned by formula, and the two can diverge sharply. Knowing which one you are paying is central to disciplined TSA cost reduction.
Actual cost is the incremental cost the seller incurs to provide a specific service to the carved out business. It is what the seller would no longer spend if that service stopped. Allocated cost is something else entirely: a slice of broader parent overhead, assigned to the business by a formula such as headcount, revenue, or transaction share.
The two answer different questions. Actual cost answers what this service costs to deliver. Allocation answers what share of the parent cost base this business would carry if it were still an internal division. Only the first is a fair basis for a TSA charge, because the buyer is paying for a service, not for a share of the seller enterprise.
The gap between them is rarely small. Allocation can sweep in management layers, idle capacity, and corporate functions the carved out business never touches. When a TSA charge is built on allocation, the buyer is often paying for a great deal more than the service it actually receives.
Sellers reach for allocation because it is how large enterprises already spread shared cost internally. The finance team has allocation models for everything, so applying them to a TSA is the path of least resistance. The seller is not necessarily acting in bad faith, but the default favors the seller and costs the buyer.
Allocation is also hard to challenge, which is part of its appeal. The charge arrives as a single number with a formula behind it, and the formula sits inside the seller systems. A buyer that does not ask for the build up sees only the result and has no obvious foothold to question it. The opacity does real work for the seller.
There is a further trap in how allocation interacts with mark-up. A seller can offer a fair sounding mark-up while quietly basing it on an allocated cost. The percentage looks reasonable, the base does not, and the buyer who only argues the mark-up never reaches the part of the charge where the real money sits.
The clearest example of the gap is idle capacity. A seller data center or shared service team has a fixed cost, and allocation spreads that cost across all users including the carved out business. But the seller would carry most of that cost regardless, so charging the buyer a full share of it goes well beyond the incremental cost of serving the business.
Corporate overhead is another. Allocation often loads a share of the parent finance, HR, legal, and management functions onto each service charge. The carved out business uses little or none of that overhead during the TSA, yet an allocated charge bundles it in as if the business were funding the whole corporate structure.
Fully loaded rates complete the pattern. A per person or per hour charge built on allocation can include benefits, facilities, and management the service does not require. The activity the buyer receives is the same as a lean rate would buy, but the allocated rate prices in the entire cost structure standing behind it.
The principle a buyer should hold is simple: a TSA charge should reflect the incremental cost to provide the service plus a modest contribution, not a share of the parent enterprise. The buyer is paying to keep a service running through transition, not to fund the seller overhead structure for the duration.
This principle is also the fairest one for both sides. The seller recovers the real cost of providing the service and a reasonable contribution. The buyer pays for what it actually receives. A charge built this way survives scrutiny, while an allocated charge invites the dispute that arrives the moment the buyer looks closely.
Holding this line before signing sets the basis for the whole agreement. If the buyer establishes incremental cost as the standard at the outset, every later charge can be tested against it. If the buyer accepts allocation up front, it has conceded the most important point and will argue percentages on an inflated base for the life of the TSA.
The practical move is to demand the build up behind every material charge and require it to be expressed as the incremental cost to provide the service. A seller that can only produce an allocation formula has revealed that the charge is not grounded in the cost of the service, which is itself a strong negotiating point.
Where allocation genuinely cannot be avoided, challenge the driver and the rate rather than accepting the headline. Question whether the allocation base reflects the service the buyer uses, strip out overhead and idle capacity, and test the rate against what a lean provision would cost. The aim is to push the allocated charge toward the incremental truth.
This is the same discipline that runs through every part of cost reduction. See the real number, insist on the right basis, and challenge the parts that do not hold. A buyer who refuses to confuse allocation with actual cost removes one of the largest and best hidden overcharges a TSA can carry.
Actual cost is what it genuinely costs the seller to provide a service to the carved out business. Allocated cost is a share of broader parent overhead assigned to the business by a formula. The two can diverge sharply, because allocation can charge the buyer for capacity and overhead it does not consume.
Allocation is how large enterprises normally spread shared costs internally, so sellers default to it. It is also convenient and hard to challenge, because the formula sits behind the charge. For the seller it is a familiar and defensible looking basis. For the buyer it often means paying for parent overhead it will never use.
Because a fair mark-up on an allocated base is still an overcharge. The TSA principle is that the buyer pays the actual cost to provide a service plus a modest contribution. An allocated charge can build in overhead, idle capacity, and management layers that have nothing to do with the service the buyer receives.
Ask for the build up behind each charge and require it to be expressed as the incremental cost to provide the service, not a share of parent overhead. Where allocation is unavoidable, challenge the driver and the rate. The goal is a charge that reflects what the service actually costs to deliver to this business.
Why a fair mark-up on an allocated base is still an overcharge.
Read the article →Hold charge, true cost, and mark-up as three separate numbers.
Read the article →Catch allocation creep against the plan, every cycle.
Read the article →The 90-day governance, IT, finance, HR and procurement separation plan we run on live carve-outs. Get the playbook plus the bi-weekly Day One Letter — short, signal-heavy, buyer-side.
No spam. Unsubscribe in one click. · Read the overview first →
Fixed-fee proposal in 48 hours. Senior team on day one. The first conversation is always free.
Seven buyer-side moves to exit a Transition Services Agreement on time and below budget. The mark-up, the extension-fee curve, exit sequencing, and the 11-month calendar.
One tactic, one benchmark, or one pattern from a recent buyer-side engagement. Short. Signal heavy. Free.
Subscribe to The Day One Letter →