Service Business Costing

Transcription

1 Service Business Costing

2 Markus B. Baum Service Business Costing Cost Accounting Approach for the Service Industry Foreword by Dr. Kerry Sullivan RESEARCH

3 Markus B. Baum Mainz, Germany MBA Dissertation, University of Surrey, England, 2012 ISBN DOI / ISBN (ebook) Library of Congress Control Number: The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at Springer Gabler Springer Fachmedien Wiesbaden 2013 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or scholarly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this publication or parts thereof is permitted only under the provisions of the Copyright Law of the Publisher s location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty, express or implied, with respect to the material contained herein. Printed on acid-free paper Springer Gabler is a brand of Springer DE. Springer DE is part of Springer Science+Business Media.

4 Foreword The costs associated with service provision are often problematic especially in areas where there is significant pressure on pricing. With a growing emphasis on outcomes pricing, the need to understand and control the costs that arise is paramount. Service companies often have high overheads and traditional costing methodologies are not providing adequate solutions in an outcomes based environment. In using a value chain analysis approach this thesis offers an insight into a more efficient method of dealing with the real costs of a project. The core of the content after a brief examination of the traditional costing models relates to the use of value chain analysis in providing a systemic evaluation for the allocation of costs as applied to management consultancy. The result is a proposed hybrid model-costing model for a service business which can enhance practice and provides a potential methodology that is adaptable across other service providers. A clearer understanding of costs is essential today and the process suggested offers a thoughtful route through this important aspect of a service business. Dr Kerry Sullivan Surrey University V

5 Acknowledgements Though only my name appears on the cover of this paper, many people have contributed to its finalisation. I owe my deepest gratitude to everyone who made this work possible. Thank you so much! First, I would like to express my deepest gratitude to my supervisor (MBA- Programme) Dr Kerry Sullivan of the University of Surrey, Guildford, United Kingdom. Kerry gave me the most freedom possible to develop this study and book with my own ideas and styles. With his thorough experience in corporate finance and in academic research, his guidance and support contributed significantly to this book. I am also grateful to the board members and my Corporate Finance team members of the firm J&M Management Consulting AG (Mannheim, Germany) for funding and supporting my study and research project. Most importantly, this work would not have been possible without my wife Sandra who gave me so much encouragement, love and patience, especially when our son and daughter were born. I also owe special thanks to my parents, parents-inlaw, my brother and his wife for their support and help. Special acknowledgement also goes to my new friends Marco Hackstein, Marcel Mehling and Jörg Dickerboom, whom I have come to know through the MBA study at the University of Surrey and from whom I have learned so much. Many thanks for making my studies so valuable and for the exciting and enjoyable experience. This book is my recently deceased stepfather Fabri dedicated. Thank you that you were my biggest fan. Markus B. Baum VII

6 Brief Contents Contents List of Tables List of Figures List of Abbreviations xi xv xvii xix 1 Introduction Theoretical background and literature review Methodology Action research: value chain analysis of the firm Design and development of a costing approach Conclusion and recommendation References APPENDIX A APPENDIX B IX

7 Contents Contents List of Tables List of Figures List of Abbreviations xi xv xvii xix 1 Introduction Target group of the study: management and IT-Consulting firms Definition and purposes of management consulting History of consulting Consulting market Purpose statement Research objectives Design of the study Theoretical background and literature review The value chain and service value chain Value chain analysis Service profit chain analysis Strength of the models Weaknesses of the models Opportunities and threats for consulting firms Introduction to cost accounting Absorption costing model Strength of the model Weaknesses of the model Opportunities for consulting firms Threats for consulting firms Variable costing model Strength of the model Weaknesses of the model Opportunities for consulting firms XI

8 2.6.4 Threats for consulting firms Activity based costing model Strength of the model Weaknesses of the model Opportunities for consulting firms Threats for consulting firms Job order costing model Strength of the model Weaknesses of the model Opportunities and threats for consulting firms Process costing model Target costing model Methodology Research strategy Research design Data collection and analysis Ethics Action research: value chain analysis of the firm Course of actions Definition and development phases Introduction / overview of the corporate structure (functions) Hypothetical definition of main processes/operations Hypothetical definition of supportive processes/operations Development of the value chain Verification phases Verification hypothetical definition Value chain analysis process map Analysis phases Activity analysis and cost driver analysis Marketing Sales Knowledge management and quality management Staffing HR XII

9 Delivery Finance IT Internal communication Business support and reception Interpretation and transfer phases Design and development of a costing approach Objectives of the new model Evaluation and selection of the different costing models Design of the cost accounting approach Service business costing model Service business costing model for a consulting firm Design of the project costing model Turnover of the project Provisions and reductions Income from internal allocations Work in progress / not billed service Total income of the project Personnel direct costs external resources Personnel direct costs internal resources Direct allocation Proportional allocation Other material direct costs Personnel overhead cost allocation external resources Personnel overhead cost allocation internal resources Other material overhead cost allocation Financing cost Cost reductions from internal allocation Total overhead cost allocation of the project Total cost of the project Net project result Conclusion and recommendation References APPENDIX A XIII

10 APPENDIX B XIV

11 List of Tables Tab. 2.1 Calculation scheme of contribution margin Tab. 5.1 Calculation scheme of net project result Tab. 5.2 Calculation scheme of total income Tab. 5.3 Calculation scheme of direct personnel projects costs Tab. 5.4 Calculation scheme of proportionally allocated costs Tab. 5.5 Calculation scheme of total direct projects costs Tab. 5.6 Calculation scheme of total overheads cost allocation XV

12 List of Figures Fig. 1.1 Professional service firms by industries adapted from Scott (1998)... 2 Fig. 1.2 Classical value chain adapted from Porter (1985)... 3 Fig. 1.3 Generic consulting purposes adapted from Kubr (2002)... 4 Fig. 1.4 Segmentation of the consulting market adapted from FEACO (2009)... 7 Fig. 1.5 Consulting market in Europe adapted from FEACO (2009)... 8 Fig. 1.6 Consulting market segmentation adapted from FEACO (2009)... 9 Fig. 1.7 The five competitive forces (extended) adapted from Porter (2008) Fig. 1.8 Selecting a management consultant following Munchus (1989) Fig. 1.9 Hierarchical structure and responsibilities in consulting firms Fig. 2.1 Classical value chain: adapted from Porter (2001) Fig. 2.2 Value chain as part of a network of chains Fig. 2.3 The Service Profit Chain adopted from Loveman (1998) Fig. 2.4 Value to customer and employee formula (Heskett et al. 2010) Fig. 2.5 The three functions of cost accounting adapted from Bertsch (1991). 27 Fig. 2.6 ABC design steps adapted from Mowen and Hansen (2011) Fig. 2.7 Job-order vs. process costing (adapted Mowen and Hansen 2011) Fig. 3.1 The research onion ( Saunders et al. 2008) Fig. 3.2 The action research spiral ( Saunders et al. 2008) Fig. 4.1 Course of actions Fig. 4.2 Typical split of a consulting firm Fig. 4.3 The consulting process adopted from Kubr (2002) Fig. 4.4 The consulting process extended (enhancements of Kubr (2002)) Fig. 4.5 Overview about main processes by functions Fig. 4.6 Overview about supportive processes by functions Fig. 4.7 Derivation of traditional VC to a VC of a consulting firm Fig. 4.8 Hierarchy levels of the value chain analysis process map Fig. 4.9 Value chain analysis process map (example: billing) Fig. 5.1 Cost allocation in ABC Fig. 5.2 SBC: Sub projects and main projects assigned to activity center Fig. 5.3 SBC: Terminology traditional costing vs. service business costing XVII

13 Fig. 5.4 SBC: Hierarchical structure and examples of allocations Fig. 5.5 SBC consulting firm example: projects and opportunities Fig. 5.6 Entity-relationship-model of the researched firm: delivery Fig. 5.7 Fit ERM and SBC model of the researched firm: delivery XVIII

14 List of Abbreviations ABC BDU BRAM CAC DAC ERM ERP EU EVA FEACO Fig. HR ICMCI IGC IT KPI M&A MAC MBA MP PAC RAC ROI SAC SBC SME SP Tab. Activity Based Costing Bund Deutscher Unternehmensberater (German Federation of Consultants) Basic Resource Activity Map Corporate Activity Center Delivery Activity Center Entity-relationship-model Enterprise Resource Planning European Union Economic Value Added European Federation of Management Consultancies Associations Figure Human Resources (department) International Council of Management Consulting Institutes International Group of Controlling (Germany) Information Technology (department) Key Performance Indicator Merger & Acquisition Main Activity Center Master of Business Administration Main Project Partner Activity center Resort Activity center Return of Investment Sub Activity center Service Business Costing Short and Medium Sized Enterprises Sub Project Table XIX

15 VC VCA VCAPM Value Chain Value Chain Analysis Value Chain Analysis Process Map XX