Written by Helene Abrams Monday, January 18 2010
Reducing costs is the major strategic focus for most companies. An often overlooked cost is the general operation of financial operations. This paper details a methodology for calculating the costs of running each of the financial modules. The costs are compared against both internal and external benchmarks. After calculating the costs, the paper shows how to reduce costs in two ways: first, by eliminating work that is duplicated across different business units or divisions, and second by determining which operations that are currently distributed across the organization can be consolidated into a shared services center. Together these changes, both to the organization and the Oracle EBS system, can generate significant cost savings. Finally, the paper details how streamlining operations prepares for a better R12 implementation.
Calculating the Cost of Operations
The cost of operations is calculated by breaking down how much time is spent on an activity during the year by each person doing that activity, how many items were processed, and then calculating the cost using a baseline cost of FTE. As an example, for AP, each department would calculate the number of hours in a year spent on each of the following tasks or activities:
- Maintain policies and procedures
- Enter, code, match, and correct payment documents
- Prepare and issue automated checks
- Certify checks
- Process manual checks and special payment requests
- Respond to vendor and internal inquiries
- Perform Reconciliations
- Perform corporate and government reporting
- Create Corporate Chargebacks
- Other A/P Activities
The hours would be translated to a number of Full-Time Equivalents (FTEs) by dividing the hours by 2080 (the number of hours for a person working full time per year). A baseline average burdened (including benefits and expenses) salary is then multiplied by the number of FTEs to calculate the annual cost of that activity. To obtain the cost of an operation, multiply the number of items processed (i.e. number of checks) by the cost of the activity. For each of the finance areas, costs are calculated to measure the performance of each activity. For example, General Accounting would calculate the number of journal entries processed per FTE per year and compare those to an internal benchmark. Travel and Entertainment would calculate the number of expense reports processed per FTE per year. Fixed Assets would calculate the number of unique fixed assets or line items per FTE per year. Accounts Receivable would calculate the number of bills issued per FTE per year. In other words, each area would develop its own internal key performance metric and a way to calculate that metric against FTEs contributing to the process. In aggregate these calculations may uncover significant additional cost savings that could be realized quickly and relatively painlessly by migrating from a distributed services model to a shared services model.
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January Puzzle
A traveler gets lost on a deserted island and finds himself surrounded by a group of n cannibals.
Each cannibal wants to eat the traveler but, as each knows, there is a risk. A cannibal that attacks and eats the traveler would become tired and defenseless. After he eats, he would become an easy target for another cannibal (who would also become tired and defenseless after eating).
The cannibals are all hungry, but they cannot trust each other to cooperate. The cannibals happen to be well versed in game theory, so they will think before making a move.
Does the nearest cannibal, or any cannibal in the group, devour the lost traveler?
Solution
The short answer is the traveler’s fate depends on the parity of the group. If there is an odd number of canibals, the traveler will be eaten, but if there is an even number, the traveler will survive.
To prove this, we will consider small groups and use mathematical induction to explain the solution for larger groups.
Case n = 1: this is an obvious case. If there is one cannibal, the traveler will be eaten. It doesn’t matter that the cannibal will get tired because there are no other cannibals around as a threat.
Case n = 2: this is a more interesting case. Each cannibal wishes to each the traveler, but each knows he cannot. If either cannibal eats the traveler, then he will become defenseless and the other one will eat him. So each cannibal uses backwards induction to realize that the only strategy is to not eat the traveler. The hapless traveler finds a bit of luck, therefore, and actually survives.
Case n = 3: this is where the problem gets interesting. The best strategy is for the closest cannibal to make a move and eat the traveler. The cannibal will be defenseless after eating, but ultimately he will be safe. Why is that? The reasoning is due to induction: once the cannibal eats the traveler, the resulting situation has 2 unfed cannibals and the 1 defenseless cannibal. But as we just showed above, when there are 2 unfed cannibals, neither will make a move for fear of being eaten by the other! Thus the first cannibal to make a move will be safe as the remaining 2 cannibals block each other.
We can prove the higher cases using mathematical induction. If the number n is odd, then the closest cannibal can safely eat the traveler because the remaining number of unfed cannibals is even (and by induction, with an even number of unfed cannibals no one makes a move). If the number n is even, then no cannibal will eat the traveler, for if he did, the remaining number of cannibals would be odd, meaning he will get eaten by the induction hypothesis.
Success Tips for Oracle Project Management
- Create a standard for documentation at the beginning of your project, and hold team members accountable for completing documentation requirements as well as keeping them at and above the standards required.
- Before promulgating user documentation or training, it’s also a good idea to choose a representative from the among the business users base to review materials first.
- If you are not sure about the resources and budget required, obtain several estimates from people that have experience with the same size and scope of your project.
- Be explicit, before beginning the project, what internal resources are required for execution. This includes people, infrastructure, hardware, and software.
- Help the project champion understand the impact your project will have on the organization and how its successful completion will make him or her an internal hero or heroine for supporting it.
- Break up your project into smaller projects (try for projects that can be completed in 4-6 months, especially early on) to get success and demonstrate momentum.
- Make sure that your testing includes reports, upstream and downstream interfaces, customizations, enhancements, and workflows.
- Ensure that comprehensive transition reports and meetings between departing and incoming personnel are completed.
- Instead of spending time and resources implementing third-party reporting, consider consolidating multiple instances, moving to a global chart of accounts (CoA), and/or standardizing on a consistent calendar.
- Include governance, risk, and compliance management as part of the project plan.
- Finally, celebrate the successes. Too many projects focus on defects, failures, or small cost over-runs without looking at the big picture and what was accomplished.
The Analyst Corner
John Van Decker, Research VP of Gartner, states:
"A single chart of accounts allows consistency in financial reporting across the enterprise by standardizing on common metrics and reporting structures, reduces dependencies on a separate financial consolidation system, and significantly reduces the costs incurred with ongoing, complex conversions and translations."
