Insurance
Content
HOMEWORK INSTRUCTIONS 6
Fleet Ltd
a) An incremental costing analysis Current cost per annum
Depreciation cost each year Salary of IT staff Rent of IT building Total fixed costs Depreciation has been calculated as £1.00 million/4 = £ 2,50,000 First year £ 2,50,000 £ 3,00,000 £10,000 £ 5,60,000 2nd yr £ 2,50,000 £ 3,00,000 £10,000 £ 5,60,000 Third year £ 2,50,000 £ 3,00,000 £10,000 £ 5,60,000
Outsourcing cost per annum
First year 2nd yr Third year
initial contract cost One staff to be retained A contract manager Rent of IT building Less sub letting of IT building Less saving of consumables Less Saving of Annual OH for the IT dept Less Saving on account of charles smith
Total fixed cost per annum
£2,50, 000 £30, 000 £50, 000 £10,000 (£4,000) (£5,000) (£ 14,580) (£ 20,000)
= £ 2,96,420
£2,50, 000 £30, 000 £50, 000 £10,000 (£8,000) (£6,000) (£ 14,580) nil
= £ 2,91,420
£2,50, 000 £30, 000 £50, 000 £10,000 (£10,000) (£7,000) (£ 14,580) nil
= £ 2,88,420
b) the effects on reported profits
as we can see costs for the company under current cost conditions are much larger in the next three years . depreciation has been calculated assuming that the components are equally used in the total life period of four years. ( one year before and three years remaining). incremental profit for the next three years is calculated as follows:
Total fixed costs under current scenario Total fixed costs under outsourcing scenario Incremental profit £ 5,60,000 £ 2,96,420 = £ 2,63,580 £ 5,60,000 £ 2,91,420 =£ 2,68,580 £ 5,60,000 £ 2,88,420 = £ 2,71,580
this means the company is going to save lot of cost and the profitability of the company will rise by these respective amounts in the next three years.
c) Discussion of other factors that need to be taken into account before a decision is made
Beyond cost savings and the need to focus resources on your company's core strengths, there are other various reasons why you should – or should not – outsource. After all, not all outsourcing companies are created equal, and outsourcing, in general, is not necessarily the end-all and be-all of IT strategy.
Technical Expertise The workforce that will handle the day-to-day development work, quality management, documentation, and analysis of your software development project is the heart and soul of your outsourcing engagement. In this type of situation, a larger headcount is not always the best option; in fact, a small team of internal specialists within your firm may be more effective than a pool of junior engineers offshore. Therefore, it is vital that you ask the potential vendor about its standard knowledge management processes and training programs. This access to technical expertise should also include knowledge transfer from the vendor to your in-house team as well. Quality Quality must not suffer when your organization sends aspects of your operations or parts of your development job to a third-party provider. Fortunately, the vast majority of outsourcing providers have embraced industry-wide quality management processes and standards. In choosing the best provider for your organization, it is important to review how quality is being managed within that company. Vendor's Expertise in Your Business Space Not all vendors are created equal; we know that much. However, much like having an individual specialization, it helps if the vendor has had extensive experience in your particular business space or vertical. Prior experience in delivering projects for the financial services sphere, for example, could mean that your organization can access the vendor's wealth of technical and industry knowledge. Overall Business Strategy you have to see if outsourcing is merely a short term knee-jerk reaction required for cost-cutting or this strategy is a long-term engagement that will become a integral to the organization's overall business plans. the permanence or the temporariness of outsourcing's presence in your operations can affect resource acquisition, internal processes budget allocation.
d) Recommendations with Reasons
•
sunk cost: the amount spent on installing the IT equipments are all part of sunk cost. they are already spent and the decision regarding it can't undo the damage which has already been done. but when it is resold after only one year only 30% of the amount is recoverable. so it is lost opportunity as far as fixed assets are concerned. this decision made now would have been useful one year before. increase in profitability: BY Outsourcing the company is actually in a position to take advantage of the profitability situation. Profits for the entire three years are showing signs of increasing for the entire period. thats worth a try only if it does not compromise the IT service quality in the Long Run. saving of human resources: it is also capable of saving lots of resources on account of human resource planning and watching it executed well. saving of other resources: other resources can also be saved partially like paying pensions and medical benefits given to people in IT department. better management of IT services: Because IT services is outsourced to a fairly experienced set up and possibly off shore place , the company will be able to manage it more efficiency and more coordinated manner and perhaps without thinking too much about the service. so it should be left to experts say the least.
•
• • •
An Executive Summary
The business structure and function of American and European corporations has become too fast paced to be ably handled by a single body of management. Most of the unified attempts only lead to instabilisation of the entire structure. You simply cannot keep on stacking up cards above without adding more at the bottom. Small industries or giants have all resorted to some sort of support or the other commonly termed as Outsourcing. the core activities have to be world class and that the organization must strive to achieve it through planning. These core skills were identified as essentially buying and selling. so the immediate focus should be shifted to this and this core activities are required to be developed rapidly. by focusing on one's own strengths more synergy can be developed. synergy will bring in better results - reduction of cost , more sales , less complications in planning and better and increased profitability. but this can't be achieved in isolation. You also need world class support, i.e. noncore activities, but this is difficult, if not impossible to achieve in-house.
for this purpose and in the backdrop of these activities outsourcing takes its advantageous position. Availability of world's best services at much lesser cost. Provide better, specialized, customized and dedicated customer service Keep pace with the rapidly changing business modules Be reliable and innovative. Shedding of HR or IT burden helps you do better in core business. 5. Reduce the risk of technological obsolescence and increase efficiency by consolidating and centralizing functions. 6. Reduce overheads, free up resources, the money can be applied to develop the Core business rather on overheads such as computers, desks etc. 7. You have to outsource if you don't have the rightly skilled professionals. Leverage the provider's extensive investments in technology, methodologies and people. Right now FLEET is looking at getting advantageous position through their ambitious outsourcing program. it is highly likely that they will go through the plan as it is likely to get them mileage both in terms of cost cutting and profit maneuvering. it will also more likely to help streamlining the core business in a more fructified manner. 1. 2. 3. 4.
Fleet Ltd
a) An incremental costing analysis Current cost per annum
Depreciation cost each year Salary of IT staff Rent of IT building Total fixed costs Depreciation has been calculated as £1.00 million/4 = £ 2,50,000 First year £ 2,50,000 £ 3,00,000 £10,000 £ 5,60,000 2nd yr £ 2,50,000 £ 3,00,000 £10,000 £ 5,60,000 Third year £ 2,50,000 £ 3,00,000 £10,000 £ 5,60,000
Outsourcing cost per annum
First year 2nd yr Third year
initial contract cost One staff to be retained A contract manager Rent of IT building Less sub letting of IT building Less saving of consumables Less Saving of Annual OH for the IT dept Less Saving on account of charles smith
Total fixed cost per annum
£2,50, 000 £30, 000 £50, 000 £10,000 (£4,000) (£5,000) (£ 14,580) (£ 20,000)
= £ 2,96,420
£2,50, 000 £30, 000 £50, 000 £10,000 (£8,000) (£6,000) (£ 14,580) nil
= £ 2,91,420
£2,50, 000 £30, 000 £50, 000 £10,000 (£10,000) (£7,000) (£ 14,580) nil
= £ 2,88,420
b) the effects on reported profits
as we can see costs for the company under current cost conditions are much larger in the next three years . depreciation has been calculated assuming that the components are equally used in the total life period of four years. ( one year before and three years remaining). incremental profit for the next three years is calculated as follows:
Total fixed costs under current scenario Total fixed costs under outsourcing scenario Incremental profit £ 5,60,000 £ 2,96,420 = £ 2,63,580 £ 5,60,000 £ 2,91,420 =£ 2,68,580 £ 5,60,000 £ 2,88,420 = £ 2,71,580
this means the company is going to save lot of cost and the profitability of the company will rise by these respective amounts in the next three years.
c) Discussion of other factors that need to be taken into account before a decision is made
Beyond cost savings and the need to focus resources on your company's core strengths, there are other various reasons why you should – or should not – outsource. After all, not all outsourcing companies are created equal, and outsourcing, in general, is not necessarily the end-all and be-all of IT strategy.
Technical Expertise The workforce that will handle the day-to-day development work, quality management, documentation, and analysis of your software development project is the heart and soul of your outsourcing engagement. In this type of situation, a larger headcount is not always the best option; in fact, a small team of internal specialists within your firm may be more effective than a pool of junior engineers offshore. Therefore, it is vital that you ask the potential vendor about its standard knowledge management processes and training programs. This access to technical expertise should also include knowledge transfer from the vendor to your in-house team as well. Quality Quality must not suffer when your organization sends aspects of your operations or parts of your development job to a third-party provider. Fortunately, the vast majority of outsourcing providers have embraced industry-wide quality management processes and standards. In choosing the best provider for your organization, it is important to review how quality is being managed within that company. Vendor's Expertise in Your Business Space Not all vendors are created equal; we know that much. However, much like having an individual specialization, it helps if the vendor has had extensive experience in your particular business space or vertical. Prior experience in delivering projects for the financial services sphere, for example, could mean that your organization can access the vendor's wealth of technical and industry knowledge. Overall Business Strategy you have to see if outsourcing is merely a short term knee-jerk reaction required for cost-cutting or this strategy is a long-term engagement that will become a integral to the organization's overall business plans. the permanence or the temporariness of outsourcing's presence in your operations can affect resource acquisition, internal processes budget allocation.
d) Recommendations with Reasons
•
sunk cost: the amount spent on installing the IT equipments are all part of sunk cost. they are already spent and the decision regarding it can't undo the damage which has already been done. but when it is resold after only one year only 30% of the amount is recoverable. so it is lost opportunity as far as fixed assets are concerned. this decision made now would have been useful one year before. increase in profitability: BY Outsourcing the company is actually in a position to take advantage of the profitability situation. Profits for the entire three years are showing signs of increasing for the entire period. thats worth a try only if it does not compromise the IT service quality in the Long Run. saving of human resources: it is also capable of saving lots of resources on account of human resource planning and watching it executed well. saving of other resources: other resources can also be saved partially like paying pensions and medical benefits given to people in IT department. better management of IT services: Because IT services is outsourced to a fairly experienced set up and possibly off shore place , the company will be able to manage it more efficiency and more coordinated manner and perhaps without thinking too much about the service. so it should be left to experts say the least.
•
• • •
An Executive Summary
The business structure and function of American and European corporations has become too fast paced to be ably handled by a single body of management. Most of the unified attempts only lead to instabilisation of the entire structure. You simply cannot keep on stacking up cards above without adding more at the bottom. Small industries or giants have all resorted to some sort of support or the other commonly termed as Outsourcing. the core activities have to be world class and that the organization must strive to achieve it through planning. These core skills were identified as essentially buying and selling. so the immediate focus should be shifted to this and this core activities are required to be developed rapidly. by focusing on one's own strengths more synergy can be developed. synergy will bring in better results - reduction of cost , more sales , less complications in planning and better and increased profitability. but this can't be achieved in isolation. You also need world class support, i.e. noncore activities, but this is difficult, if not impossible to achieve in-house.
for this purpose and in the backdrop of these activities outsourcing takes its advantageous position. Availability of world's best services at much lesser cost. Provide better, specialized, customized and dedicated customer service Keep pace with the rapidly changing business modules Be reliable and innovative. Shedding of HR or IT burden helps you do better in core business. 5. Reduce the risk of technological obsolescence and increase efficiency by consolidating and centralizing functions. 6. Reduce overheads, free up resources, the money can be applied to develop the Core business rather on overheads such as computers, desks etc. 7. You have to outsource if you don't have the rightly skilled professionals. Leverage the provider's extensive investments in technology, methodologies and people. Right now FLEET is looking at getting advantageous position through their ambitious outsourcing program. it is highly likely that they will go through the plan as it is likely to get them mileage both in terms of cost cutting and profit maneuvering. it will also more likely to help streamlining the core business in a more fructified manner. 1. 2. 3. 4.
