Costing Models in

IT and ITES Sector

By
Dr. M. Kandan

Enterprise Learning Solutions

Market Overview
• Over the past decade, the IT industry has become one
of the fastest growing industries in India.
• Total software and services revenues were USD 22
billion in FY 2004-05.
• It is forecasted to register a growth of around 30-32%
in FY 2005-06
• Indian IT-ITeS exports is expected reach US$ 42bn by
2010.
• Over the years the industry evolved a sophisticated
model of operations and created global delivery models
(onsite-near shore-offshore).
• The industry adopted sustainable solutions to various
issues such as risk management, retention and cost
management.
Sector-wise break-up ( billion USD)
2005-06
2003-04 2004-05
(Est)

IT Software and Services

9.2 12.0 15.2
Exports

IT Enabled and Business

Process Outsourcing 3.6 5.2 7.3
Services Exports

Domestic Market 3.9 4.8 6.0

Total IT and related

16.7 22.0 28.5
services
Costing Models

Broadly the costing models are

– Activity based costing (ABC)
– Time and material
– Fixed cost model
– Dedicated capacity building
– A combination of the above
Activity based costing (ABC)

• ABC model is a systematic way of capturing effort and

cost at the source of development or service delivery
based on the work breakdown structure of the project.
• It has the potential to provide insight into what drives
costs and profits across an enterprise.
• It can provide managers with information that enables
them to take meaningful and quick decisions such as
pricing, key account negotiation and product strategy.
• Rather than starting with the general ledger and
working down through activities to cost objects it is far
more effective to start with the cost objects
themselves.
Activity based costing Contin…

• There is a belief that activity-based costing (ABC) is

laborious and needs armies of accountants to generate
any meaningful results.
• Only to have them finally dismissed by line managers
as being out of date and unreliable.
• The ABC is time-consuming, cumbersome if we have
to manually collect the data from a large number of
contributors.
• Which means that most management accountants
cannot provide reports in line with business managers’
monthly management reporting cycles.
Activity based costing Contin…

• Hence, acceptance and use of ABC was limited and

the reasons are many:
– It is common with ABC to find activity dictionaries
that run to many hundreds and occasionally
thousands of activities, as extraneous activities that
account for minute amounts of cost are included into
the ABC system.
– Such exhaustive list also make it difficult for the
developer to enter data accurately.
– In addition, few business units carry out only one
activity. This means that increasing the number of
activities in a model also increases the complexity.
Activity based costing Contin…

– Traditionally, ABC data was collected by paper-based surveys

and therefore required collating and re-keying into the ABC
model.
– Furthermore, the information and insight generated by activity-
based costing is worthless until executives and manager’s
right across the organization can access it and use it in their
decision-making.
– Typically this means exporting the data out of the ABC
application into spreadsheets or a business intelligence tools
before manipulating it and distributing to management in a
variety of formats that are meaningful to the stakeholders.
– As a result the amount of time and cost expended in reporting
can be extensive.
Activity based costing Contin…

• However, the web-based ABC removes many of

the obstacles and can generate meaningful
reports to aid managerial decisions.
• Web-based ABC can have provision to schedule
and monitor repetitive processes to collate data
from many business units or remote branch
contributors over the web.
• Also pre defined reports can be generated in no
time to help the line managers for business
decision making.
• Also, it can be integrated with the business
intelligence portal already in place.
Activity based costing Contin…

• More importantly, with the web-based ABC can provide

frequent reports to management, moving from
quarterly to monthly reporting.
• Management can be provided with monthly activity
costs to understand trends in the unit cost and monitor
the impact of initiatives designed to improve
productivity and reduce costs.
• The project managers can monitor cost and
productivity data on a weekly basis using the
predefined report feature.
Implementing ABC model

• Identify major business units and functional teams.

• Identify all roles in each of the functional teams.
• Identify major activities for each of the roles.
• In identifying the major activities be realistic and don’t
include activities that are rare and take very little time
and inconsequential.
• Build/configure the ABC in a web environment and
design necessary reporting module.
• Add all the members to the tracking system and assign
them to various project.
• Start tracking the activities/time for each business unit
member including login and logout time.
Implementing ABC model Contin…

• Be realistic to have a non project/non billable activities.

• Review project wise /team wise and unit wise analysis
periodically.
• Use user feedback to refine and improve the method of
data capturing and reporting to tools.
• Use historical data to analyze productivity and cost
factors.
Implementing ABC model Contin…

• Extend the model to capture quality related data and

the cost of rework by refining the activity list to capture
rework.
• Link quality and productivity data to individual and
teams.
• Use system to measure individual/team performance in
terms of quality and productivity.
• Establish benchmark for productivity, quality and cost
parameters.
• Export data to the organization wide ERP.
Thank you
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