APPLICABILITY OF ACTIVITY-BASED COSTING AND RELATED MANAGEMENT TOOLS:

THE CASE OF IPKO TELECOMMUNICATIONS LLC

Mentor: Prof. Metka Tekavcic Ph.D.

Candidate: Saso Damjanovski

Motives & Objectives

Motives: • To investigate common reasons driving the low degree

utilization of ABC/M systems in the region• The study may serve as a basis for further in-depth analysis

and feasibility study in case of initiation of such project in IPKO

Objectives: • To provide insights on applicability, benefits and threats

related to implementation of ABC/M in IPKO• To address the issues related to management concerns on

ABC/M implementation and to assess the possibility for adoption of simplified ABC or TDABC models in IPKO

Topics in Scope of the Study

• Costing and Activity-Based methodologies

• ABC/M implementation practices

• Software support on ABC/M systems

• IPKO: Company profile and business practices

• Analysis on applicability of ABC/M in telecommunications

and Ipko

• Management implications

Research Questions

• How could the telecommunication service providers benefit from implementing ABC/ABM?

• Which are the technical, financial and organizational preconditions and concerns related to successful implementation of ABC/ABM?

• What are the limitations and risks related to implementation of ABC/M system?

• What adjustments in company’s organization need to be done in order to support successful implementation of ABC/M?

• How can SAP CO-OM-ABC module support implementation and maintenance of the ABC/M?

• What long-term effects on costs’ reduction, profitability, and processes’ optimization could be expected from implementation of ABC/ABM?

Costing methods and ABC - Overview

• Activity-Based Costing concept• two step indirect costs’ assignment• the real consumers of costs are activities, not the cost

centers

• Development of ABC• increased overhead costs ratio• high level of diversification of product offers

• Activity Analysis and Activity-Based Management

• Activity-Based Budgeting

ABC/M Cross

Source: G. Cokins, Activity-Based Cost Management: An Executive’s Guide, 2001

ABC/M implementation practicesGeneral• Higher diffusion rates in advanced economies, low utilization

in developing countries• Main drivers of ABC/M distribution among business entities:

• company size• ratio of overheads• diversification of product offers• complexity of internal processes

• Increasing trend of implementation in service industries• Controversial experiences reported

Telecommunication Industry• increasing complexity of product/customer mixes drives the

necessity of sophisticated costing methodologies• increased importance of the pricing decisions• regulatory requirements

Success and failure factors• Technical factors

• identification of the key activity and cost drivers• IT systems• data collection and processing• system maintenance…

• Organizational and behavioral factors• corporate culture• management commitment• involvement of non-accounting staff• adequate training programs• sufficient resources• clearly communicated objectives and benefits…

• Putting too much emphasis on the technical factors and ignoring the organizational aspects will most probably lead to project failure

ABC Paradox;

• ABC Paradox• Issues following ABC/M adoption (complexity, high costs,

uncertain benefits)• Main reasons for difficulties in implementation and

maintenance of ABC/M systems (Kaplan & Anderson, 2007):• the interviewing and surveying process is time-consuming and costly• the data for the ABC model are subjective and difficult to validate• the data are expensive to store, process, and report• most ABC models are local and do not provide an integrated view of the

enterprise-wide profitability opportunities• the ABC model could not be easily updated to accommodate changing

circumstances• the model is theoretically incorrect when it ignores the potential of

unused capacity

Time-Driven ABC

• Time-Driven Activity-Based Costing concept calculates the costs of supplying resource capacity and using the capacity cost rates assigns departmental costs to cost objects by estimating the demand for resource capacity (time) that each cost object requires

• Advantage: avoids the costly, time-consuming and subjective activity-surveying task of conventional ABC

• Weakness: Simplified activity mapping process reduces the opportunities for activity analysis and activity-based management

SW Support and SAP

• Leading systems: SAP, Oracle, Acorn Systems, QPR CostControl, SAS, MyABCM, FlexABM…

• Option 1: Standalone ABC software: • more expensive• integration with accounting SW required• difficulties related to maintenance of master data and real-time data

updates

• Option 2: Embedded ABC functionalities in existing SAP ERP SW (CO-OM-ABC module, PCM):

• inbuilt ABC engine• data integration; one source of information• real-time updates

IPKO: Company profile and data

• Location: Prishtina, Kosovo

• Majority owner: Telekom Slovenije

• Industry: Telecommunications

• Services: mobile & fix telephony, internet, TV

• Direct Sales Network: 17 PoS

• Employees: ~ 480 (YE2011)

• Customer base: ~375.000 (YE2011)

• Revenues: ~70 mEUR (Y2011)

• EBITDA margin: 39% (Y2011)

• Ratio of overheads in total costs: ~70%

IPKO: Business perspective

High degree of diversification in all business areas:

• Converged services offers• mobile, fix telephony, internet, TV, bundled offers

• Multiple customer segments• prepaid/postpaid, residential business, wholesales…

• Large number of tariff models• Various technology employed

• GSM, cable• Direct and Indirect sales channels• Revenue sharing arrangements• Complicated internal processes

IPKO: SAP system

SAP R/3 system implemented in 2008, including:

• Financial Accounting• GL, AP, AR, fixed assets…

• Material Management• purchasing, inventory management…

• Controlling• cost center / profit center accounting, internal orders,

overheads distribution…

• Treasury (2010)• payments, AP, liquidity management…

• Investment Management and Project System (2010)

Areas of potential benefits / threats

Potential benefits in the areas of• Service / Customer profitability analysis• Pricing decisions• Process optimization• Budgeting process• Cost controlling• Decision-making process

Potential threats• High costs for implementation and maintenance• Extensive IT and human resources required• Difficult to maintain, due to complexity• Uncertain benefits versus the resources engaged

Management implications

ABC/M can support the management in:

• Price adjustments on the basis of higher quality of profitability analysis

• Reducing costs by elimination of non-value adding activities• Reduction or modification of services offered to low-profit

customers• Design of new product / services• Obtaining different perspective on operating expenses on

the basis ABC specific costs reporting structure• Higher quality what-if simulations and scenarios based on

realistic cost drivers• Process re-engineering on the basis of activity analysis

results, etc.

Conclusions

• Diversification of service offers, high ratio of overheads and regulatory requirements create needs for utilization of more sophisticated costing methods by the telecommunication service providers

• ABC/M is difficult to be implemented in smaller size companies, due to extensive demands on financial, IT and human resources

• Organizational and behavioral aspects have to be seriously considered in case of implementation

• Decision on the scope and complexity of the ABC/M model is critical for the outcomes of the project

Conclusions (cont’d)

• In order to protect and improve its market position and profitability levels, IPKO will presumably need to adopt some more advanced costing methodology such as ABC

• Important potential benefits for IPKO can be achieved in the areas of profitability analysis, pricing, budgeting, activity analysis and decision-making processes

• Already implemented SAP system, with additional upgrades is an important advantage in case of ABC implementation

• Time-Driven ABC model is assumed to better fit IPKO’s organization because of its simplicity and lower costs of implementation

THANK YOU

FOR YOUR ATTENTION