Achieving business objectives through Cost Minimization

This study is carried out as the second assignment for the Accounting for Management module in the first year of the MBA program conducted by the University of Sri Jayewardenepura. During the study, the cost cutting methods currently used by the company are identified and recommendations which are more effective to overcome the current problems are proposed and compared.

Objectives of the Study

The company should clearly identify the sources that incur costs as well as where they have gone wrong when bringing in cost cutting techniques. After identifying the areas that the firm should concentrate on, we should identify the areas that we have not controlled the costs properly and need to suggest new methods to cut costs more effectively.

It allows the firm to decide which method to use and the associated risks of the current and proposed techniques used.

About the Company and Software Development Industry

Company X is a software development company which provides solutions to several foreign and local clients in diversified fields. Our aim is to supply high quality software products and services to all our existing clients and seek potential markets around the globe. Custom programming is also used to create a new software product from scratch, or, more typically, customizes an existing software product for customer use.

It is an Application and Service provider for the Telecom, Financial and Insurance markets and specialize Web technology and windows based technologies. With a staff of over 35 skilled engineers, the firm tries its best to offer very good solutions for particular business.

The software development industry is an extremely challenging and dynamic industry whether each and every firm involved should be updated with latest technology and skillful people for their respective firms. It a very competitive place whether flexibility and innovation is a must. Cost is another factor that we need to draw our attention on because in order to provide better solutions for a competitive and lower price we need to reduce the costs drastically. All companies in the software development industry has now focused on following cost effective techniques and as a result we also need to follow new strategies to reduce our operational and overall costs in order to compete with our competitors.

As many foreign clients seek vendors here, there are so many opportunities available in the current market for new projects. Even if we can minimize our cost of developing a new software product, we can market our software product for a lower price than competitors. I that way we can increase our customer base than our competitors.

Current Cost cutting methods used by the company

The firm finds is very difficult to cater its clients with the competitive priced demanded by then and the competitors. As the economy has slowed down, the company has found itself dipping into its own savings in order to meet survive in this extremely competitive and challenging industry. As a result, it currently follows some cost-cutting strategies which are described below.

Turn off the lights, computers, electronics, A/C when we leave the office overnight and on weekends. Also, they have suggested to turn off the A/C after 6.00 pm during weekdays.

The company has a new trend to recruit students as interns rather than experienced IT professionals. Professionals are recruited only as team leads in order to minimize the cost on salaries. Interns are recruited for a lower salary and also on contract basis.

To cut down on paper usage, use both sides of each sheet when printing internal documents. Only a limited number of A4 sheets are available at the printer and if the employee wants more, he/she has to ask for additional papers from the person who is in-charge of stationary.

Request bids from new cost effective vendors for the materials that we use. Comparing services and negotiating prices with our current vendors can in order to save money.

Reduced the number of trips we go during the year and also the two-day annual trip has been converted to a one-day trip to a low cost destination.

Reduced the number of trainings provided for employees both foreign and local. Only the essential trainings are given to a selected number of employees.

We now use conference calls rather than meeting face to face. Video-Conferencing facility is used for contacting special clients without the hassle and cost of travel and arranging refreshments and other facilities to them.

The company has decided to provide only a proportion of medical (OPD maximum limit Rs.2000, etc..) and examination fees (75%) claims to employees which was previously reimbursed in full.

When employees are working for long hours (after 9.00 pm), they are encouraged to limit the number of cabs used. Only one cab is provided for specified rout and all in that rout is supposed to leave the office together waiting for everyone in that rout to finish their work if they are staying after 9.00 pm.

When employees are working after 9.00 pm, they can claim the dinner cost up to Rs.300/= per head.

Problems in Current Cost cutting methods

Although the firm uses these sorts of cost cutting methods, all of them are not practical in some situations especially as a company in the IT industry. Some decisions that the company has taken have dissatisfied employees heavily and they are not happy with the facilities provided to them. As a result, employees now try to compare with the standards in other firms in the IT field and seek employment elsewhere as there are plenty of opportunities available in the industry for IT professionals.

Turning off A/C after 6.00 pm during weekdays is not acceptable as most of the employees are pressurized to work till late in order to cover up their heavy work load. And when they find, that they are not provided with basic facilities, they tend to leave early even they have work to be done.

Recruiting students are acceptable up to a certain level and not beyond that. Experienced IT professionals are needed by a company in order to maintain it’s standards and also to compete with the massive competition from other development firms. Interns don’t have enough experience to cope up with the pressure and technology required by the challenging environment and they can only work as assistants to seniors until they learn how to handle the pressure.

Reducing the number of trainings provided for employees are fine if they are not really required. But the firm is reluctant to send more than two employees for any training although the team has four. This creates lack of knowledge in the team and also very difficult to select people from equally skilled employees there by creating conflicts between team leads and members.

As only one cab is provided for everyone in the specified rout all in that rout are supposed to leave the office at the same time. But if an employee is finishes his work at 9.00pm, he is forced to stay at even 12.00 mid night till the others are finished if he plans to take a cab.

Suggestions for improved cost cutting methods to be used

We cannot just follow cost cutting methods which were successful to others without a proper analysis. Concentrating on saving money might not give us the intended result but might create dis-satisfaction among employees, clients, etc.. These cost cutting methods should not only reduce the cost, but also create value to the company. By considering all these factors, I have suggested three main cost minimizing techniques which can be very effective for a modern day technology organization like ours. Suggested techniques are Remote Virtual Teams/Organization, Green IT and Outsourcing.

Remote Virtual Teams/Organization

Nowadays, the remote/virtual team concept has become so popular for many organizations. Virtual teams/organizations help us to cut across the distance, minimize the barriers of different cultures and organizational barriers. This is a very strong cost cutting technique which can be used very effectively by the firm.

By bringing in the concept of virtual organization requires a different communication technology methods by the organizations in order to facilitate the remote communication with the servers. Although there is an initial cost (Eg/ for VPN (Virtual Private Network) connectivity), it later on helps to reduce the cost massively as it reduces the requirements of a physical organization. It also allows employees to work at anytime and from anywhere.

But, it’s better to track down whether employees are working continuously by using a tracking software as there are no supervisors, they might not work as they do within the company. But as software development is basically run on project deadlines, employees tend to work hard in order to achieve deadline.

Anyhow, this method largely reduce electricity cost on lights, fans, A/C, etc.., cost on refreshments (tea, lunch, dinner, etc..). The firm might even operate in a temporary place without even having its own workplace as they don’t need to meet up every day. For example, project team can meet only during the software design phase and during initial requirement discussions. After the work is been assigned to different individuals, the can work separately by logging in remotely to a shared, common virtual place or a server.

As mentioned earlier, one of the biggest problems faced by the management managers in virtual organizations is the relationship the team leads/managers have with their employees. Employees in an IT organization like this have more freedom in making decisions without the input of the leads. While here we save time and cuts cost, it also causes the common goal between the management and the employee to become confused. As mentioned earlier, it is very important to monitor whether employees are really working or whether they are idling. Relevant techniques should be used to identify their actual performance and whether the work being done is truly productive.

Use of ‘Green IT’ techniques

This concept enables firms to drive considerable financial and environmental benefits. Especially, data center energy savings is a huge opportunity which consume so much energy than any other. The greening is a trend that’s developing with great speed, and with good reason. As technology is as essential to technology firms, the demand has forced these companies to start generating more energy-efficient and sustainable products or services to reduce power consumption.

This Green IT concept helps us to practice of designing, production, using, and disposing of computers, servers, and associated subsystems (Eg/ monitors, storage devices, etc..) efficiently and effectively with minimal or no impact on the environment

Green IT, refers to environmentally friendly computing which also helps us to make our organization a socially responsible entity there by creating a better image about the company in the minds of its customers. This concept focuses on using computing resources efficiently.

Approaching to green concept

The efficiency of algorithms has an impact on the amount of computer resources required for any given computing function and there are many ways to efficient program writing. Algorithms can also be used to route data to data centers where electricity is less expensive. For example, allocation of algorithm that successfully routes traffic to the location with the cheapest energy costs. Much larger server centers are sometimes located where energy and land are inexpensive and readily available.

Another green concept, which is called computer virtualization, refers to the generalization of computer resources, such as the process of running two or more logical computer systems on one set of physical hardware. Here, a firm can combine several physical systems into virtual machines on one single, powerful system, thereby removing the original hardware and reducing power and cooling consumption.

The computers, storage devices and A/C equipment are usually working fairly inefficiently so we can use this concept to have a big impact here. Many server computers run at less than its optimal capacity. If we can double the amount of work each processor does, we can halve the number of devices in use and cut the overall environmental and energy impact and also reduce the number of physical resources used.

Another way is recycling computing equipment that can keep harmful materials such as lead, etc.. Computer systems that have outdated can be re-purposed, or donated to various charities and non-profit organizations. Computing supplies, such as printer cartridges, paper, and batteries may be recycled as well.

Telecommuting such as Teleconferencing technologies is mainly implemented in green computing initiatives. The advantages are increased worker satisfaction, and increased profit margins as a result of lower overhead costs for office space, heat, lighting, etc. The savings are the average annual energy consumption, many types of jobs, such as sales, consulting, and field service, integrate well with this technique.

Benefits of Using Green IT concept

Discourages the use of documents as people always try to keep a paper copy of every memo and e-mail they’ve sent or received. This fills rows of file unnecessarily and also increase the cost on stationary and will also reduce the cost of toner and disposal.. Make an electronic document management system available and reduce the amount of physical storage available. This reduces paper usage and its cost and frees floor space.

Reduce the amount of data kept in online storage. As disks spin, and they need to be cooled down. Disks may be full of multiple data copies or ancient files that are not always opened. As a solution, archiving historical files are done.

Make use of power-saving features. Ensures that all hardware we install has the power-saver function enabled and that users are locked out of changing it.

Make office recycling convenient. Establish a collection points for unnecessary things. Works out in advance who will pick up the full containers for recycling.

Buy power-efficient and environment-friendly equipment. Require that all new equipment is compliant with energy saving capability that at least 50% efficient and thereby save electricity.

Consolidate IT assets into a single location for shared use. Eliminate private parts and spare equipment caches in encourage of a single place of shared assets. This will definitely reduce the cost on computer hardware.

Link the cost of resource consumption with those who consume it. When IT pays for material that everyone draws from, no one feels accountable for minimizing its cost. Among other things, green linkages show which departments are consuming laser cartridges and paper, generating equipment for disposal, or consuming the most electricity.

Consider the actual needs when upgrading equipment. Not everyone needs the latest and most powerful workstation. Only upgrade systems when justified by the business need or to replace equipment that isn’t energy-efficient. Consider using low-cost and energy-efficient thin clients and desktop virtualization.

Encourage others to follow you as a role model and promote the idea of a greener IT in conversations with co-workers.

Outsourcing

Outsourcing has become a popular method of cost cutting nowadays. But outsourcing without a proper analysis/evaluation make companies suffer more but incurring heavy losses. But is used wisely, outsourcing can be very effecting both on the firm’s operational cost as well as the quality of work because we should not consider just value in terms of cost, but we should think of the value in terms of business benefit.

Outsourcing is contracting with some other company or any third party to do some intended functions of the organization. Nowadays, the function being outsourced can be considered as a non-core to the business or it can be a core function as well when it comes to a software development firm like ours. In our organization we can outsource the Software Quality Assurance function easily with its own risks. Also if the company wants they can outsource its support services. When outsourcing core-activities, the firm don’t have to recruit employees bearing a heavy HR cost on salaries and other benefits and also office space, computers, etc.. Also we can outsource non-core functions like payroll, tea suppliers, etc..

Problems that might occur when outsourcing

Sometimes, outsourcing can cost more than staff labor. But when it comes to software development firms, staff cost is very high as these IT professionals demand for a very high salary and incentives. But the risk involved in outsourcing these technical functions can be very risky if we don’t outsources to a company which does not have properly trained specialists on the subject matter. That will cost us more if the outsourced party makes some mistake and there by paying a penalty to the client, etc..

Also, adaptability to the new system or the new requirements from the client is not easily built into a contract. Outsourcing so much skill and knowledge on existing clients is not that easy.

Also, uncertainty costs appear when Outsourcing. This can lead to contractual problems as we cannot put the increasing burden to a third party and they might charge higher prices. But we can assign any amount of work to our internal staff.

But these are not problems if we outsource after a very good analysis of the current situation of the firm. When outsourcing, we should go for a firm with knowledgeable set of IT professionals.

Benefits we can gain by Outsourcing

The staffing cost, office space cost, hardware and software resource cost, other physical resource cost, benefit package cost, etc.. can be massively minimized. The same services with the same level of quality are offered for a much lower cost.

When the firm does not have skilled staff on a particular function, outsourcing helps to seek service of specially trained specialists on the subject. It helps us to extend your business operations. This allows great opportunities to take your business to the next level. It helps to achieve a big increase in your profits, productivity, level of quality, business value, business performance and much more. It can help you see an increase in almost every aspect of the business.

They can come up with good business strategies for us and we can relax a bit and concentrate on other parts of our business. The organization will be free to concentrate on it’s core business. By outsourcing most of the non-core functions, the workers can be put to better use and we will be able to see a huge growth in your core business.

Another huge benefit of this is that we can make quicker deliveries to our clients. The outsourcing partner will provide faster deliverables and we can in turn be able to make quick deliveries to your clients. Faster deliveries will help us to save both time and money for penalties. It helps to increase customer satisfaction and customer retention.

Outsourcing might be able to give the organization to gain a competitive edge in the current and potential market. If required, we can get access to specialized services for different business processes and thereby provide customers with best services. It can give us the cutting-edge technologies in the worldwide market and beat our competitors.

Comparison

There has to be a considerable difference in the cost incurred between using current traditional cost minimizing techniques and the suggested cost cutting methods such as virtual organization, green IT and outsourcing. Although both these techniques reduces the cost, the suggested methods reduce it by a larger margin if used wisely.

Approximate analysis of cost reduction per month when traditional (current) methods are used :

Reduction on Staff personnels (use of interns instead of professionals) Rs. 675,000

Power saving (A/C, Lights, etc..) Rs. 75,000

Reduction on cost on paper usage Rs. 6,000

Reduction due to Cost effective vendors Rs. 10,000

Cutting down trips and other social events Rs. 20,000

Reduction in number of face to face meetings Rs. 30,000

Cutting down medical and examination fees Rs. 60,000

Reduced usage of cabs Rs. 12,000

Total (per month) Rs. 888,000

Approximate analysis of cost reduction per month when suggested (modern) methods are used:

Reduction on Staff personnels (outsourcing) Rs. 850,000

Power/Energy saving (Green IT/outsourcing/virtual org.) Rs. 200,000

Reduction in cost on office space & physical resources

(Green IT/outsourcing/virtual org.) Rs. 150,000

Reduced usage of cabs (virtual org.) Rs. 45,000

Total (per month) Rs. 1,245,000

Approximate analysis of new cost incurred annually when suggested (modern) methods are used:

Outsourcing payments Rs. 850,000

Cost on communication channels used (VPN connections) Rs. 200,000

Initial high performing servers and PC cost Rs. 750,000

Total (per annum) Rs. 1,800,000

Total (per month) 1,800,000/12 Rs. 150,000

Actual cost reduction when suggested (modern) methods are used:

Total cost reduction (per month) Rs. 1,245,000

Total cost incurred (per month) (Rs. 150,000)

Actual cost reduction (per month) Rs. 1,095,000

Therefore, we can save Rs. 207,000/= more per month if we use suggested cost reduction techniques.

Note: All these figures are just approximate figures

Conclusion

It is clearly seen that suggested cost reduction methods has the ability to reduce the organizational operational and overall cost further than the current cost cutting methods used. The suggested methods also help to improve the performance as a whole by energy saving, permanent staff reduction, etc.. Also, they are more cost effective although is associated with more risk.

From the above analysis, we identified that we can save Rs. 207,000/= more per month if we use suggested cost reduction techniques. (All these figures are just approximate figures).