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A Closer Look at Cost Management in ASEAN Countries

By Eric van der Vorst

How much do ASEAN businesses care about costs? And how professionally are they currently managing their finance function in order to provide solid management accounting and decision making information? A short survey among financial management consultants in the ASEAN region showed that most companies in Southeast Asia do not have clear insight into common management accounting variables such as profitability, idle capacity or a volume-based budget.

This article will investigate the reasons behind the slow development of professional cost management in ASEAN countries. It will also give advice on how to persuade companies to improve their cost management processes, including some valuable best practices to keep in mind while selling a cost management project.

Chart 1: Most common answers in survey among consultants in ASEAN.

Chart 1 (1)

As can be seen in chart 1, the use of cost-allocation and cost management in ASEAN is not a very widespread practice. Only a minority of ASEAN companies currently makes use of important management accounting insights. What’s worse is that most survey respondents indicate that only a minority of ASEAN companies currently bases cost/capacity related management decisions on the right management accounting information. There are four main reasons for this backlog.

What’s blocking the professional cost management approach?

Cheap labour

In western countries, such as The Netherlands, it is often essential for companies to have good cost management in place. Every employee that is not reaching his full capacity forms a burden to the company. Nurses for instance have to follow strict time schedules including minute-based standards for performing activities. In many other industries manual back office work is either automated because computers are cheaper than manpower, or it is outsourced to ASEAN countries.

In ASEAN, average salaries and employee benefits are much lower than in Western countries. In almost all ASEAN countries the average salaries are significantly lower than in Europe or the US.

The cheap labour effect is visible in two ways. Firstly managers often regard proper cost management as a luxury good which will not bring much benefit. The impact of firing inefficient employees is small since they don’t cost much anyway. In many companies the efficiency of employees is not even measured. Secondly this same effect takes place inside the team of management accountants that will have to produce the costing calculations. Companies can easily hire a few extra, often relatively low-educated finance employees to work in excel to provide management accounting information, instead of funding a large scale project to automate and improve the management accounting information processes.

Everybody knows Excel

Cost Management efforts in excel are often less detailed, more error prone and more difficult to explain than models in dedicated cost management software. Companies therefore use the limits of excel as the limit of their management accounting information. They do not take the effort to manage their costs simply because the excel-based process is too complicated.

Excel-addiction is a worldwide phenomenon. However, it seems to be much more present in ASEAN than elsewhere. Three main reasons can be found:

  • Cheap labour: in most ASEAN countries it seems less expensive to hire extra finance people to work on manual costing calculations than to invest in professional cost management software.
  • Education: Excel is a standard part of financial education in ASEAN countries while other software is not. All employees have the skill to work with excel, but do not receive training to work with professional management accounting software.
  • The absence of ASEAN business software: The ASEAN market for business software is still not developed at all. ASEAN countries might be strong in developing apps or social networks, but for management and financial accounting software they heavily depend on foreign vendors. Even if the foreign vendors are willing to sell in ASEAN, it is understandable that the threshold for ASEAN companies to buy foreign software is higher than buying software from their own market.

Conservative managers

In many ASEAN businesses the managers still base their management style and decisions on ‘old school’ techniques. Most of the current managers at CxO-level were educated in a different era. In Vietnam, for instance, many managers are still impacted by the mechanisms of the subsidy period.[1] In times when the state would provide funding, control of costs wasn’t needed. The managers here simply didn’t grow up with cost management.

Economic growth has caused old mechanisms to be relatively effective, so managers often stick to those. The replacement of older managers by younger ones could trigger attention on cost management, as it is often neglected by older managers.

Besides that, managers, not only in ASEAN, often focus on the short term costs and benefits of improving their cost management systems. Especially Activity Based Costing is seen as a pricy short term investment. The same goes for replacing excel by specialized software. Long term benefits and total cost of ownership are often not taken into account. Business cases calculating long term cost savings are often not made when deciding about Cost Management initiatives.

Market growth & maturity

Compared to Western markets, all ASEAN markets, including Singapore, still have a fast growing economy. The effects of population ageing and expensive labour have not reached ASEAN yet. In fast growing markets, such as Vietnam, companies do not often have to worry about costs because market growth causes the next profit to be higher than the previous one anyway. In recent years however, certain ASEAN countries have seen a slowdown in the economic growth. Those countries include Malaysia, Singapore and Indonesia. In these countries many companies will still be making profits, but it might not be as much as they had expected. Within the next ten years, an increasing demand for cost reduction and cost management seems to be inevitable in these countries.

However, the future of these ASEAN markets can not completely be compared to Western markets. Singapore currently has a relatively large number of citizens between 40-60 years old. Just as in Europe the retirement of these employees could cause an increased pressure on the working population. By the time they retire however, many of them can easily be replaced by employees from neighbouring countries. In the Philippines, Cambodia, Myanmar and Indonesia more than 35% of the population is younger than 20 years old while Vietnam and Malaysia have large groups of 20-30 year olds. In Thailand the ageing population could become a problem with a large number of 35-50 year olds. But also here there is the possibility to hire employees from other ASEAN countries.

An economic crisis or stagnation can trigger the improvement of cost management systems. In Thailand, for instance, the economic crisis of 1997 forced Thai firms to adapt innovations such as Activity Based Costing to keep control of their organisation.[2] Similarly, current economic stagnation in Singapore, Malaysia and Indonesia could indicate a rising demand for cost management.

 

So do they need to care about costs?

Yes they do. Any organisation that wants to predict the future and analyse the past needs to have a good cost management framework. In ASEAN it is not the question whether there is need for cost management, but whether there is a trigger to ignite cost management thinking within an organisation.

In the (semi-) public sector, companies depend on government funding. Many governments in ASEAN, including Vietnam, Laos, Malaysia and Cambodia have a structural budget deficit. In those countries the cost management in the public sector will have to improve to reduce the budget deficits and eventually to keep the nation’s wealth growing. In other countries the budget deficits are under control, but it is questionable whether government agencies have financial models that can realistically predict their future. Budgets here are often input-based and determined with a ‘cheese slicer’, taking the previous overall budget and simply adding or cutting a percentage, not paying any attention to the output that each government agency actually produces.

Chart 2: Budget deficits as % to GDP range 2009-2015

Chart 3
More sustainable triggers can be found in competing markets where there is a high pressure on costs. In logistics for instance, there is a lot of competition and margins can be low. The ASEAN aviation industry is still growing but so is the number of airlines. Vietnam alone already has three airlines with a fourth one entering the market soon. Other industries all have their own examples of pressure on costs and high competition. In other parts of the world we have seen that competition is always an important trigger for cost management. A Deloitte survey among US-based Fortune 1000 companies showed that in most industries a competitive advantage over the peer group is the main driver of cost management.[3] In these industries, reduction in operational costs is the top area for cost reduction.[4]
In the private sector there are other triggers. One of them is the growing demand of regulators to make costing calculations. Compliance with accounting standards can be a very forceful way to get ASEAN companies ready for cost management. The disadvantage of this ‘financial accounting’ trigger can be that companies will not see the real added value of good cost calculations and will just choose the easiest way to satisfy the stakeholder, usually through a highly abstracted and input-based excel model.

Now, a manager might argue that his company is already doing fine without advanced cost management. Gross margin is good, targets are met and stakeholders are satisfied. Why would anyone spend money and time on cost management if the company is already in perfect shape?

First of all, you can’t really know if your company is ‘lean and mean’ without doing cost management. Your gross margin can be good but you might still be losing a lot of money on bad products or inefficient departments. Secondly, you could argue that a satisfied company has simply set its targets too low. Thirdly, even if cost management might seem like a waste of time at the moment, this does not mean that there will be no long term benefits. The market share of a company can fluctuate heavily. You might be the market leader now, but in five years you might have to fire half your staff. Using good cost management makes it possible to predict best- and worst case scenarios and adjust your course before hitting the iceberg.

 

So how to reach more clients?

Start with small and medium sized companies

It might seem paradoxical to focus on small companies before large companies. The general idea is that large firms often pay more for large scale consulting projects. Big companies might indeed eventually be bigger spenders than small firms. However, it also takes much more time to sell projects to big organisations. Company politics and regulations often slows down the acquisition process. Large scale projects also have a bigger chance to fall silent, be more costly than expected, become too complex, or even fail.

Besides that, large firms often make profit anyway. They often have one or two ‘cash cows’ that generate enough profit to compensate for inefficiencies in other parts of the organisation, making cost management seem redundant or even unwanted. For smaller companies the impact of good or bad cost management is much more tangible. Even after making only a few good cost management decisions, they will immediately notice an increase in cost reduction and profit.

Keep the project small and practical

If you do decide to approach big companies, try to keep the scope of the project as narrow as possible. Most firms will need a culture change to become cost management leaders. A culture change within a company can take years. Even if the CEO and CFO are ready for good cost management, many branch and department managers might not be. Large cost management projects aiming to achieve perfection from scratch often fail or take much more time and effort than expected. It is better to introduce cost management step by step in various parts of a company. Start for instance with the IT department, then expand to supporting departments, add some front office departments and expand slowly.

It is also important to get every manager inside a company involved in the cost management process. Do not simply sell cost management as an off-the-shelf solution, but organize meetings, workshops, trainings in which you explain the benefits of cost management to all parts of the organization. Focus on what the model can offer to each specific department.

Sell the software as if you own it

As mentioned earlier, ASEAN companies are often afraid when it comes to acquiring professional software from foreign countries. They might have bad experiences with local software support in previous acquisitions. A project is always sold easier if it appears to be sold from the home market. This gives clients a feeling of continuity and security. Of course it will be difficult for you to build new cost management software. Therefore it is recommended to familiarize yourself with the software you like most, and sell it to the client as if it were your own. With CostPerform for instance it is possible to sell the tool without direct contact between the client and the software developer. The client pays you and you pay CostPerform. You offer support and for that you receive a support fee. By doing this you ensure your client that even though this software is foreign, there are no worries about the long term usage, because your firm will guarantee support.

Make it more than a ‘finance party’

One of the biggest mistakes when implementing cost management is to let it be done by finance people for finance people. It is understandable that the finance department and the CFO of a company play a central role in cost management, but it should never be the sole owner and user of cost management. In a recently published survey by KPMG UK and the ACCA, 77% of 900 worldwide respondents agreed that planning, budgeting and forecasting should have a partnership-based approach driven jointly by the business and finance.[5] Implementing cost management with only involvement of the finance team will make cost management a ‘finance party’ that will not get support from other parts of the business. Or, as the writers of the KPMG & ACCA report concluded: “Ownership must remain within the business, with Finance being a facilitator of the process and one of a number of equally important inputs into it.”[6]

Do it right or don’t do it at all

It is definitely possible to implement cost management in ASEAN. In some places it has actually already been done. For instance, over the past decade, many Vietnamese banks have successfully implemented cost management and cost allocation models. For these banks cost management is a way to survive. Vietnam currently has around 40 banks. Competition doesn’t get much bigger than that. Also in manufacturing, traditionally an industry with low unit margins and pressure on costs, cost management is already an important part of management decision making. Considering these success stories, another good advice will be to only use cost management if you are able to set it up in a professional and easy-to-use way. Complicated manual or overly ‘techy’ processes are always counterproductive.

It might be difficult to resist the client’s demand for an ‘easy, quick and cheap’ excel-solution, but eventually it is in the client’s interest to advise them a professional approach. As you can see in chart 3, our survey among ASEAN consultants shows that companies often expect software that is easily integrated, easy to use and not too expensive. Cost Management software that has all these traits can only be found among specialized vendors, such as CostPerform.

Chart 2

 

This article was written by Eric van der Vorst, owner of Value to Use, a consulting company based in The Netherlands. Please visit our website www.valuetouse.com for more information.

[1] Tandung Huynh, Guangming Gong, Huyhanh Huynh, ‘Suggest solutions for diffusion and implementation of Activity-Based Costing in Vietnam’, Asian Economic and Financial Review, 2014, 4(2): 173-182.

[2] Wiriya Chongruksut, The Adoptation of Activity Based Costing in Thailand (Victoria University, Australia, 2002) iv-v

[3] Based upon a survey among US companies in the Fortune 1000. Omar Aguilar, Ryan Jacob, Thriving in uncertainty. Deloitte’s fourth biennial cost survey: Cost improvement practices and trends in the Fortune 1000 (Deloitte Consulting LLP, 2016) 27-33.

[4] Ibidem.

[5] John O’Mahony, Jamie Lyon, Planning, Budgeting and Forecasting: an eye on the future (KPMG/ACCA, 2015) 8.

[6] Ibidem 7.