You are on page 1of 39

Best Practices in Cost Reduction

AICPA MAPS Conference


New Orleans
May 2004
Who conducted the Survey

!@
zErnst & Young is a global leader in z Leading professional
professional services. organization devoted
z It employs 106,000 people in more exclusively to financial
than 140 countries around the management.
globe. z The IMA is a non-profit
organization with over 67,000
members worldwide.

!@#
Overview

z Key Findings from the IMA-E&Y Management


Accounting Survey
z Selected Best Practice Case Studies
z How Cost Information Forms the Basis of Decision Support Tools
z Conclusion and Discussion

!@#
The 21st Century Finance Functionary Must
Provide Value

z Value Added Activities


– Strategic Consulting
– Business Partnering
– M&A
– Risk Exposure Management

z Value-Added Tools
– Leveraging New Technology/Software
– Economic Value-Added (EVA)
– Balanced Scorecard
– Activity Based Management (ABM)
– Risk Estimated Value (REV)

!@#
The Evolution in a Snapshot

From To
z Scorekeeper z Score Maker

z Keeping Track z Making Things


of Performance Happen
(Adding Value)

!@#
Objectives of the Survey
z Has the role of management accountants changed?

z Do existing tools fulfill the changing needs?

z If not, which tools and methods are needed or are being


adopted? Is there a perceived need for new
technologies?

z Which factors constrain or accelerate adoption of new


tools?

!@#
Cross-Section of Respondents
(By industry)
Industry Sectors Represented:
Manufacturing (Various) 39.8 %
Financial & Consulting 15.5 %
Government / NonProfit 7.8 %
Consumer Package Goods 5.8 %
Retail / Wholesale 5.1 %
Telecomm / Media Services 4.9 %
Pharma / Health Services 4.1 %
Tourism, Legal, Education 4.1 %
Mines, Energy and Utilities 3.6 %
Construction 3.1 %
Software / InfoTech. 2.7 %
Transportation / Logistics 2.2 %
Agriculture / Environment 1.3 %

!@#
Cross-Section of Respondents
(Size of Company, Role of Respondent)

31 % decision Makers 36% Large Corporates


22.2%
13%

44.0%
26% 12%
13.3%

30% 20.6%

CEO, CFO, CIO, or COO Pres, VP or Dirs of Finance Less than $100 MM $100MM - $1 BN
Controllers Managers (Acct / Finance) $1 BN - $5 BN Above $5 BN
Other Position

!@#
Key Finding #1
z Cost Management plays a Key Role in Strategic Decision-Making

60%

50%
81%
Cost management

% o f R e sp o n d e n t s
enables strategic 40%
decisions
30%

20%

10%

0%
1: Not Impt 2: Not so 3: Some- 4: Impt 5: Very Impt
Impt what Impt
Q: On a 5-point scale, how important is the role of cost
management in your organization’s overall strategic goals?

!@#
Key Findings #2
z Generating Accurate Cost Information is the Top Priority
Cost information is the #1 priority, followed by cost reduction for decision
makers and decision enablers

Decision Makers Decision Enablers


1. Generating Cost Information 1. Generating Cost Information
2. Cost Reduction 2. Cost Reduction

3. Contributing to Core Strategy 3. Improving Processes


4. Improving Processes 4. Setting Standards
5. Setting Standards 5. Contributing to Core Strategy

Q: On a 5-point scale, please rank the current priorities facing management


accounting in your organization

!@#
Key Findings #2 (continued)
Cost information is the #1 priority, followed by cost reduction for decision
makers and decision enablers
Generating cost Information

Cost reduction

Improving Processes

Contributing to Core Strategy

Setting Standards

Reducing Risk

Automating Processes

0 1 2 3 4 5
Not a Priority Top Priority
Q: On a 5-point scale, please rank the current priorities facing management Decision Makers
accounting in your organization Decision Enablers

!@#
Key Findings #3
z Respondents Believe Costs were Significantly Distorted

Cost Information is Important.


However,
– 98% agree that costs were distorted
– 38% significantly distorted

Q: In your experience, what factors are distorting the


computation of true costing in your organization?

!@#
Key Findings #3
z Overhead Allocations is Biggest Factor Behind Cost Distortion
Primary Factor in Cost Distortion
No Distortion
The Primary factors of Cost 2%

distortion are: Greater Customer


Overhead Allocations
Diversity
z Overhead Allocations 13% 30%

z Shared Services Greater Product


Diversity
z Greater Product Diversity 19%

Increasing IT Shared Services


Expenditure 20%
16%

!@#
Key Findings #3: CPG Sector
z Overhead Allocations is Biggest Factor Behind Cost Distortion

Greater Customer
The Primary factors of Cost Diversity
distortion are: 13%
Overhead
– Overhead Allocations Allocations
32%
– Shared Services
– Greater Product Diversity Greater Product
Diversity
33%
Shared Services
Increasing IT 12%
Expenditure
10%

!@#
Key Findings #4
z Medium to Low Priority on New Management Accounting Tools
100
90 Low to
80 Medium
Priority
70
% of Respondents

76 77 77
60 84 84
94
50
40
30
20 High
24 23 23 Priority
10 17 16
6
0
ERP Implementation New Reporting new Budgetary Financial New Analytic Outsourcing Back
Software Procedures Consolidation Software Office Functions

Q: What are some of the top initiatives your


department is undertaking in management accounting?

!@#
Key Findings #5
z Despite Introduction of New Tools, Traditional Tools still Used
Frequently
Spreadsheets and traditional costing remain the preferred tools
Planning and Decision Product Costing Performance
Budgeting Support • Traditional costing Evaluation
• Operational • Quantitative • Overhead • Benchmarking
Budgeting techniques allocation • Balanced scorecard
• ABM/Std. Budgeting • Break-even analysis • Multidimensional • Value-based
• Capital Budgeting • Internal transfer costing management
prices • Target costing
• Supply chain costing • Life cycle costing
• Value chain analysis • Theory of constraint

!@#
Key Findings #5
z Strong Emphasis on Home-Grown Systems
Home-grown systems are implemented 72% of the time

Installed as part of an All Companies Large Companies


Installed as part of an ERP
ERP Package Package
14% 17%

A "Best of Breed"
technology A "Best of Breed"
14% technology
17%

Developed in house using Developed in house using


home-grown systems
home-grown systems
66%
72%

Q: How were these solutions or tools implemented within your organization?

!@#
Key Findings #5: CPG Sector
z Strong Emphasis on Home-Grown Systems
Home-grown systems are implemented 63% (Large Corp) and
77% (Small Corp) of the time
Large CPG Companies Small CPG Companies
Installed as A "Best of
A "Best of Installed as
part of an ERP Breed"
Breed" part of an ERP
technology
Package technology Package
5%
17% 20% 18%

Developed in Developed in
house using house using
home-grown home-grown
systems systems
63% 77%

Q: How were these solutions or tools implemented within your organization?

!@#
Key Findings #6
z Tangible Value Propositions Seen As Critical For Tool Adoption

Total
Clear,quantifiable
ROI cited as Loss of Cost Savings 4.15
important Loss of Better Cost Control 4.13
necessity to Loss of Improved Efficiency 3.95
persuade tool
Loss of Greater Accountability 3.89
adoption
Loss of Potential Revenue 3.54
3.17

0.00 1.00 2.00 3.00 4.00 5.00


Important
Q: On a 5-point scale, which perceived losses (if any) resulted would motivate implementing best practice
management accounting tools?

!@#
Survey Revealed Critical Issues Facing
Management Accounting

z Management Accountants seen as Strategic Partners

z Current cost solutions not providing desired information

z Organizations do not perceive pressing need to adopt new solutions

z Adoption decisions are constrained by:


– Economic realities
– internal resources (technology/expertise)
– Difficulties with changing familiar practices
– Lack of clear, quantifiable value proposition for new solution

!@#
Bridging the Chasm

Can we bridge the chasm between this need for


better information and real constraints to adopt
appropriate solutions?

!@#
Overview
z Key Findings from the IMA-E&Y Management Accounting Survey

z Selected Best Practice Case Studies


z How Cost Information Forms the Basis of Decision Support Tools
z Conclusion and Discussion

!@#
Best Practice Framework
z Superior, successful & systematic processes – that have been
demonstrated competitive advantage
z Must be replicable, transferable, and adaptable across industries.
z Require continuous improvement and are, therefore, constantly
changing.

!@#
Key Steps in Interview Process
z Sample questions from interview :

– Challenges facing cost management


– Company’s vision around cost management
– How do you rate your organization to your
peers/competitors
– Do you currently use or plan to any formal tools
– What kind of tool(s) How integrated?

Interview process was thorough with


nearly 30 questions in multiple categories

!@#
Best Practice Framework
z Managing By Information

z Finance Function is Catalyst for Change - A True Business


Partner

z Not Constrained by Tool & Test Boundaries of Costing System

z Experts at Change Adaptation

z Striving for Continuous Improvement

!@#
Best Practice – Managing by Information
z Supporting clear strategic vision
z Objective not precision but incenting optimal behavior
z Not overload but information that is actionable
z Clear line of sight : Bridge any significant interruption
z Understand/calibrate/adjust to any major changes
z Manage through Performance Metrics

Example: Olympic Health Management

!@#
Finance Catalyst for Change/Business
Partner
z Finance from support function to full business partnership
z Finance Group true catalyst for change
z Viewing entire organizational performance, not just financial
performance
z Developing new measures of competitive effectiveness
z Articulating a customer-centered focus to sustain competitive
advantage

Example: BAX Global

!@#
Best Practice – Testing Boundaries of Tools
z Deep understanding of user needs
z Deep understanding of tools
z Not let tool drive/dictate/constrain the business need
z Doing more with less
z One particular software/tool/point solution not to be seen as a
panacea
z Basic tools are imbued with sophisticated logic/Innovative
solutions

Testing Boundaries of Tool : Amtec Brakes

!@#
Best Practice – Leading Change
z Different Types –Controlling/managing the process
z Clear communication around change – define end state vision,
visual storyboards, communicating intuition etc
z Training- content , delivery, audience
z Putting new output in context – connecting the dots
z Reporting (simplified , summarized, integrated into existing
reporting)
z Working in the cultural constraint
z Business case for change

Example : Fortune 1000 Insurance company

!@#
Overview
z Key Findings from the IMA-E&Y Management Accounting Survey
z Selected Best Practice Case Studies

z How Cost Information Forms the Basis of


Decision Support Tools
z Conclusion and Discussion

!@#
Models Are Designed to Support the Strategic or Tactical
Decisions That the Cost System is Meant to Support

Immediate Longer Term

• Costing Analysis • Accurate budgeting


Operational /

• Costing Allocations • Product life cycle


Tactical

(for the P&L) costing

• Make vs. Buy • Target costing


decisions

• Profitability Analysis• Business Process


Analysis
• Product/channel
Strategic

rationalization • Benchmarking
• Costing simulation • Competitive
analysis
• Customer migration

(Illustrative Only)

!@#
A Cost System Supports Decision Support
Tools
Level 5
Decision
Decision Support
Support Predictive
Predictive Planning
Planning (DECISION
Trend
Trend Analysis
Analysis
Models
Models Models
Models TOOLS)

Level 4
Customized
Customized Reports
Reports Summary
Summary Report
Report Detailed
Detailed Reports
Reports (STANDARD
OUTPUT)
Material Labor
Product C.O. P.O. Product M.O. BOM Std Act Var Std Act Var
Type
Level 3
(DBASE)

Customer
Customer Order
Order Procurement
Procurement Level 2
MRP
MRP System
System GL
GL System
System
System
System System
System (PIPES)

Customer
Customer Information
Information Product
Product Spec
Spec Bill
Bill Of
Of Material
Material Level 1
Labor
Labor Routings
Routings
C.O.,
C.O., P.O., Product
P.O., Product Structure
Structure (from
(from KBC)
KBC) (RULES)

!@#
Fully Absorbed, Multi-Dimensional Costing

z INDUSTRY
– Financial Services
z ISSUES
– Company could not analyze cost and profitability by product, customer or channel.
– Company wanted to re-vamp internal performance measures to more accurately reflect business
realities.
– Company wanted to additional analytical capabilities to build predictive models.
– Company wanted the work finished in 16 weeks.
z SOLUTION
– Developed an automated pricing/costing model that employed a “best of breed” software application that
was customized to the company’s needs.
– Incorporated tools that allow the company to fully absorb costs (both direct and indirect) into pricing
decisions with both internal and external clients.
– Built tools to track profitability by transaction type, by customer, by exchange and by other factors.
z OUTCOMES
– In the first month the model was implemented, the company recovered $4 million in fees from external
clients.
– The company generates roughly an additional $1 million a month from re-pricing its contracts/services
with internal clients.

!@#
Standard Costing – An 80-20 Solution

z INDUSTRY
– Manufacturing
z ISSUES
– Company wanted a standard costing model to help analyze cost and profitability by product, by customer
and by geographic region.
– Company wanted an “80-20” solution given time and financial constraints.
– Company was struggling with containing costs related to perpetual inventory and WIP.
– Company wanted to adopt performance measures to track productivity and address cost variances.
– Rank-and-file employees were considering a union vote in response to cuts in health care benefits and
other workplace-related issues.
z SOLUTION
– Designed a phased solution around the company’s existing IT infrastructure to track and measure costs
and profitability.
– Developed and led a “change-management” initiative with the company’s management and rank-and-file
to build understanding and support.
z OUTCOMES
– Version 1.0 of model went live on January 1, 2004.
– Version 2.0 will include additional user functionality, reporting and analytical tools.

!@#
Predictive Planning Model

z INDUSTRY
– Telecommunications
z ISSUES
– Major investment made during an 18 month period to build and implement a cost system for shared
services and other corporate “over-head” allocations across business units.
z SOLUTION
– Designed a predictive planning tool that integrated systems, information flows and decision support
models
z OUTCOMES
– Provided a predictive planning tool that would take into account drivers of cost and profitability and allow
for “what-if” scenario planning
– Strategic decisions were set based on model output
– Historic analysis capabilities formed the foundation of the analysis
– Model flexibility was of paramount importance
– This model has been devised to be flexible enough to work in conjunction with available cost models,
software tools and IT platforms
– Time bound, high priority, high investment process
– This model was used by client to assign and re-allocate hundreds of millions of investment funds

!@#
Make vs. Buy Model

z INDUSTRY
– Manufacturing
z ISSUES
– The company wanted a model to measure cost savings on “make vs. buy” decisions for
potential customers that were considering the outsourcing of specific manufacturing
activities to the company.
z SOLUTION
– Built a model using MS Access and Visual Basic to calculate the cost savings around
outsourcing opportunities.
z OUTCOMES
– Tied internal performance measures to the “make vs. buy” analysis from the model.
– Completed the project in six weeks.

!@#
Overview

z Key Findings from the IMA-E&Y Management Accounting Survey


z Selected Best Practice Case Studies
z How Cost Information Forms the Basis of Decision Support Tools

z Conclusion and Discussion

!@#
Concluding Remarks
z Even basic tools can be imbued with sophisticated
logic/Innovative solutions
z As needs of profession have changed tools should evolve to
better fit needs
z Need a compelling business case (quantifiable and tangible
objective)
z Particular software/tool/point solution not to be seen as a panacea
z Without adequate cost analysis, many decision support tools are
not worth the time and effort expended in building them

!@#
Contact Information
z Deba Ghosh, Ph.D.
LaSalle Consulting Associates, LLC
Ph: 312 399 8341
E-mail: deba.ghosh@lasalleconsulting.com

z Mark Madrian
Ernst & Young LLP
Ph: 801 350 3320
E-mail: mark.madrian@ey.com

!@#

You might also like