Index Serial No.
Contents
Page No.
1. 2. 3. 4. 5.
About the Company Accounting Process Product Costing Costing Technique IT Cost Accounting
3 3 5 8 10
6.
7. 8. 9. 10.
Cost Behavior Generation
and
Invoice
Calculation of Application Cost Balanced Score Card Performance Index Budget Control
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17 19 20 23
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Tata Consultancy Services Mission: To help customers achieve their business objectives by providing innovative, best-inclass consulting, IT solutions and services.
Values: Leading change, integrity, respect for the individual, excellence, learning and sharing.
About the Company: Tata Consultancy Services Limited (TCS) is a global IT services, business solutions and outsourcing company headquartered in Mumbai, India and a subsidiary of the Tata Group conglomerate. It is the second-largest India-based provider of business process outsourcing services TCS has 142 offices across over 47 countries and generates around 20 per cent of India's IT exports. It sponsors an IT Quiz called TCS IT Wiz which is held annually in 12 cities of India.
Accounting Process: Accounting at TCS is usually done by the following major points:• WON (Work Order Number) - It is a unique number by which any billable project in PA is identified. It always starts with the digit ‘2’ and is a seven digit number • SWON (Standing Work Order Number) - It is a unique number by which any internal (non-billable) project in PA is identified. It always starts with the digit ‘1’ and is a seven digit number • End Client - It is the customer with whom the contract is signed. It is the End Client who will make the payment against an invoice • Executing Company - It is the company which actually executes the project for End Client • Local Company - It is also called ‘Front Ending Company’. It is a TCS owned subsidiary in some other geography, created due to some tax implications. It is this company which signs contract with end client on behalf of TCS and in turn bills the end client • Pass Through Company - It is a TCS owned subsidiary in some other geography created due to some tax implications. Whenever this company is involved in a project, Local Company will also be involved The basic criteria for passing accounting entry is to book realized profit and loss and pre delivery charges. They pass the accounting entries of realized gain /loss or pre delivery charges only. For pre delivery, square off or rollover types of deals only realized gain/Loss or pre delivery charges entries are passed. If the user defined customer status is closed i.e. the deal entered is delivery, rollover or square off of some other deal, and then if the deal is a pre-delivery of another deal, the pre-delivery charges will be taken 3
into account. So for this deal we pass the pre-delivery charges to the pre-delivery charges account. If the deal is square off or rollover of another deal then the realized gain/loss will be there. If the square off or rollover is for full amount then no calculation for original buy or sell amount is required. But if the square off or rollover is for part, then the original buy or sell amount corresponding to part square off or rollover is required to be calculated. For that we need to know the constant currency of the deal. By taking all these factors into account we pass the accounting entries with a corresponding Journal Entry (JE) source category. 1.1 ACCOUNTING FOR REALISED GAIN / LOSS: For square off and rollover deals realized gain / loss will be there. For the realized gain / loss, those deals which are linked by deal linking code are considered. Again the part or full cancellation is the criteria for calculating the gain / loss amount. In calculating the original buy / sell amount the constant currency of the original deal is to be found out and depending on that the corresponding original amount is calculated. For Indian Rupee (INR) –American Dollar (USD) deals only transaction rate is required for calculation of realized amount whereas for cross currency deals the bank rate is also required. 1.2 ACCOUNTING FOR PREDELIVERY CHARGES: For pre delivery deals the pre-delivery charges will be there. Pre-delivery charges will be either positive or negative depending on whether they are paying the pre delivery charges or getting them. They pass the pre delivery charges entries with all other details like deal no, deal linking code, currency buy, buy amount currency sell, sell amount etc. 1.3 ACCOUNTING FOR CANCELLED DEALS: For an erroneous deal for which entry is already passed they just pass a reverse entry of what they have passed earlier .They just pick up the entry with the help of deal linking code and pass the reverse entry.
Project Type Classification and Description on Billing Basis:-
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Project Type Classification and Description on Location Basis:
Product Costing: The Product costing at TCS is based on following parameters:a) Won Costing:-
b) SWON Costing:
SWON Costing at TCS is done under following 6 heads: I. Manpower cost II. Hardware cost III. Establishment expenses IV. Other Establishment Expenses V. Marketing cost VI. Training cost a) SWONs cost allocation to WONs: 5
Cost Allocation in TCS depends on: Category of SWON, Basis of allocation, SWON Expense head being allocated. Expenditure Head Employee Cost - Salary, Allowances Hardware Cost
Allocation Basis Revenue for IP/SP/Geography/Client/Group Client SWONs Equi-distribution for DC and Branch SWONs Hardware Cost (From AIMS)
Establishment Cost Eg: Rent, Repairs & Maintenance etc
Employee Cost
Other Establishment Cost Eg: Travel, Communication etc
Employee Hours
Marketing Cost Eg: Advertising and Publicity Training Cost
Revenue Employee Hours
WONs and SWONs are very helpful in determining cost as it helps in Manpower cost accounts for significant portion of the total Cost It is primarily a directly attributable Cost • Hence identifying the time devoted against activities of WON/SWON will help in proper monitoring of cost. • Booking of time against the respective WON/SWON will help in achieving the above objective a) Cost Drivers: 1. Cost Drivers helps in giving an insight into the ‘Risk factors’ of the project. 2. All the Risk factors that are specified in the Risk plan are brought into the costing system as ‘Cost drivers’ for tracking, monitoring and managing these risks. This helps in taking corrective actions and decisions wherever necessary 3. Quantification of Risks is possible only through proper usage of ‘Cost Drivers’ • •
Classification of Cost Drivers: TCS has divided its cost structure in following points and all these are managed effectively and efficiently.
a) Timesheet Entry:
Time Sheet entry helps in determining time logged against a combination of WON,
SWON, Task-Category or Cost-Driver. Logging of time against the respective WON/SWON helps in cost allocation. Proper usage of Task Category (Activity) and Cost Drivers helps in quantitative analysis of effort and reporting at DC Level. 6
Concept of VA/NVA in effort analysis:- Value addition is the total useful effort spend on performing an activity, giving rise to the productivity. b) Concept of VA/NVA in effort analysis:
Once value addition is being measure, then we check whether the activity is billable or not. c) Value addition and billing:-
• • •
It should be emphasized that though EVA is a financial measure, it is much more than that. It is about creating the right kind of behavior among the employees. All value creating companies (including TCS) have been using EVA as the basis to judge performance and evaluate decisions implicitly. Making it an explicit objective brings the focus in a sharper way. Some of the major points taken into consideration: Once the revenue is accrued, raise the invoice promptly. Once the invoice has been generated, follow up for timely payment. Once resources (manpower, hardware, etc.) are released, ensure that they are immediately released from your WON/SWON in Ultimatix.
Test development is typically an enormous expense, often half of total development cost. But because of the wide variation in the extent of testing by different developers, and variance in testing requirements for different types of software, testing costs can range from 30% to 90% of total labor resources .Thus any increase in the efficiency of test development can have a significant impact on product cost. Formal specifications can be used for more than analysis and proof. Formal specifications can be used to generate complete test cases, with both input data and expected results. This can result in a significant reduction in the cost of testing. Formal methods thus can be used effectively at all stages of software development, from initial design and specification through testing and assurance.
Costing Technique: TCS follows Activity based costing for all its cost measurement. In TCS, every activity is tagged to a particular number and the every number has assigned a cost. So, total cost of any project depends on the cost incurred in each and every activity being done to execute the project. TCS is developing an emission management system based on activity-based costing, a standard methodology for allocating costs among the different units in a business. This approach allows one to slice and dice the emission data and report emissions at business process, activity or resource levels, and simulate the effects of different organizational changes on emission levels. This is not only a carbon accounting mechanism but also helps them in better decision making towards Greener Business Processes.
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Classification of Costing is based on following points:a. Project Classification – As of now, TCS is using Pseudo turnkey technique, which is going to be phased out in due course of time (as it does not have projections) and only T&M and Pure Turnkey assignments are being approved. Defining a project is an important activity and this should be critically reviewed at the time of creation. Currently lot of pseudo turnkey projects have been advised to be converted into either T&M or Pure Turnkey based on the nature of billing as defined in the original statement of work/ contract. In that case the current WON needs to be closed and a new WON has to be created. b. Revenue Recognition – Negative Revenue recognition is a concern, as it affects the financial health of the project / organization. Revenue recognition cannot be committed to the corporate without Center Head’s approval. Revenue recognition as per books of accounts should be in sync with that as per Ultimatix. In case of deviations, whatever is there in the books of account will prevail. c. Billing in T&M (Time & Material) - 100 % allocation effort to be billed in T&M projects and the gap between the two is the billing leakage which needs to be tracked at the month end. d. Billing in FP (Financial Projects)- Similarly unbilled milestones should be followed up at the month end critically and the invoices should be raised. In case of postponement, milestones should be duly shifted with adequate reasons. Project Classification Questionnaire captures additional information of the project at the time of creation of the project, before sending for approval. It also will be used by Finance (Branch Accountants) to decide whether the nature of project (Product, Job Work, Time and Material, Pure Turnkey or Pseudo Turnkey etc.) is correct or not. This exercise may lead to Unbundling of contracts, where contract/ projects involving different types of work are now split into different WONs under the same agreement. Thus by creating different projects based on the classification, correct revenue recognition, correct calculations of profits / EVA and Correct validations are enforced by the system. 8
Time & Material
Periodic Billing.
Pure Turnkey
– A very high cap would still qualify the project to be a T & M project. – A T & M project doesn’t necessarily mean that the billing is hourly. Even projects billed at daily, weekly or monthly rate per consultant qualify to be a Time & Material project. Milestone Based, linked to deliveries A Pure turnkey conditions:
Pseudo Turnkey
– – – Fixed
project
has
3
essential
A Fixed project value Milestone based billing Milestones linked to a deliverable. Price, not linked to delivery
Milestone information inadequate Large contract with sub-contracts Pseudo Turnkey projects also include the subclassifications of Product sales (both internal and Third Party), Consulting work and AMC/ATS contracts. Job Work
Billing is based performed.
on
the
number
of
tasks
Negligible, e.g. Check printing of UTI As it is difficult to arrive at projections quarter wise, Pseudo Turkey projects are being phased out. New WONs to be defined as Pure Turnkey or T&M types. Only for AMC and License WON Pseudo Turnkey is allowed. Importance of correct classification – revenue recognition in the books of accounts: • Percentage Completion Method- For pure turnkey projects. I.e. Revenue from consulting services in FP contracts is recognized by the Proportionate Completion method. • T&M contract is recognized as the services are rendered as per contract • Revenues from AMC & technical services – to the period of service • Licensing- As and when done.
IT Cost Accounting: In the days of economic downturn, TCS’ visibility into IT Operational costs has become increasingly important due to the proliferation of IT into their Business. This visibility is 9
essential in order to establish control over the ever increasing IT expenses, caused by unchecked IT sprawl. Also, understanding the cost of IT, at the point of delivery, lays the foundation for many key themes of today -like Service valuation, Green IT, economic analysis of IT projects etc. It is based on following models: a) Application Cost Model – is the expression of an Application’s Operating Cost in terms of cost categories & sub categories. The final cost is obtained through roll up of these constituent costs.
b) Application Cost categories – provide a means to describe the cost profile of
an application and are derived from the expenditure under Cost Heads of the IT Organization. Two broad category could be thought of – People & Technology, with sub categorization. c) Cost Heads – are categories under which the IT organization accounts for their operational expenses, typically incurred through payment to vendors and Utility Agencies. Eg – Hardware maintenance, software maintenance, service, energy, Network Bandwidth etc.
d) Cost Objects – are components of the applications’ deployment environment,
the cost of which are aggregated under the Cost heads. These provide a mechanism to relate the Application with the operating expenses. Servers, 10
Network equipments, People Salary etc. could be typical examples of Cost objects.
e) Cost Units – are the basic elements of cost objects to which a cost figure can
be assigned. The quantity of cost units determine the cost of the cost objects, which in turn contributes to the cost of applications using them. f) Unit costs (of Cost Units) – is the cost of a single Cost Unit. These can be estimated from the deployment architecture (e.g. number of Servers / CPUs / COTS / LAN Ports, amount of Disk space etc.) and costs under the Cost Heads. For example – Dollar per CPU or Dollar per GB These various scenarios require apportionment of the Cost Units (of the Cost Objects) to applications and lead to cost fan-in and/or cost fan-out. They are addressed as under –
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Cost Behavior and Invoice Generation:Cost of Performance Tuning during the SDLC The following diagram explains that cost of performance tuning can be minimized if planned from the initial phases of the project.
Invoice Eligibility Utility :-
Invoice Eligibility Checking Utility is introduced in Ultimatix—Projects Accounting—to minimise the delays in generating invoices. This enables you to ensure that any specific WON, depending upon project type (Turnkey, Time and Material and Job), satisfies all the pre-requisite checks and balances necessary to generate an invoice for the month. This will also provide you with the course of actions to be followed, to make the WON eligible for invoicing, if some of the pre-requisites are not satisfied.
Navigation :- Project Costing and Billing / Manpower Resource Management PA Project Information Invoice Eligibility Utility.
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Here 1. Enter the Project Number 2. Enter Bill through date 3. Click Check Invoice Eligibility .
The screen displayed after clicking on ‘Check Invoice Eligibility’ will be as follows :-
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Please note that Project number and Bill through date are mandatory.
If all the pre-requisites are satisfied , invoicing can be done
Final Invoice Effective from 29th August 2003,once the draft invoice is approved and released, the scheduled batch program will generate the final invoice automatically. To generate the Final Invoice through Ultimatix, do the following: Generate the Draft Invoice. Approve and Release the Draft Invoice. The Final Invoice is generated in the next batch update. Print the Final Invoice. However no notification comes to the user that the final invoice generation is complete, but the invoice is “Accepted in Receivables”. If the projects is in USA, use in the link TAIC Corporate link for printing the final invoice.
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Calculation of Application’s Cost: Application’s Cost is computed from its cost categories. However, the following diagram tie up the concepts explained above and depicts the chain of derivation of application costs. It shows how the costs under Cost Heads can be apportioned to Cost Objects, using certain logical allocation criteria based on the Cost Drivers. It finally links the category wise costs to application’s usage of Cost Units, summing up to the Application’s Cost.
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Accounting at TCS: The Accounting at TCS is basically done on the following parameters. Accounts payable tells us what all and how much we have to pay to the vendors, service providers. Accounts Receivable tells us from where we have to collect the amount and prepares an Invoice sheet.
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Balance Score Card: TCS describe a BSC approach to Service Management for a portfolio of projects for managing the client-vendor relationship. During the growth of any business relationship, there would be a need to manage a critical portfolio of projects in IT delivery services, with special reference to Services Level Agreements (SLA), customer feedback and KPI management. The BSC approach manages and controls such program situations, for the ease of design and for the clarity of communication amongst its stakeholders. For the purpose of moving up the value chain in Vendor – Customer Relationship, (Relationship, henceforth), there will be situations where projects are being managed in an out-tasked mode or can be in an out-serviced mode. The project control is usually vested with customer team or with TCS team respectively, with well defined Service Level Agreements (SLAs) and project management metrics. This depends on the maturity of relationship and the criticality of the projects from customer view point. To manage the portfolio in a better manner, we need to identify suitable candidate projects as part of profiling the portfolio, with the following objectives: - (these are examples; the actual objectives can be different but approach should remain as described below): 19
Establish a Decision Framework and Roadmap to optimize the current Operating Model; Profile the delivery portfolio, grouping work into the appropriate delivery categories, viz.- Work best delivered in the out-tasked model; Work best delivered in a managed services model; For work appropriately delivered in the current model, Identify opportunities for improvement (OFI’s); Develop specific plans of action to achieve near-term and longer term improvements.
TCS follows Middle-Out Approach for performing BSC. The advantages of this middle-out approach can be summed up as follows: The Program Scorecard can evolve from the vendor – customer relationship, while contributing to the respective organizational scorecards, at specific KPIs and at individual Perspectives of scorecard. The scorecard structure (parent – children scorecards) can be extended to more projects, at different ‘coalescence’ phases, as the maturity of vendor – customer relationship grows. The design process is typically recursive at each time when a new project is added to the program portfolio and it is easy to find the participating projects contributing to the design more, by way of carrying forward their set of measures. Thus we would prefer to call the design approach as the ‘Middle-out’, compared to top down mode of designing scorecards. TCS manages the BSC on following points:-
During the ‘coalescence’ phase of getting all the individual scorecards and lists of measures, in order to derive a consistent set of scorecards at program and at individual projects’ level, the following set of parameters are important for ensuring high data integrity, viz.1. Single source of data (the Customer or TCS) Vs. Disparate Sources 2. Atomic data Vs. Derived one 3. Manual data entry vs. automatic updating 4. Testing is done (one time activity) for BSC data at individual measures, for logic and expected result, with the Customer managers vs. testing not done.
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The 16 combinations of situations for these parameters can then be grouped into 5 ratings (assuming a normal distribution) for, what we call ‘certainty factor’ (CF), so that appropriate actions or initiatives can be taken at the Program level.
Performance Index: For the purpose of monitoring performance, as well for the purpose of rewards recognition, the individual measures would be given ‘weights’ (though, during the time of piloting, the weights can be set to a value of 1) and their performance deviation can be measured at regular intervals. The individual measures’ performance values are then aggregated for specific BSC perspectives, as well as at individual scorecard levels. Thus one would have various ‘weighted performance of measures’, which are called Performance Indices (PI) on the scorecards. This idea can help the portfolio-program management in a significant way, by comparing PIs across various perspectives, across scorecards as well as across individual projects. Given below is a simplified version of PI formula (exceptions and other indeterminate results are given separate heuristics in the system).
PI = ∑ (MP*W) / ∑ (W) • Primary Parameters (for design of PI) o Target (‘T’) o Actual (‘A’) o Directionality (‘D’) o Weight (‘W’) • Derived Parameter (for design of PI) o Metric Performance (MP) ➢ MP= A/T (if D is ‘>=‘) ➢ MP= T/A (if D is ‘<=‘) • The MP gives the ‘% performance’, viz., the extent of target getting achieved, based on the Directionality. • Directionality focuses on the goal of, either maximization or minimization of the ‘Metric intent’ (for example, measures like ‘profit’ will be having a Directionality of ‘>=’ while a ‘metric intent’ for ‘cost’ will be to get minimized (‘<=‘)). Balance Score Card is carried out at TCS in various stages:At TCS, the employees pass through following stages- 2 Half Yearly Appraisals, 1 Final Anniversary Appraisals and an appraisal for new joined employees. It also does a BSC for the contract paid employees. Below is the example of a BSC which is usually used at TCS.
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Example of CEO’s Balance Score Card:-
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Critical Success Factors of Balance Score Card: Some of the critical success factors for this BSC implementation can be as follows: • By adopting an effective change management approach to implementation, by identifying early adopters and champions amongst the project teams; and by maintaining regular communication through training and town hall meets (call it ‘socializing’); • By involving the stakeholders and the project managers, through iterative discussions on the objectives of the program, and on the elements from SLA and the KPIs at the Relationship level; this would become the leaven for useful scorecards with well defined project management metrics, well defined delivery performance (quality) metrics, customer satisfaction metrics and knowledge management metrics; • By designing scorecards with measures that are independent at their scorecard level besides the measures whose values of performance are aggregated from those of lower levels; this has facilitated a quick identification of ‘root causes’ and ‘relationships’ (if any) amongst scorecard elements, while trouble shooting; • By evolving an ’index’ (weighted average) based method of monitoring measures, for BSC perspectives and Scorecards; this would help in comparing the projects’ performance across the program; • By making the scorecards visually ‘pleasing’ and useful, by having important measures tracked for their trends.
Budget Control: SWON Budget Control system will be used to define Manpower budget (headcount) and Financial Budgets for all SWONs in Ultimatix on a quarterly basis. For this, all SWONs have been tagged with an additional classification at SWON Level. The Financial budgeting exercise will be applicable for all expenses except the Manpower cost.
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The Financial budget is to be defined and tracked in INR currency only irrespective of the subsidiary to which the SWON belongs. The Manpower budget will have to be defined and tracked in 2 parts – India headcount and Non-India headcount. The budgets will be first defined for the Level 1 SWONs at the corporate level by the corporate process owner. Thereafter, each Level 1 SWON owner has to pass on the budget to its child SWONs. The budgets for SWONs at Level 2 and thereafter are to be defined in a similar manner. However, the screen to be used from Level 2 onwards is different from the one to be used for defining Level 1 SWONs Once the budgets are received from the Parent SWON / Corporate (in case of Level 1 SWONs), the respective SWON owner (including Level 1) has to do the following: Out of the total financial budget received, a part of it is to be passed on to Child SWONs. Thereafter, this figure has to be further allocated/ distributed among the child SWONs by the Parent SWON owner using a separate screen available for this. Out of the total manpower budget received, a part of it is to be passed on to Child SWONs. Thereafter, this headcount has to be further allocated/ distributed among the child SWONs by the Parent SWON owner using a separate screen available for this. After the budget number is given to child SWONs, the balance budget is available to be utilized by that SWON itself. For the residual financial budget (Self Budget), a detailed Financial Self Budget has to be entered using a separate screen available for this. This detailed budget is at an expense category level. The total of this detailed financial budget can be less than or equal to the amount available for defining Self budget. Also all budgetary checks are fired with the total of detailed financial budget as the base. Budget Depletion and Checking: The SWON BTS system will track expenses incurred through the PO, ESS, GlobalNet, ITIMS, Accounts Payable and General Ledger applications and deplete the SWON’s financial budget for the respective quarter. Even though all expenses (except salary) will consume the budget, the budgetary checks will be only on certain sources and expenses as given below. Budgetary checks on the Financial Budget will be applicable to the following transactions: Travel Request in ESS Travel Request in GlobalNet Purchase Orders raised in PO system. It is necessary that every SWON has a detailed financial self budget defined so that the budget can be depleted. However, if a particular SWON has not defined a detailed financial self budget, then the transaction will deplete the budget of its Parent SWON. But this roll up can happen only for maximum one level. The provision to consume budget of parent is applicable only in cases where budget is not defined for that SWON. It is not applicable in cases where the budget is defined, but is insufficient. 24
While checking the available budget, the system will not only consider the current available budget, but also take into consideration the expense requests which are in pipeline and not yet approved by the SWON owner in ESS, Purchasing or GlobalNet. On similar lines, while allocating associates to SWON, the PjRM system will check if the new allocation is within the manpower budget for the SWON. Some of the Screen prints are below:-
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Annexure
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