Activity based Costing and the need for Business Process and Workflow mapping

As the CFO of a mid-size services organization, let us say you are tasked with analyzing three SBUs with varying products and services. You are also expected to provide a dashboard indicating the profitability of each operation and an advisory on pricing strategies. I had such a problem on my plate some years ago, and we followed a traditional costing approach of apportioning the common overheads to each SBU based on headcount. Activity Based Costing would have been a superior approach but there were key barriers that stood in the way. Have you experienced these in your corporate finance department?

1. ABC needs to be backed by BPD. Business Process Diagramming (BPD) is a method by which the business processes and workflows can be mapped. This helpsidentify all the activities that come together to make up the Business process in the business unit. When his is available, the accountant can apply ABC to the Business Unit.
2. Accountants lack BPD skills. The need for accountants to see themselves more as partners to business operations rather than score keepers or tabulators has been understood well by business owners and senior executives. However in reality, to expect such competency and perspective is quite daunting. Process analysts and Financial accountants have mostly been strange bedfellows.

Offshoring your corporate financial management and accounting processes to us at ThomasandAlex gives you the following stepping stone benefits towards ABC

1. Process and Workflow mapping : When we transition your processes offshore, the first step is to systematically capture in detail your existing business process and workflow. This is documented carefully and validated with your help.
2. Rigorous Documentation and maintenance: We have a monthly internal audit and review mechanism to ensure that each process document is updated with any changes through the month have been incorporated.
3. Process improvement initiatives: A bi-annual evaluation is planned for process efficiencies. However, a process improvement initiative need not wait for this review and our accountants are encouraged to keep an eye for such initiatives.
4. BPD and BPA specialists : While the accountants assigned to your processes are also the custodians of the business process documentation and maintenance, they are supported by Business process analysts and BPD specialists.

So as and when you want to press in the advantages of ABC to your business unit, you will have this team ready to help you achieve your objectives. All it takes them is to translate the above practices to all your relevant business processes and get started on ABC.

If you are interested to know more about our services please do not hesitate to contact us. Please also feel free to share your perspective and experience and offer your comments.

The Dream Indian Accountant

Did you know that the examinations for chartered accountants in India are among the toughest in the world? India has always been serious with the profession of accounting and has always had respected accountants, who are so much more than report generators and tax filers.

An Indian accountant is responsible and committed to the numbers that he/she is working with and is aware of how important his/her role is in the success of the organization.

If you‘ve been thinking of outsourcing your accounting work, an accountant from India could well turn out to become your dream accountant!

S/He will Help You Run a Smarter Business

Your dream accountant does more than just maintaining records. A thorough knowledge of the numbers which make or break your business, ensures that s/he doubles up not just as an accountant but also as analyst.

Your dream accountant is your economist, decision maker and financial manager rolled into one!

S/He will Help You Know What You Need to Know

You don’t have to wait for the accountant to tell you what you need to know. Even if it is not good news, a good accountant always keeps you in the loop. Be it a bad decision that you have taken or a great opportunity that you could make use of, your dream accountant has a piece of advice for you and will even show you the facts and figures you need to make an informed decision.

A Dream Accountant is Your Confidant/e

You are giving the keys of your business of your business and entrusting it to your accountant. This is where the accountant’s character, reliability, commitment and values are important.

A dream accountant is the best confidant/e of a business man or woman. S/he is not just an accountant who knows the accounting principles; but also a person with character.

S/He is Your Financial Astrologer!

A good accountant can always f oretell if your finances could go wrong. Let us put an emphasis on “could go wrong”. You definitely don’t expect him to give you data after things have actually “gone wrong”.

S/He is proactive and makes sure things don’t go wrong

If you love risks, s/he will tell you how to take a safe risk and ensure that you don’t puncture the wheels of your business. And if, by some remote chance, it does get punctured, s/he has the spare ready to keep you going! Your dream accountant takes the role of a proactive problem solver whom you need at all phases of your business.

S/he tells you that even your dog kennel is eligible for tax deduction!

Did you raise your eye brows? Yes, s/he knows these nitty gritties that can make a huge difference to your business. You might not be aware of details, but s/he will bring those to your notice. (And if you are in the US, of course you can claim tax deduction for your dog kennel).

S/He is Your Financial Life Partner

Whenever you are looking for an accountant for your business, you need to analyze if this person is likely to serve your company for years together. An accountant is the person who knows your financial status in and out and you would not like to part with such a person too soon. So, commitment is a quality which will make an accountant a credible long term asset.

Wishing you could get an accountant with all these qualities?

Finding an accountant with all these qualities is not as tough as you think! TA is committed to being the extended financial arm of its clients and every accountant we assign to you has proven capabilities.

Macroeconomics of Outsourcing

In one of his visits to India, President Bush defended outsourcing calling it the reality of the global economy. The migration and deprivation of jobs in the US is indeed a serious concern. But in the larger interest, opposing outsourcing is against the natural trend of the economy.

Globalization has set the world economy on a momentum wherein protectionist national policies cannot prevail.

It is high time we accept that outsourcing is not all that bad.

Why is Outsourcing the Way of the Economy?

Cost savings and technological expertise are the most luring aspects of outsourcing. Deloitte & Touche studies say that by 2006 the expected cost savings of the top 100 global financial-services firms will be more than $700 million.

The following are the observations of NOA/NelsonHall analysis:

• 80% of companies claim that outsourcing has increased their competitiveness
• 87% of companies say that outsourcing services have helped in improving the quality of their internal processes
• 77% of companies say they could see a significant drop in their process cost by outsourcing

From being an activity intended to get rid of routine work, outsourcing is evolving into a genuine business opportunity. IDC says that the US IT offshoring market will show a compounded annual growth rate of 14.4% and will double to $14.7 billion by 2009.

And it is not just about the US. The economy is seeing a balance between the East and the West. Moreover, there is an undeniable inter-connectedness between the nations which, as Thomas Friedman says, has shrunk the world from size small to size tiny.

What are the Major Reasons for Corporates to Favor Outsourcing?

“Substantial cost benefits” - is this not enough of a reason? There are enough and more reasons which are persuading corporates to find an offshore partner. Let’s see some of them:

How do we Address the Job Loss Issue?

You definitely cannot turn a blind eye towards job loss and other risk factors. But the positives out-weigh the negatives. While jobs are being lost on the one hand, more are being created on the other. Information Week says that offshore outsourcing will create more than 337,000 jobs by 2010.

The Vice President of NASSCOM, India says, “If IBM is able to lower its cost structure, the U.S. economy benefits as a whole”. It is all about the overall mutual benefits rather than individual gain.

Is Outsourcing Here to Stay?

Meta Group studies say that the offshore outsourcing market will continue to grow nearly 20% annually through 2008. 26% of those companies who are already using outsourcing services are expected to double their spending in the coming years.

Unless and until there are some forceful checks on outsourcing, the economy will continue to favor outsourcing. And it does not seem that insightful nations will resist outsourcing. The current trend shows a positive incline with India and China being the major players.

Managing Risks in Offshore Outsourcing

As the new waves of outsourcing trends emerge, it is also important to take a pause and analyze the risks that come with such virtual domain. An understanding of such risks and ways to mitigate them would help small and medium business enterprises to have a successful off shoring engagement.

According to Aron, assistant professor, Carey Business School, Johns Hopkins University and a research partner with the Wipro Council for Industry Research, there are three kinds of outsourcing risks that buyers should take into consideration while venturing into off shoring arrangement.

They are:

(A)Operational risk:

What?

The propensity of a process to break down and result in less than acceptable quality of work. Here the output of work has too many errors and defects. Like while engaging in FAO, in the supply chain outsourcing, the accounts receivable/accounts payment closures have too many errors.

Why?

This kind of risks mainly originates “because of the complexity of work. It takes a while for the offshore organization to understand what the buyer wants.” Another reason is “business unfamiliarity”.

How to manage?

According to Aron, who is also a Senior Fellow at the Phyllis Mack Center for Technology and Innovation at the Wharton School of Business, The University of Pennsylvania, there are four definite ways to deal with such risks.

• Knowledge transfer and Management:

  In this it is important never to take it for granted that “your suppliers will understand”. The suppliers need training to understand how your business works in your country. Added care should be taken to make them understand the terms and processes. The professor suggests creating joint knowledge repositories and deploying collaboration mechanisms such as wikis, blogs, and RSS feeds via corporate intranets

• Metrics:

  The metrics “have a huge impact on operational risk”. It is important for the buyers to make sure that the suppliers understand their standards and definition of quality. According to the professor, “through well-defined metrics the supplier can easily understand and greatly reduce operational risk”

• Transition Management:

  It is very important that extra care and time is given while transitioning the work. This is as it establishes a clear understanding of work flow during the off shoring process. Mr. Aron says that, “don’t overlook transition management because it can reduce operational errors by up to 15 percent”

• Monitoring versus Control:

  It is important to have some monitoring ways in place while not controlling too much on the work flow

(B)Strategic risk:

What?

Losses that result when the offshore supplier behaves opportunistically.

According to Mr. Aron there are three ways the suppliers do this. They are:

• Deliberate underperformance or shirking
• Poaching or the deliberate misappropriation of information
• Opportunistic renegotiation of the contract or other opportunistic behaviour

How to manage?

• Build transition service clauses into the contract:

  This clause gives an opportunity to find a new supplier in case of a sudden termination of the contract from the supplier’s side

• Use multiple suppliers:

  This can cover strategic risks as in case of breach from one supplier, the work can be diverted to another one with disrupting the business process

• Retain residual capacity:

  The professor says, “Retaining strategic residual capacity also gives buyers the comfort they can immediately take important tasks back in house if the supplier starts misbehaving.”

• Monitor and control:

  The professor says, “Continuously monitoring what’s happening will go a long way in stopping the provider from taking liberties, shirking, or deliberately underperforming. It’s a great deterrent.”

(C)Composite risk:

What?

This kind of risk arises over time from a combination of factors like erosion of competence and loss of flexibility.

EOF

The extended organizational form (EOF) “contains in great measure all three risks.” The EOF “bridges the strengths of both organizations” by letting the provider’s employees report to the buyer’s management. While there is no direct employee relationship between the buyer and the provider’s employees, this allows the buyer to divest financial control while retaining operational control.

“Surprisingly, it also provides operational benefits to the supplier,” says Mr. Aron. Over a period of time the provider’s costs fall without compromising the quality of work. Another benefit of this is to deal with a possible legislation that would discourage US- based companies from off shoring by not allowing tax deductions for their captive centres off shore.

Mr. Aron says, “In these difficult economic times, it provides a compelling rationale for offshore services. Combining the EOF with careful use of CSS criteria in contracts allows buyers to move towards transforming their offshore service providers into strategic partners.”

The understanding of the types of risks and taking appropriate measures from the beginning would help in the comfortable off shore transactions. The best way is to get it all covered in the contract…

Outsourcing’s new trends

Outsourcing is no more only about employing in cheap labor but with the advent of globalization it is all about competitiveness, employing intelligent skilled professionals and opening of new markets.

The wing of outsourcing trends has been spreading beyond India and China with more countries trying to raise the stake of competitiveness by providing specialized skilled labor force.

With the world hit by recession it is very important that small and medium size businesses also outsource their business processes to cut down on cost. With the opening of new economies with extremely liberalized policies, we have got a vast global talent pool of offshore skilled workers who can make your business function comfortably.

In an interview with Forbes, Robert Kennedy, director of the Global Initiative at the University of Michigan’s Ross School of Business, said that liberalization on the policy side is one of the key driving forces of outsourcing at the macro level. He said,”In the mid- to late-1980s, the global economy consisted of the U.S., Europe and Japan. Places like India and China were behind Central and Eastern Europe and parts of Africa. They weren’t really engaged in the global economy. That’s completely changed. Roughly 3 billion people have entered the global economy.

They want to buy things, and in order to do that, they have to sell something back to us. They can sell us manufactured goods, and they have a small advantage there. But in services, they have a huge advantage. If you move an automobile manufacturing plant from Michigan to Mexico, you may save 20%. If you move a call center offshore, once you’ve set it up on a run-rate basis, you’ll save 50% to 60%. The advantage in services is that labor costs are a bigger overall percentage.”

Digitization of business processes have made it irrelevant where your business functions are processed. Virtual employment is the buzz in the world of outsourcing. Every record involved in the business processes can be digitized and stored including business contracts. With this the small and medium businesses can get their processes digitized and cut down on huge cost of infrastructure, high salaries for native employees and the emotional burden of dealing with them on a personal level.

As Mr. Kennedy said,”In the past it was done by middle-income Americans, but now it’s done by middle- or high-income Indians. That leads into the next trend, which is the low cost and high speed of computing and telecom. Bandwidth is cheaper, and international calls are cheaper.”

Another prominent trend in outsourcing is the development of a global talent pool with skilled professionals. With more and more number of foreign educated professionals deciding to return to their native countries, the outsourced work is now handled by specialised task force in destinations like India.

“There is a lot of engineering talent in India and China, which leads to the last trend–the rise of a global business culture…Now 30% of the MBAs at U.S. schools are international, and they’re going home after they get their degrees. They used to come to school in the U.S. and stay here. These countries have liberalized since then. They’ve got their own venture capital groups and start-ups. That really closes the cultural gap.It’s much easier for someone at Citibank or AIG to do business in India if they’ve been to the same schools and they use the same software like PeopleSoft. That’s made it much easier to go abroad, as well. When I looked at the class of 1980 from developing countries, only 20% were working in their home region after five years. For the class of 1990, it was up to 38%. For the class of 2002, 56% were back in their home region. In 1980, if you were a Harvard M.B.A., there weren’t a lot of interesting jobs for you in India or Brazil. The place to go was here or Europe. Now if you’re in India with an M.B.A., there are numerous interesting jobs for you, and a lot of them pay as much as here–sometimes even more,” said Mr. Kennedy during the interview.

Mr. Kennedy, the author of The Services Shift, a new book on off-shoring, concludes: “If you look out over the next five years, 90% will be open to the global economy. There are always some backsliders, like Venezuela and Zimbabwe, and North Korea has never moved forward. The rest all have Internet connections. They’re investing in technical and higher education. That means the network of service providers around the world will be denser, and there will be more opportunities.”

These off shoring trends are not only for the corporate giants but targeted equally towards the small and medium businesses too. It is important to understand the upcoming trends of the world economy and its link to the more specialized outsourcing processes for the profitable outcome of your business functions. These trends are here to stay so buckle up to enter the world of virtual employee and employer…