Cost Management and TELCO (Incl. ABC)

Stefan Müller & Peter BittnerSAP AG

Cost Management and Telecommunication Industry

SAP AG 2001, Title of Presentation, Speaker Name 2

Content

Overview

Part 1 - Network Area Network Product Model What is crucial for meeting regulatory requirements for interconnection

costs? Parallel Costing Scenarios

Part 2 - Activity Based Costing within the Service and Sales Area SAP’s integrated ABC Solution Push vs. Pull & Templates ABC Reporting Outlook - The R/3-OROS Bridge


Why Introduce Cost Management and ABC?

No 1: support management decisions Assure profitability analysis by:

Product and product bundle segments Customer and customer segments

Develop cost transparency by: Allocating overhead cost to product, customer

segments Identifying cost drivers

No 2: fulfill regulatory requirements Telecommunication pricing Cost based charging LRIC


Telecommunication Company

NetworkArea

Customer Service, Sales

Area

ManagementArea

• Network Products

• Providing Network Infrastructure

• Sell Products & Services

• Manage Customer Relationship

• Call Center

• Human Resources

• Management

1 2

Part of Presentation

Cost Management Areas in Telco’s


Telecommunication Company

NetworkArea

Customer Service, Sales

Area

ManagementArea

Profitability Analysis

Customer

Product

RE

GIO

N

Competitor

Private

BusinessNo

rth

S

ou

th

Ea

st

Voice Data Mobil


Content

Overview





®

Key Requirements to meet Regulation

Part 1 - Network Product Model

Parallel Costing Scenarios

Network Product Model

Tracing Actuals


Reference Project

Operational with less in functionality on 3.1

Functional prototype based on R/3 Release 4.0 in 1999

Going operational with new functionality R/3 4.5 or 4.6 in 2000


Model: Network Products

Cost Structure

Salaries Depreciation Capital Cost Supply

Resources

Human Technical Service

Network ElementsAccess Lines

Access Switching

Transmission 1 Transmission 2

Elementary Network Products ( Combination of Network Elements )

Interconnection Gateway Trunk Transmission International Switching

Network Products ( Combination of Elementary Network Products )

Interconnection Trunk Traffic International TrafficNeed

Need

Need


Mapping Resources to Products

ResourcesResources ProductsProducts

Product xyz

Product 1

Product 5

Product 4

Human

Technical

Service

NetworkElements

?


Resources: Translation into Cost Management

ResourcesResources Identify output measures

Define activity types per cost center

Analyze and define qty based activity structure

Define rate / output unit based on cost center planning setting political rates

Cost Center

HUMAN

Cost Center

Technical

Cost Center

Service

Cost Center

NetworkElement


Cost Allocation / Push vs Pull Approach

PU

SH

Cost Center

HUMAN

Cost Center

Technical

Cost Center

Service

Cost Center

NetworkElement

%

%

%

PU

LL

Cost Center

HUMAN

Cost Center

Technical

Cost Center

Service

Cost Center

NetworkElement

AT1

AT2

ATn 45 h

100 units

100 days


Cost Center - Activity Types

ResourcesResources

Cost Center

HUMAN

Cost Center

Technical

Cost Center

Service

Cost Center

NetworkElement

AT 1

AT 2

AT n

AT x


Costing your Products

ResourcesResources

Cost Center

HUMAN

Cost Center

Technical

Cost Center

Service

Cost Center

NetworkElement

AT 1

AT 2

AT n

AT x

ProductsProducts

Product xyz

Product 1

Product 5

Product 4

Using Activity Rates


Access Network B

Trunk Network

Example: Long Distance Call (I)

Access Network A

International Network

trans

trans

Nat. Long Dist.

Access A

Access B

Connection

1 x1 x

trans

1 x

1 x1 x

trans


Example: Long Distance Call (II)

ResourcesResources

Cost Ctr / Trans A

Cost Ctr / Switch A#

switches

#trans

Cost Ctr / Switch B

#switches

Cost Ctr / Trans B

#trans

Cost Ctr / Connection

#minutes

COCCACO

CCA Products Products

Long Distance Call

Access A

Access B

Connection

1 x1 x

trans

1 x

1 x1 x

trans

Salaries DepreciationCapitalCosts

Supplies

Primary Cost Component Split

COPCCOPCAssetsAssets

Depreciation

Depreciation

Depreciation

Depreciation

Depreciation

FIAAFIAA


®


Part 1 - Key Requirements



Tracing Actuals


Regulatory Requirements

“It is recommended that the calculation of interconnection charges should be based on forward looking long run incremental costs (LRIC). Where “bottoms up” cost calculations based in forward looking LRIC are not available, interconnection charges bases on “best current practices” as given in this recommendation ......”

“The recommendation to use forward looking LRIC implies a cost accounting system based on current costs rather then historic costs. Furthermore, the use of Activity Based Costing, ...... allows joint and common costs to be allocated to the maximum extent possible.”

European Commission Directorate General XIII in”Working Document on Telecommunication Pricing.....” ( 6 August 1997)

Should reflect situation of efficient provider


Cost Management System Implications

High flexibility

Transparency and exact methods to allocate joint and common costs costs

Support of virtual cost and infrastructure

Comparison with operational data

Support of parallel scenarios


®


Part 1 - Parallel Costing Scenarios



Tracing Actuals


Depreciation Areas, Versions, Variants

Asset Management

Cost Center Accounting

Business Process Accounting

Product Cost Planning

Profitability Analysis

AssetAsset

Cost CenterCost CenterProcessesProcesses

Product CostProduct Cost

ProfitabilityProfitability

FI-AAFI-AA

COCCACO

CCA

COABCCO

ABC

COPCCOPC

COPACOPA


AssetsAssets

Depreciation

Depreciation

Depreciation

Depreciation

Depreciation

different depreciation

areas

Asset Management / Depreciation (I)

“The recommendation to use forward looking LRIC implies a cost accounting system based on current costs rather then historic costs.”European Commission Directorate General XIII in”Working Document on Telecommunication Pricing.....” ( 6 August 1997)

Each depreciation area is set up to handle depreciation for a particular purpose

book depreciation, tax depreciation, group depreciation, cost-accounting depreciation, LRIC ...

FI-AAFI-AA


AssetsAssets

Depreciation

Depreciation

Depreciation

Depreciation

Depreciation

ResourcesResources

Cost Ctr / Trans A

Cost Ctr / Switch A

#switches

#trans

Cost Ctr / Switch B

#switches

Cost Ctr / Trans B

#trans


#minutesX

X

X

different plan versions

Asset Management / Depreciation(II)

depreciation from all or just selected assets

can be transferred to cost center accounting

COCCACO

CCACO

ABCCO

ABCFI-AAFI-AA


ResourcesResources

Cost Ctr / Trans A

Cost Ctr / Switch A

#switches

#trans

Cost Ctr / Switch B

#switches

Cost Ctr / Trans B

#trans


#minutes

Cost Center / Business Process Planning (I)

Should reflect situation of efficient provider

Each plan version is set up to handle cost planning for a particular purpose

internal cost accounting, group cost accounting, best case, worst case, LRIC ...

COCCACO

CCACO

ABCCO

ABC


Cost Center / Business Process Planning (II)

Resource Version 0

Salaries

Depreciation

Capital Cost

Supply

Debit

Output 100.000 unit

Rate

XXXX

Resource Version 1

Salaries

Depreciation

Capital Cost

Supply

Debit

Output 180.000 unit

Rate

YZZX

Change output quantity

Change primary or secondary planning

allows to simulate beyond the existing cost structure

Strong copy

capabilities

• plan / plan

• actual / plan

COCCACO

CCACO

ABCCO

ABC


Product Cost Planning (I)

Products Products

Long Distance Call

Access A

Access B

Connection

1 x1 x

trans

1 x

1 x1 x

trans

standardstandard

modifiedmodified

actualactual

otherother

Cost Estimates Cost Estimates COPCCOPC


Product Cost Planning (II)

Long Dist. Call

Access A

Access B

Connection

1 x1 x

trans

1 x

1 x1 x

trans

Long Dist. Call

Access A

Access B

Connection

0 x2 x

trans

1 x

1 x1 x

trans

• Change input quantity & resources & structure• Use different rates to value quantities (plan versions)• Allows to simulate beyond the existing cost & infrastructure

LRICstandard

Copy structure

Tools to maintain

structure

High flexibility

COPCCOPC


Product Cost Planning - Multilevel Unit Costing

New4.6

Unit Costing

Selection BlockCosted Structure

Drag & Drop


®


Part 1 - Tracing Actuals



Tracing Actuals


Backflush (i)

Cost Object Actual

Resource

Resource

Resource

Resource

Debit

Stat. Keyfigure 100 x

abcd

Resource e

trans

trans

Cost Ctr / Trans A


switches

#trans

Cost Ctr / Switch B

#switches

Cost Ctr / Trans B

#trans


#minutes

1x Long Dist. Call

1x Access A

1x Access B

1x Connection

1 x1 x

trans

1 x

1 x1 x

trans

periodically

Backflush*based on qty structure

of product

* Use BAPI’s of CO-CCA and CO-PC


Backflush (ii)

Cost Object Actual

Resource

Resource

Resource

Resource

Debit


abcd

Resource e

trans

trans

Cost Ctr / Trans A


switches

#trans

Cost Ctr / Switch B

#switches

Cost Ctr / Trans B

#trans


#minutes

100x

100x

100x

100x

100x


Actuals at Standard Cost

Cost Object Actual

Resource

Resource

Resource

Resource

Debit


abcd

Resource e

trans

trans

Cost Ctr / Trans A


switches

#trans

Cost Ctr / Switch B

#switches

Cost Ctr / Trans B

#trans


#minutes

100x

100x

100x

100x

100x

Valuation at Standard


Actuals at Full Cost

Cost Object Actual

Resource

Resource

Resource

Resource

Debit


abcd

Resource e

trans

trans

Cost Ctr / Trans A


switches

#trans

Cost Ctr / Switch B

#switches

Cost Ctr / Trans B

#trans


#minutes

100x

100x

100x

100x

100x

Valuation at Standard + Delta


Profitability at Standard Cost

COPA

COPA

Profit. Segment

Revenue

Extern

al S

ystem

Customer Product Region Qty

Residential Long Dist. South 50 x

Standard cost estimate

LRIC cost estimate

ResourcesResources

Cost Ctr / Trans A

Cost Ctr / Switch A

#switches

#trans


#minutes

Variance


South


Profitability at Full Cost (i)

COPA

COPA

Profit. Segment

Revenue

Extern

al S

ystem


Residential Long Dist. South 500.000 x

Standard cost estimate

LRIC cost estimate


Long Dist.

Cost Object Plan Actual

Resource a

Resource b

Resource x

Resource y

Debit

Stat. Keyfigure 100 x 120 x

X

X

X

X

Y

Y

Y

Y

Resource z X Y

Actual CostSettlement

500.000 x


Profitability at Full Cost (ii)

COPA

COPA

Profit. Segment

Revenue

Actual Cost


Long Dist.


Residential Long Dist. South 50 x

Residential Long Dist. North 30 x

Residential Long Dist. West 30 x

Top-Down Distribution in Profitability Analysis


Content

Overview





SAP AGPeter BittnerProduct Management Activity-Based Costing

Activity-Based Costing

A Strategic Cost Management Tool


* Gartner Group AAS Research Note Strategic Planning, V. Frick

Strategic Planning Assumption

By 2000 companies that have not incorporated ABC into a formal ongoing business transformation program will beoperating at a severe competitive disadvantage. (80%) *

ABC - Competitive Advantage 2000


®

Push vs Pull & Templates

Part 2 - SAP’s Integrated ABC Solution

ABC Reporting

SAP’s Integrated ABC Solution

Outlook: The R/3 OROS Bridge


Network CostsNetwork Costs Costs to ServeCosts to Serve

ResourcesResourcesCost Ctr / Trans A


switches

#trans

Cost Ctr / Switch B#

switches

Cost Ctr / Trans B

#trans

Cost Ctr / Connection#

minutes

COCCACO

CCAAssetsAssets

Depreciation

Depreciation

Depreciation

Depreciation

Depreciation

FIAAFI

AA

Products Products

Long Distance Call

Access A

Access B

Connection

1 x1 x

trans

1 x

1 x1 x

trans

Salaries DepreciationCapitalCosts

Supplies

Primary Cost Component Split

COPCCOPC

ServiceTeam A

ServiceTeam B

TruckFleet

CallCenter

Tech.Order-fulfillment

OrderAcceptance

AccountingAR

COCCACO

CCA

OrderManagement

OperatorServices

CustomerComplaints

Payment Processing

NetworkMaintenance

COABCCO

ABC

Customers

Regio

ns

Pro

du

ct s

COPACOPA

Network Costs & Costs to Serve


Market Segments

Cu

mu

late

d P

rofi

t

Profitable LossCum

ulated A

BC Pro

fit

Customers Regio

nsPro

du

cts

Fair cost Fair cost assignmentassignment

ROI Optimized Processes

Enable Growth Reduce Total Overhead

Realistic Product Costing Improved Profitability

Business Processes

Eliminate non-value Eliminate non-value added activitiesadded activities

CostCostDriverDriver

Activity-Based Costing to Activity-Based Management


Processes ProcessesProcesses

Product FamiliesCustomersDistribution Channels...

CO-ABCCO-ABC

CO

-PA

CO

-PAC

O-P

CC

O-P

C

ABCABC

CO-CCACO-CCA

Products

R/3’s Comprehensive Approach to Integrated ABC


Benefits of Integration

ABC fully integrated in the R/3 environment

Automatic cost driver evaluation from operational data

Dynamic processingof high data volumes

No need for a parallel cost accounting system

No need for complex interface & upload processes

Scalable tool support

CO-OM-ABC


Process View

ResourceDrivers

Cost Assignment View

ActivityDrivers

PerformanceMeasures

CostObjects

ActivityCost

Activities

ResourceCost

Resources

Assignment

Assignment

R/3 CAM-I Cross

Assessment,Assessment,(In)Direct Allocation,(In)Direct Allocation,Process TemplateProcess Template

Assessment,Assessment,(In)Direct Allocation,(In)Direct Allocation,Process TemplateProcess Template

Cost Drivers

Cost Center Accounting(CO-CCA)

Cost Center

Activity Types

Activity-BasedCosting (CO-ABC)

Process

Product Costing(CO-PC)Profitability Analysis (CO-PA)

ProfitabilityObjects

CostObjects

SAP‘s Solution Complies with the CAM-I Cross


®


Part 2 - Push vs Pull

ABC Reporting


Outloook: The R/3 OROS Bridge


Cost Center(Resources)

Products,CustomersRegions, etc.

CostAssignment

FinancialsFinancials

ProcessDriver

ResourceDriver

CostAssignment

CostAssignment

Push ApproachPush Approach

Re

so

urc

e Q

uan

tity

Pu

ll

Co

sts

= Q

ua

nti

ty *

Ra

te

Pull ApproachPull Approach

FinancialsFinancials

Cost Center(Resources)

Products,CustomersRegions, etc.

ProcessDriver

ResourceDriver

Push versus Pull Approach (I)


Push Approach(Traditional ABC)

Pull Approach(Advanced ABC)

Implementation

Process Optimization/Flexible Budgeting

Fair Costing

Easy, straight forward

No Quantity Structure• No backflushing capability. • No capacity view. (Requires dummy processes for idle capacity.) • No leveraging of resources.

Costs not assigned according to actual usage of resources• Costs of idle capacity burden products and customers

Requires more details and knowledge ofstandards / cost behavior

Quantity Structure• Backflushing capability • Identify idle capacities. • Leverage resources in an early stage (planning).

Prices calculated basedon practical capacity• Costs of idle capacity not assigned to products and customers but where it makes sense.

++

++

++

--

--

--

Push versus Pull Approach (II)


QuantityTracing

Cost =Quantity× Price

Processes

Cost Objects

Assessment

Process Consumption

Cost Centers

Cost flow

DistributionAssessment

Resource Consumption

ProfitabilitySegments

Process 1

Process 2

Process 3

Process 4Indirect Tracing Methods

Direct Charging

Templates

ActT

ActT

Structured Processes

Overview of Assignment Techniques


Tracing factor:Number of new products

Costs: 300000.-

Costs: 600000.-

# new products: 10

# new products: 100

Customers

Pro

du

cts

new exist.

Regio

ns

NorthSouth

West

Voice

Data

Leasedlines# new products: 50

Activation ofnew products toexist. customers

Activation ofnew products tonew customers

Costs: 300000.-

Costs: 100000.-

Costs: 500000.-

DataWarehs.

(LIS)

Push: Assessment


New CustomerAcquisition

IncomingCall

System Data Entry

CallCenter

Chrs

CreditCheck

Provisioning

Rejectionletter

Finance

IT

CPU

Chrs

IT / CPU sec

Finance /Chrs

10

0,1

Standard time/-qty.Sender

Template for Credit Check

sec

Relationship between processes, sub-processes and cost center activities regarding their consumptionUseful for driver modelling (task lists)

Pull: Structured Processes


DataWarehs.

(LIS)

Functions

ProcessTemplate

CO-PA

Regio

nsC

us

tom

ers

ProductsDriver

Dri

ver

Process Quantities

Products Regio

ns

Cu

sto

me

rs

Pull: Templates for Market Segments


Functio

ns

Functions

Template

Plan Qty. Plan Activ.Object Actual Qty. Actual Activ.

What What process process applies?applies?

How much of the process applies?

How much of the process applies?

FunctionsFunctions

FunctionsFunctions

FunctionsFunctions

Functions

Does the process apply?Does the process apply?Does the process apply?Does the process apply?

Functions - The Power of the Template


TemplateDefinition

TemplateEvaluation

Formula-2

......

Template

Activation ofcustomers

.......

Active

......

QuantityPlan Actual

ActivationPlan Actual

Object

Formula-1

......

Active

......

Calculate the planned number of activations based on the plannednumber of new customers.

Formula-1

Read the actual number of activations from a data warehouse key figure (or LIS).

Formula-2

46

......

Active

......

QuantityPlan Actual

ActivationPlan Actual

Object

40

......

Active

......

Process Consumption

Activation ofcustomers

.......

Dynamics of the Template


®


Part 2 - ABC Reporting

ABC Reporting




ABC Reporting

Cost Center Analysis

For which process and atwhat costs does a costcenter perform?

Cost Object and Market Segment Analysis

Which processes are necessary?

What are the costs of a cost object?

What is the profitability ofa certain market segment?

What are the process costs?

Who consumes the process?

Process Analysis

CO-PCCO-PC

CO-ABCCO-ABC

CO-PACO-PA

CO-CCACO-CCA


ABC Reporting in CO/PA

Data Data Voice Voice Leased Lines Leased Lines

Total Revenues 50.003.004 203.406.9734.020.309

Quantity Discounts 103.700 807.910 50.480Customer Discounts 890.630 1.203.980 30.290

.

.

.

Total Discounts 1.000.320 2.105.600 90.760

Net Revenue 49.002.684 201.301.3733.949.549

Supplies 25.340.480 110.200.2601.440.400Salaries 6.100.340 23.600.140 420.040Depreciation 1.100.320 3.000.540 104.060Network Process Costs 800.520 900.720 54.090 Network Costs 33.341.660 137.701.6602.018.590

Contribution Margin 1 15.661.024 63.599.7131.930.959

Customer Care Process Costs 3.500.340 15.600.140 220.040Dealer Management Process Costs 3.100.320 17.000.540 204.080Billing Process Costs 4.200.660 16.600.680 224.120Service Costs 10.801.320 49.201.360 648.240

Contribution Margin 2 4.859.704 14.398.3531.282.719

Business sust. Process Costs 600.300 1.204.500 506.040 Legal Requirements Process Cost 760.600 1.708.000 200.000 Period Costs 1.360.900 2.912.500 706.040

Contribution Margin 3 3.498.804 11.485.853 576.679


Summary

Integrated component of R/3 Permanent monitoring of business processes

ABC provides a process-oriented view of overhead costs

Transparency of overhead costs is improved

Link between operational ABC and Product Costing

Improves Product Costing and contributes to strategic decisions

Sophisticated planning and allocation methods

Quantity flow with minimizedinput effort through automatic use of existing cost driver information

Link between operational ABC and Profitability Analysis

Multidimensional analysis capability

SAP Functions Customer Benefits


®


Part 2 - Outlook

ABC Reporting




Release 3.0: Parallel ABC

Release 4.0: Operational ABC: Integration with Product Costing & Profitability Analysis

ASUG-ABC User Group

Pilot installation of operational ABC at Anheuser Busch

ABC Interface

Integration with SAP Banking (Rel. 4.01A)

Release 4.5A: Extended Integration with Profitability Analysis using Templates

Release 4.0B: IDES ABC

Parallel ABC Live Customers: ABB Industry, Österreichische

Nationalbank, FEMSA, Creditanstalt Wien, Lufhansa

Cargo, Baker Hughes...

Release 4.0: Operational ABC First

Implementations: AB (live Jan. 1999) ,

ABB, Molex

Banking-ABC User Group

Today Integration with Workflow

OROS Bridge (ABC Interface II)

Roadmap for Activity-Based Costing


Modeling Measurement

Resource costs & driver data

Master data & cost assignment structures

Integrated ABCAnalytic ABC

The Power of the Integrated R/3-OROS ABC Solution

PC / PA Reporting

Cost Accounting

Learning

Rapid Prototyping

Job Costing

Refinement

Simulation

Resource costs & Aggregate driver data


Cost effectively experiment with ABC

Quickly build models for strategic cost management

Simplify and accelerate Operational ABC setup

Conduct what-if analyses for scenario playing

Explore, review, and analyze resource requirements

OROS for Analytic ABC


Extend ABC thinking to operational staff - line managers

Reflect activity costs within standard operational reports

Identify cost reduction and efficiency improvement opportunities in real-time

Report variances between actual and planned job costs

Plan and budget resources based on operational sales plan

R/3 for Integrated ABC


The End

Visit SAPNet and homepages of CO-ABC and CO-PC:

http://sapnet.sap-ag.com/co-abc http://sapnet.sap-ag.com/co-pc

http://sapnet.sap-ag.com/co-om

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