The Indian telecom industry has emerged as the second-largest in the world, with over one billion mobile phone users. The industry has witnessed significant growth in recent years, with a CAGR of 7.6% between 2015 and 2020. In addition, the increasing affordability of smartphones and data plans has driven mobile internet penetration, with over 700 million internet users in 2020.
The telecom industry is highly competitive, and companies always look for ways to reduce costs and improve profitability. A structured costing system can provide valuable cost insights and help telecom organisations make informed decisions. This case study will examine how a leading telecom company implemented a costing system to boost profitability.
The company in question is India’s leading telecom service provider with a PAN India presence. The company has a customer base of over ~100 million and a market share of ~10% in the wireless segment.
The telecom company was facing challenges with controlling costs, impacting profitability. It was difficult to determine the actual cost of providing services, and there needed to be a clear understanding of which services were the most profitable. This lack of clarity made it difficult for the company to make informed decisions about where to allocate resources.
To address the client's challenge, our team of experts at Chandra Wadhwa & Co. suggested implementing a structured costing system that could provide valuable insights into the company's expenses and revenue streams. Accordingly, we worked with the company in question to develop a cost accounting framework that complied with the Telecom Regulatory Authority of India's (TRAI) Accounting Separation Regulations, 2016 . The framework included the following steps:
Identifying Cost Elements: This includes the various cost elements contributing to the company's overall cost structure. For example, direct costs include employees’, maintenance costs (equipment) and indirect costs, such as overhead expenses like rent, utilities, and insurance.
Identifying Profit centres: Profit centres are individual units or divisions within the organisation that generate revenue and can be held accountable for their own profitability. The company improved profitability in underperforming areas by identifying profit centres. The company maintained separate accounts for each service provided, including voice, data, leased lines, etc. This enabled the company to accurately track the revenue generated by each service and the associated costs.
Identifying Cost Centers: Telecom companies have several departments and functions, each with its own expenses and revenue streams. To accurately track these expenses and revenue streams, the company identified various cost centres within the organisation, such as customer care, marketing, network operations, etc. Each cost centre was treated as a separate entity for accounting purposes.
Allocating Costs: Once the cost centres were identified, the next step was to allocate costs to each cost centre based on the resources used by each department or function. For example, the marketing department incurred expenses for advertising and promotional activities, while the network operations department incurred expenditures for equipment and maintenance. These expenses were allocated to the appropriate cost centres based on the resources used by each department or function.
Analysing Costs: Once the costs were allocated to each cost centre, the data could be analysed to identify areas where the company could cut costs and optimise its operations. The company found that it was spending a significant amount on customer acquisition costs but had a low ROI for those expenses. As a result, the company significantly reduced customer acquisition costs and increased profitability by retaining existing customers and reducing customer churn.
Identifying Profitable Products/Services: Telecom companies offer a wide range of products and services, each with its own profitability. The company identified its profitable products/services and allocated resources accordingly to optimise its operations and improve its profitability. For example, the company found that its data plans were more profitable than its voice plans and allocated more resources to marketing its data plans.
After rigorous deliberations and continuous collaboration with the client for over six months, our team at Chandra Wadhwa & Co. implemented a detailed costing decision support system resulting in significant improvements in the profitability and financial performance of the telecom organisation. The key results achieved were as follows:
Cost savings: It allowed the organisation to identify inefficiencies and cost savings opportunities across various departments. The organisation reduced its operating expenses by 5% in network maintenance within the first year of implementing the costing system.
Improved decision-making: It gave the organisation valuable insights into its cost structure and helped make informed decisions. The organisation could accurately assess the profitability of its products and services and make strategic decisions regarding pricing and product development.
Optimized resource utilisation: It helped the organisation optimise its resources by identifying areas where resources were being underutilised. The organisation reallocated resources to more profitable services, i.e. data, resulting in a 4% increase in revenue.
Increased transparency: The structured costing system increased transparency and accountability within the organisation. This helped identify areas of inefficiency and waste and implement measures to improve performance.
FREQUENTLY ASKED QUESTIONS:
What is a structured costing system?
A structured costing system is a method of assigning costs to products, services, or activities in a systematic and organised way. It involves identifying and categorising the different cost components, such as direct and indirect costs, and allocating them to specific cost centres or activities within an organisation.
How can a structured costing system help telecom organisations boost profitability?
A structured costing system can help telecom organisations boost profitability by providing insights into cost drivers and behaviour. By identifying and analysing the different cost components, such as network infrastructure, equipment, and personnel, telecom organisations can optimise their cost structure and improve their pricing strategy. Additionally, a structured costing system can help identify areas for cost reduction and process optimisation, leading to increased profitability.
What are some benefits of implementing a structured costing system in a telecom organisation?
Some benefits of implementing a structured costing system in a telecom organisation include improved cost transparency and accuracy, better cost management and optimisation, enhanced decision-making, and improved pricing strategy. Additionally, a structured costing system can help identify areas for process improvement and increase efficiency.
What challenges are associated with implementing a structured costing system in a telecom organisation?
Some challenges associated with implementing a structured costing system in a telecom organisation include the complexity of the telecom industry and its various cost components, the need for accurate and timely data, and the involvement of multiple stakeholders across different departments. Additionally, the implementation may require significant resources and time and changes to existing accounting and reporting systems.
How can telecom organisations overcome challenges in implementing a structured costing system?
Telecom organisations can overcome challenges in implementing a structured costing system by adopting a phased approach, starting with a pilot project and gradually scaling up. It is also important to involve stakeholders from across the organisation and provide training and support to ensure buy-in and adoption. Additionally, leveraging technology and automation can help streamline the process and improve accuracy and efficiency.
What are the Accounting Separation Regulations issued by TRAI?
TRAI has issued the Accounting Separation Regulations, 2016, as a framework for the Indian telecom operators to separate their financial and accounting information into different segments, such as access, interconnection, and other services, to promote transparency and facilitate regulatory oversight.
Who is required to comply with the Accounting Separation Regulations?
All the telecom operators in India, including both wired and wireless operators, who are licensed by TRAI and fall under its regulatory purview, must comply with the Accounting Separation Regulations.
What is the purpose of the Reporting System on Accounting Separation Regulations, 2016?
The Reporting System on Accounting Separation Regulations, 2016, is a mechanism established by TRAI to facilitate the reporting of financial and accounting information by telecom operators in compliance with the Accounting Separation Regulations. It aims to streamline the reporting process and ensure consistency and accuracy in the financial reporting of telecom operators.
What are the key components of the Reporting System on Accounting Separation Regulations?
The key components of the Reporting System on Accounting Separation Regulations, 2016, may include reporting formats, templates, guidelines, and timelines for submitting financial and accounting information by telecom operators. These components are designed to provide a standardised approach for reporting and enable effective monitoring and analysis by TRAI.
What type of financial and accounting information is required to be reported under the Accounting Separation Regulations?
Under the Accounting Separation Regulations, telecom operators must report financial and accounting information related to their operations, including revenues, costs, and assets, associated with different segments such as access, interconnection, and other services. This information is required to be reported in a disaggregated manner to facilitate transparency and enable effective regulatory oversight.
What is the timeline for submitting financial and accounting information under the Reporting System on Accounting Separation Regulations?
The Reporting System on Accounting Separation Regulations, 2016, has specified the timelines for telecom operators to submit duly audited accounting separation reports. The service provider shall submit it within seven months of the end of the accounting year at the head office of the TRAI in New Delhi.
What are the consequences of non-compliance with the Accounting Separation Regulations?
Non-compliance with the Accounting Separation Regulations may result in penalties or other regulatory actions imposed by TRAI. As per the provisions of the regulations, a service provider may be liable to pay a financial disincentive of up to Rs. five lacs for the initial contravention and an additional amount of up to Rs. fifty thousand per day of delay after fifteen days from the last date of submission of the report. In case of consecutive contraventions or false reporting, the financial disincentive may be increased to up to Rs. ten lacs, with an additional amount of up to Rs. one lakh per day of delay after fifteen days as directed by TRAI.
Reach us if you have any concerns regarding cost management accounting issues in your organization.
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
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