Use of Outsourcing, Activity-Based Budgeting, and Management, and Continuously Improving Efficiency - Example

Benchmark Report By Course Instructor Institution Date Table of Contents Introduction 3 Data Choice 3 Operating income 4 Operating expense 4 Performance against the benchmarks 8 Possible Changes 9 Outsourcing 9 Activity Base budgeting and management 10 Maximize efficient to drive down cost 12 Automation of processes to reduce labor costs 12 Streamlining operations and compressing the time cycle 12 Eliminate waste and redundancies. 12 Summary and conclusion 13 Recommendations 13 1.Adoption of outsourcing 14 2.Activity-Base Budgeting ( ABB) and Activity-Based Management (ABM) 14 3.Maximization of efficiency 14 Implementation plan for putting the recommendations into action 14 1.Outsourcing 14 Deciding on the activities 14 Deciding on the responsibilities of the outsourced service provide 15 Publication of the tender 15 Selection of the best bidder 15 Supervision 16 2.Activity-Based Budgeting and Activity-Based Management 16 Collecting Cost data 16 Assigning costs 16 3.Minimization of wastages and increase of efficiency 16 References 17 Executive Summary Benchmarking is a critical tool for management and improvement of businesses. This report provides an evaluation of the performance of our CBD building facilities against the industries benchmark data in order to identify opportunities for improvement and enhancement of efficiency. The data chosen for benchmarking is operational income and operation costs. The data was chosen because being accounting data; it has some statistical advantages that facilitate comparison. Although the firm has positive operating income, the operation cost is high. This necessitates the need for strategies to reduce costs. The report explores the use of outsourcing, activity-based budgeting and management, and continuously improving efficiency. Introduction Benchmarking is an important tool for monitoring and controlling a business development (Elliott & Folsom, 2013). We have also adopted this tool to evaluate and monitor the performance of our facilities. Our CBD building has completed it business year and it time to evaluate and report its performance. This business performance report will evaluate the performance of the CBD building facility against the benchmarked performance. The report will determine and justify the benchmark data that is to be used for this analysis. Data Choice Several sets of data will be used to evaluate the facility. The data sets will capture various different benchmarks in regard to the performance of the building. The building is located in Perth CBD. It is an eight years building with an A Grade standard. The building possesses net lettable space of 23, 000m2. Recent data that will be used for this benchmark analysis includes operating income, operating expenses. The choice of these data is based on the fact that is the best data necessary to evaluate a firm’s performance or growth. It is also the main set of data used to benchmark performance of firms in the property industry. Being accounting data and metrics, this data has numerous other advantages that make it suitable for benchmark evaluations (Jain, & Malehorn, 2006). Fist, it is calculated using accurate and dependable information. It is consistently calculated from period to period. It is easy to compare with other similar organizations. It can be observed as a statistic in time as a trend over a specific period of time. It is also open to interpretation using both internal and extern parameters. The data that will be use will include Operating income Operating income is the indicator of how profitable a firm is. It indicates how revenue will finally yield profits for a firm. Operating expense This is a type of expenditure which results from normal business operations. Managers are always preoccupied with determining how low they can reduce operating expenses (OPEX) without affecting efficiency (Elliott & Folsom, 2013). Bellow is the entire set of the buildings benchmark data: Operating income Rental Income $540.50 Car Park Income $37.80 Naming/Signage income $2.50 Total $580.8 Statutory charges Municipal Rates $30.50 Water and Sewerage Rates $6.80 Land Tax $12.18 Other Statutory Charges $2.62 Total 52.1 Operating Expenses Insurance Premiums $4.10 Air conditioning / Ventilation $9.62 Common Area Cleaning $16.50 Building Supervision $10.80 Car Parking $4.50 Electricity $9.70 Fire Protection/Public Address $2.50 Gas and Oil $0.55 Lifts and Escalators $9.72 Pest Control $0.15 Repair & Maintenance $7.42 Emergency Generators $1.82 Energy Management/building automation systems $1.53 Security/ access control $17.52 Gardening/ landscaping $0.90 Administration management fee $15.07 Miscellaneous $3.80 Total 116.16 Recoverable expenses Tenancy area cleaning $22.82 Total 22.82 Spatial Information Average floor area per Full Time Employee 20m2 Building Efficiency Rate (NLA/GFA) x 100 65% Net Personal Work Area 44% Circulation Area 25% Support Area 31% Total This data will be compared to the Property Council of Australia’s property management benchmarks. The Property Council of Australia has set benchmarks that asset manager can use to gage the performance of their assets. Bellow is how our firm performs against the benchmark data. Figure 1. Operating Income Figure 2. Expenses Performance against the benchmarks Our CB building is performance good but fails to meet several benchmarks. The performance meets several benchmarks in operational income. The rental income if is far beyond the industry benchmark as well as the industries highest range benchmark. The car park income is also far beyond the benchmarks (both the industry optimum benchmark and the highest range benchmark). However, the naming and signage income if bellow the industry benchmark. On a positive not, the naming and signage income is above the industries lower range benchmark. However, there is still need to find way to increase the naming/signage income to equate of surpasses the industry benchmarks that way rental income and car park income are. The CBD building fails to meet the expenses benchmarks. The building’s statutory high is higher than the industry benchmark as well as the industries highest range benchmark. This means that we are spending more on statutory charges than necessary. The same situation is replicated for the main operating costs. The operating expense for the building is far beyond the industries benchmark and is almost double the industry’s highest range benchmark. This means that the building is incurring double the cost necessary for operation. This can be a result of wastage of poor use of funds. As noted earlier, it is always a preoccupation of managers to find a way to lower operating cost to the lowest cost possible at which a firm can operate without affecting efficiency. It is necessary to find a way to reduce to operating cost to a lever bellow the industry benchmarks of close to the benchmarks. These results are all centrally to the performance assumption that paints the ideal performance situation of the CDB Building. Is noted earlier the profits are expected to be high that the benchmarks for the Building to generate profits above the industry average. On the other hand, the hotel expenses are supposed to be low bellow the industry average. Low expenditure is an indication that that management is powerfully in charge of all the expenses and has minimized all wastages. Low operation cost bellow the industry average creates an opportunity to expand the profit margins. In our CBD building case, reduction of operating costs while maintaining the current rates of profitability would yield the best profit margin in the industry. Possible Changes As seen in the analysis above, there is needed to find measure to bring operation costs under control. There are various plausible options that the management can pursue to bring the operational cost down without compromising the quality Outsourcing Outsourcing can play a critical role in the reduction of operation cost for any business. Outsourcing entails contracting some of the business activities to other parties or firms (Taplin, 2007). In a Business seek the service of an outsourcing firm that is will to undertake certain activities for the business at a cost lower than what the business would have incurred through direct cost. In fact, the business can chose an outsourcing firm through active contract bidding where the best bidder is given the contract to provide the outsource service. This can ensure that the firm gets the best price possible since the bidder will compete thorough reducing their prices, and the management team will only chose the bidder who offers high quality services at a reduced cost. This outsourcing can result in benefits that go beyond mere reduction of operating costs. It may also account for some indirect costs. It is always wise to seek and determine the costs through a thorough in-depth economic assessment. For instance the contract should be clear on expenses such as electricity and telephone call at the building. Variable needs and costs must be accounted for. If executed properly intemeida benefits which are felt almost immediately include instantenious and automatic cost reductions (Taplin, 2007). Medium-term benefit will include propagation of best practices which will further, long term, impact or reducing both direct and indirect costs. Outsourcable activities include common area cleaning fire protection and public address, Repairs and Maintenance, energy management and building automations systems, security and access control, and gardening and landscaping. Additional benefits of outsourcing that also reduce costs include use of on call experts, reduction of large taskforce, and flexibility. Activity Base budgeting and management Activity-based budgeting is a common too in cost accounting. ABB allows manger budget expense proportions on the basis of past production events (Weil & Maher, 2005). The management conducts an overview of the const that have been incurred previously in conducting certain activities like parking, provision of security, cleaning or automation, among others then budget the overall costs from provision of the same services. Based on the values of these activities the management my find it appropriate to change they way they are conducted or reduce that rate or duration in which they are conducted. The business chooses the best option. Budgeting has always been the best tool for controlling funds (Needles, Powers & Crosson, 2010). Through Activity-based budgeting and management and ability of budgeting to control costs is extended resulting in reduced operational costs. Activity base management (ABM) places a lot of emphasis on identification strengths and weaknesses. It seek to identify avenues through which a business is loosing money in order to eliminate the activities or enhance them to improve profitability ABM evaluates equipment, employees, facilities, overheads, distribution among other elements to establish and allocate activity cost. Activity based management and activity based budgeting always go hand in hand (Hilton, 2009). Maximize efficient to drive down cost Increase efficiency can have numerous positive impacts on the performance of the business through reducing the operational costs. Efficiency can be achieved through targeting a number of areas of operation. The necessary activities realize a reduction in cost include compressing cycle times, automation process, streamlining inventory, optimizing staffing and resources, eliminating errors in order fulfillment, procuring inputs at better prices. Automation of processes to reduce labor costs The production of employee is limited by the confines of the working environment. Automation on the other hand has the ability to relieve employees’ routines and error prone tasks. It can encourage direct workflow leading to greater productivity. Automation improves service provision and reduces the staff engagement in nonbailale tasks that have no value to the business. It important to develop an appropriate system for tracking employees’ skills and training to ensure that their talents are properly used where they are needed. Embedded mechanism can help deal with challenges before they become costly. Streamlining operations and compressing the time cycle Time is important. It is necessary to reduce they time used in conducting routine activities at the premises. This will reduce the manpower hours used to conduct such activities and as a result reduce the expense incurred in conducting them. Eliminate waste and redundancies. It is important to conduct an evaluation of all the activities conducted by premises management team to find out which activities are unnecessary. These are activities increase expenses and do not yield any returns to the firm. These should be scraped of and develop a unified view for prioritizing all important activities in the management of the business. Summary and conclusion It is evident that our CBD building performs very well in all area of operating income with only one area still needing improvement. Rental income and car park income are far above the industry benchmarks. Naming/Signage income is still below the marketed benchmark, however it is above the lower market benchmark and only misses the main benchmark by a few points. The main are of concern for our CBD building is operation cost which are extremes above the industry benchmark. A comparison between our performance and industry benchmarks revealed that our operation costs are double the industry’s highest benchmarked operation costs. These high costs can be interpreted as a representation of inefficiency, poor costing and wastages in the management of the building. Despite making impressive profits, the high operating costs have negative impacts on the firm profit margin. There is need to tame and reduce the operation cost to reduce their impact on the profit margins of our facility. As discussed in the report above, there are various tools that can be used to reduce the operation costs and their impacts on the profit margins. The following are recommendation that should be adopted by the firm to facilitate management of the costs. Recommendations This report has discussed three viable solutions that can be used by the management to control the operation cost. These strategies can be adopted in various proportions to have a combined effect of the three. 1. Adoption of outsourcing The CBD building management should outsource some of the function of maintaining the balding. The management evaluates all the activities that it undertakes in management the facility and determines which activities to outsource to another party. 2. Activity-Base Budgeting ( ABB) and Activity-Based Management (ABM) The CBD management should embrace ABB and ABM to help manage costs. To achieve this, the management should evaluate all activities and determine where wastages emanate from and reduce these wastages through proper allocation of costs when budgeting. 3. Maximization of efficiency The management can improve efficiency by eliminating activities that encourage wastages, improving existing activities and adopting new ones. The business may increase automation of processes to reduce labor costs, Streamlining operations and compressing the time cycle and reduce redundancies. Implementation plan for putting the recommendations into action 1. Outsourcing Outsourcing will be the first step in the implementation of the cost reduction strategy. Deciding on the activities The management will conduct a meeting and decide the activities to outsource. The management will come up the cineraria of selecting the activities that shall be outsourced. The activities that shall be outsourced will be the activities that are necessary for the running of the building but are unnecessarily consume resources extra resource if managed by the premises management team. Deciding on the responsibilities of the outsourced service provide Once the activities that shall be outsourced are identified, the management will develop a document documenting the responsibilities of the outsourced firm. The document shall clearly state the duties of the outsourced firm toward our CBD building management team and the duty out team will have toward the outsourced firm. Performance indicators to be observed by the outsourced service provider and the minimum requirement to be met by the provider shall also be established during this stage. The outsourcing cycle must also be established to determine how long the service provision contract will take it is renew of new providers are invited to bid. Publication of the tender Once all issues regard the outsourced service are dealt with, the management shall advertise the tender based on the legal tendering provisions calling on prospective service providers to bid. Selection of the best bidder Once the interested parties tender their bids, the management will audit the bidders document sand select the best bidders who will be awarded the contract to provide services to various activities in the managing of the building. Supervision Consistent monitoring and evaluation shall be done to ensure those who won the contracts stick within the performance parameters of the contracts. This will be done to ensure quality standards are not compromised 2. Activity-Based Budgeting and Activity-Based Management The activities that remain after some are outsourced will be handled through ABB and ABM. This will help the management to manage the costs associated with the remaining activities. To institute this strategy, the following activities will be adopted. Collecting Cost data This will involve collection of all information pertaining the costs accrued in the running of the CBD building. The target data will include financial date and operational data. Assigning costs Two methods will be sure to assign costs to the cost data collect in the first step. These are non-period costing and period costing. The cost will help in controlling expenses; assessing and evaluating activities and purposes of the activities; and predictive planning which entails trade-off analysis, what-if analysis evaluation of outsourcing decisions, investment choices and establishing profit margins based on various costing situations. Once the costs have been established and assessed, new cost will be allocated to every activity with priority and emphasis going to the most critical activities. Based on this not critical activities can be further outsources. 3. Minimization of wastages and increase of efficiency This will be done on a continuous basis and will also depend on the costing activities of ABB. The management will consistently evaluate activities and process to determine cost which ones are no longer necessary and those that amount to wastages. This will also be followed by decisions to forego the activities/process, change the way the activities are conducted or outsource them. . References Elliott, P. H. & Folsom, A. C. 2013, Exemplary performance: benchmarking star performers for business results, San Francisco: Jossey-Bass. Hilton, R. W. 2009, Managerial Accounting: Creating Value in a Dynamic Business Environment, New York: McGraw-Hill Jain, C. L., & Malehorn, J. 2006, Benchmarking forecasting practices: a guide to improving forecasting performance, Flushing, N.Y.: Graceway Publ. Co. Needles, B. E., Powers, M., & Crosson, S. V. 2010, Financial and managerial accounting, Mason, OH: South-Western Cengage Learning. Taplin, R. 2007, Outsourcing and Human Resource Management: An International Survey, London: Routledge. Weil, R. L., & Maher, M. 2005, Handbook of cost management, Hoboken, N.J: Wiley. Read More