Cost allocation has emerged as a strategic lever and finance transformation priority for finance leaders in Asia amid increasing pressure to boost finance operations and make data-driven decisions.
This is the findings of a study by Ernst & Young LLP in Singapore and the Chartered Accountants Australia & New Zealand (CA ANZ), which found that effective cost allocation now plays an important role in the current business environment.
According to the survey, as resilience and sustainability are key to success, finance leaders are putting a hold on finance transformation.
The study found that among more than 90 finance leaders across Asia, covering Hong Kong, Malaysia, Philippines, Singapore, Thailand and Vietnam, 31% of the respondents are in the process of finance transformation.
The top challenges, EY and CA ANZ say, include change management (39%), finding the right implementation partner (26%) and creating a business case to obtain funding (25%).
The survey also found that strategic priorities among finance leaders have shifted, as prior to the pandemic, the key priorities were cost efficiencies, revenue growth, and enterprise and regulatory risks.
Today, surveyed finance leaders are focused on revenue growth, business agility and driving long-term value.
As a result of the shift in strategic priorities, cost allocation has emerged as a focus area for finance leaders, as 55% of those surveyed rated it important in supporting current focus. Cost allocation involves the process of allocating the costs of cost centers to the defined cost projects, such as products or services, customers, market segments, geographies or distribution channels.
"Cost allocation is a crucial component in finance transformation, especially for companies focusing on revenue growth," says Ronald Wong, Asean financial accounting and advisory services leader at EY.
"Effective cost allocation provides transparency into the true costs associated with various business activities, allowing finance leaders to identify areas where profitability can be improved. By gaining a deeper understanding of cost drivers, finance leaders can make strategic decisions that support revenue generation and operational efficiency."
Wong says an efficient and effective cost allocation methodology balances cost and accuracy. Thus, finance leaders need to enhance the sophistication and maturity of their cost allocation framework to ensure that they meet the necessary requirements while generating results that users can trust and rely on.
The study highlighted four key challenges that organisations face in cost allocation: process, data, technology and people.
For process-related challenges, the survey found that operations-based cost allocation processes are used by more than 55% of surveyed organizations, highlighting the importance of understanding physical and service flows.
When asked about the challenges in integrating cost allocation into current processes, the two key concerns shared by almost half (49%) of the respondents were data related. The first concern is the availability of operational or volumetric data, i.e., the source for many cost drivers (29%), and the second is the integration process that demands the availability of accurate and relevant data points (20%).
For data-related challenges, the survey finds that more than half of respondents believe that the lack of clear information – specifically visibility (35%) and traceability (30%) – of the cost incurred as a significant challenge. Only 20% of respondents are satisfied with the granularity of the data.
"While every organisation should ideally have a well-defined cost allocation process in place, the reality is that there are often varying levels of sophistication and maturity in the methodologies," says Wong.
"The generally limited appreciation of operations and not having relevant and accurate operational data on a timely basis restricts organisations’ ability to understand why costs were incurred. Implementing enterprise performance management (EPM) solutions, built on well-defined processes and guiding principles, can help to address this challenge and act as an impetus to help clean up outdated and erroneous data."
For technology-related challenges, the survey found that 50% of the respondents are still relying on spreadsheets for their cost allocation. As such, 70% rated their current cost allocation process as manual and tedious with numerous errors.
For people-related challenges, a key issue faced by the surveyed is the reluctance among employees to share data or information needed for cost allocation, where 31% of respondents revealed that getting the required data was a significant barrier. This may be due to concerns over how the information will be used, perceived lack of confidentiality or understanding of the importance of accurate data in decision-making.
"While technology alone does not define the success of cost allocation, it is an important means to improved outcomes," says Wong. "Thus, it is important for finance leaders to familiarise themselves with the emerging technologies that are fit for purpose, so they can look into harnessing them to help enhance performance."
Additionally, Wong notes that having access to the right skills and a strong digital culture should not be overlooked. Finance leaders should consider integrating advanced technologies with cognitive abilities, emotional intelligence and interpersonal skills of their talent to enable the success of their cost allocation and finance transformation.
