Activity Based Costing for Strategic

Decisions Support
WHITE PAPER

Authors : Deepak Mohan & Hemantkumar Patil

Decreasing margins and increasing cost of acquiring new customers are forcing insurance compa-
nies to take a re-look at their actual costs of business. Traditional cost accounting methods have
not helped the insurance companies in this effort. Here, the absorption costing techniques are put
to use, whereby over heads are “allocated” to every customer/product/cost center based on some
unrealistic parameters which does not give the true picture of the cost.
Activity Based Costing provides the tool with which to go beyond gross margin and penetrate the
real economics of all aspects of cost and profitability, including that of servicing customers. The
analyses provided by activity based costing can provide solutions to many of the critical business
issues facing the insurance industry. This whitpaper explains how.

Wipro Technologies
Innovative Solutions, Quality Leadership
WHITE PAPER Activity Based Costing for Strategic Decisions Support

Table of Contents
INTRODUCTION .................................................................................................... 3

LIMITATIONS OF TRADITIONAL COST ANALYSES ............................................ 3

ACTIVITY BASED COSTING ................................................................................. 5

RESOURCE DRIVERS ............................................................................ 6

ACTIVITY DRIVERS ............................................................................... 6

REVENUE DRIVERS ............................................................................... 6

WHY ACTIVITY BASED COSTING ....................................................................... 7

IMPLEMENTATION OF ABC – ISSUES AND A ROAD MAP ................................. 8

IDENTIFY KEY ACTIVITIES ................................................................... 9

ESTIMATE RESOURCE COST DRIVERS ............................................... 9

ACTIVITY COSTING .............................................................................. 9

MIGRATION TO ABC MODEL .............................................................. 10

ACTIVITY BASED MANAGEMENT ....................................................... 10

ACTIVITY BASED COSTING – BUSINESS BENEFITS ....................................... 10

ACTIVITY ANALYSIS ........................................................................... 11

BENCHMARKING ................................................................................. 11

VALUE-ADDED ANALYSIS .................................................................. 11

“S-CURVE” ANALYSIS ........................................................................ 11

CUSTOMER SEGMENTATION ANALYSIS ........................................... 11

BUSINESS PROCESS RE-ENGINEERING ........................................... 12

“INSOURCE” VERSUS “OUTSOURCE” DECISIONS ......................... 12

CONCLUSION ..................................................................................................... 12

REFERENCES ..................................................................................................... 14

ABOUT THE AUTHORS ...................................................................................... 13

ABOUT WIPRO TECHNOLOGIES ....................................................................... 14

WIPRO IN INSURANCE ..................................................................................... 15

Table
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WHITE PAPER Activity Based Costing for Strategic Decisions Support

Introduction
The pace of change in today’s business area has taken on a particular force in the insurance
industry due to increased competition, government intervention on pricing, and the advent of
new technologies and distribution channels. And if this was not enough, customers are
now gaining more knowledge (the Internet has been a great accelerator in this!) and doing
more research about personal finances – sufficient to challenge an IFA’s advice and even
source products directly or through an aggregator on the Net. Insurance companies are
looking to new ways to help them cope with the resulting obstacles and opportunities of
changing markets1 .

Across the insurance industry, management is under pressure to deliver the twin and linked
objectives of Cost Reduction and Profitability. Generally there is a lack of information in the
financial and management systems to properly inform and to target opportunities for improved
costs. The traditional ways of cost accounting – geared towards traditional models of
business – do not provide help in this matter. The complex business models, including
issues around multi-channel and multi-product are not being supported by the traditional
cost accounting.

Finance is now expected to play a vital role in assessing organizational efficiency, drawing
on a much wider base of financial and operational measures in order to propel the company
in appropriate strategic directions. Value creation as an underpinning dimension is
increasingly prevalent and principles of value based management (balanced scorecard,
embedded value analysis and activity based costing) are seen as essential tools in
maintaining competitive advantage.

Limitations of Traditional Cost Analyses

In typical cost accounting scenarios people believe that as long as the revenue of an
incremental sale exceeds the marginal cost, it makes a contribution to fixed cost and
overheads. With standard costing, incremental
sales volume yields favorable overhead
recoveries and positive variances. If the sale Traditional Cost Analysis
is incremental, most management would
perceive it as found money, because that is
what the accounting numbers report. This is Indirect Direct
only true if fixed costs are really fixed, but most Costs Costs
people who have ever thought about them
know that they are not. People have tended to
ignore the actual composition of “fixed cost.”
If asked, they would say that fixed cost refers
Cost
to rent and depreciation. However, as much Direct Cost
as 70 per cent of fixed cost is related to human
allocation
Estimates
beings. Accounts consist of salaries, benefits, factors
and facilities costs, cost of maintaining legacy
systems, poor or inconsistent processes and,
Products
often, incomplete integration following
mergers. To refer to these costs as being
fixed is misleading and their value in providing
management information for making
operational business decisions is highly questionable.

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Typically, the financial services industry has determined customer profitability through allocated
costing, which divides costs by total transactions and therefore assigns a cost per transaction.
Allocated costing cannot account for excess resources; nor for under-utilized resources
because it does not know the difference. The traditional cost accounting (TCA) method
arbitrarily allots overhead to “cost objects”. Product line profitability reports are produced
using various allocation algorithms for overheads and other fixed costs. These allocations
are always decided on intuition or educated guessing. While such a method can work in a
manufacturing scenario, in a service industry with fairly long customer lifecycle (life insurance,
for example), the cost of maintaining a customer is never factored in. Let us look at an
example to understand this.

There are two customers A and B. Both of these have bought an auto-insurance product for
$100,000. Now let’s look at the profitability calculations of each:

Customer A Customer B

Premium Income 1000 1000

Agency Commissions and 250 125
Initial costs of new business
Net premium 750 875

Apart from the initial costs, there are other costs incurred by an insurer to service the customer
during his entire lifecycle, such as Call Center expenses and Claims Handling costs (for the
sake of simplicity, let us assume these two are the only overheads and they are allocated
uniformly on the basis of “head count” used in absorption costing that is to say, the total
overhead divided by the total number of customers)

Customer A Customer B

Overheads allocations 100 100

Net customer profitability 650 775

Thus it seems that Customer B is more profitable than Customer A.

But let us look at the call center expense incurred per customer, per activity.

While customer A has not raised any claims at all and has not called the call center at all (or,
to be more realistic, very few times) through the life cycle of his policy, customer B has made
it a habit to keep the call centre on its toes during his policy lifetime. To make the matter
worse, he has even incurred three claims during the life cycle. In this case, while, we should
not attach any overheads to customer A, customer B has consumed a lot of the insurer’s
servicing resources. A re-look at their costing will be as follows:

Customer A Customer B
Claims Handling costs — 150
Call Center expenses — 100
Net (and real) profitability 650 525

This is quite different from the original picture! The simplicity of TCA allows it to be applied
to a wide range of industries, but it also limits its usefulness because it does little to identify
and diagnose the causes of costs.

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Activity Based Costing

Activity-Based Costing (ABC) is a methodology that measures the cost and performance of
activities, resources and cost objects. ABC assigns resources to activities and activities to
cost objects based on their use, and recognize the causal relationships of cost drivers to
activities. ABC shifts the focus on costs and their causes by paying attention on processes
and activities therein rather than the traditional functional and departmental perspective.

In insurance industry, it is quite typical to allocate all

operating costs to lines of business or policy types. ABC Basic Premise:
Here, these categories are often perceived to be · Cost objects consume
products. In most instances, however, it is customer activities
characteristics that drive the service organization’s cost · Activities consume
(see example above) and not attributes of a product. It resources
costs an organization almost as much, if not more, to · Consumption of
service a customer from whom they receive less resources drives costs
revenue as it does to service a higher-revenue- · Understanding of this
generating customer.
relationship is critical
to successfully
“Behavior, not demographics, drives customer
managing overheads
profitability,” says Tom Richards, research director of
customer relationship management technologies for
MA-based Meridien Research.1

By eliminating misleading allocations from management cost information, vastly different

performance results are recognized. Typical ABC results identify that some proportion of
customers consume more activities and resources than the revenue they produce. The
actual proportion of activity costs assigned to the different categories of product/service,
customer and business sustaining vary substantially between organizations depending on
the nature of their business. Service organizations perform a significantly higher proportion
of customer-serving activities than do manufacturers of automotive parts, for example.

This information has potentially significant strategic consequences for the organization. For
example, in a company that has a high proportion of customer costs previously allocated to
products, management is informed that low-volume products are relatively more profitable
than high-volume ones. It will also think that the biggest influence on the size of a customer’s
gross-margin contribution is primarily price. With ABC, management will discover that
products may have significant cost differences but that there are three influences on customer
profitability — sales volume, price, and the amount of customer-serving activities consumed.
In most organizations, a relatively few number of customers produce high levels of profits
which subsidize losses on many small or demanding customers.

Activity based costing highlights the economics of a company’s activities by developing a

workflow map of the company’s processes, products, services, and customers. This is
done by identifying: 1) principal activities, 2) the resources they consume and their related
costs, and 3) the driver or cause (generally a unit of output). This analysis also identifies the
non-value adding activities and the related profit opportunities in eliminating / outsourcing
them. These activities are usually costly and time consuming and add limited, if any, value
from the customer’s perspective.

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ABC provides the means to have

Customer a multi-faceted view of the
Type
business from cost and
measurement basis. Think of
Product business in terms of a Rubik’s
Type Order cube with each side representing
Channels
a unique view of business.
Rotating the pieces in a cube
allows you to see the business
ABC. provides the means to have a multi-faceted view from a multi-dimensional
of the busines from a cost and measurement basis. perspective. The Rubik’s cube
allows you to see a three
dimensional view; however, with ABC you can incorporate as many views as deemed
meaningful.

Linking causes to effects is one of the primary objectives of ABC. It uses drivers to identify
root cause and effect relationships between cost (labor and overhead expenses) and cost
objects (products, services, customers).

ABC uses three types of drivers:

Activities

Costs

Products
Resources Drivers
Customers

Locations

1. Resource Drivers: They are the basis for assigning general ledger cost to activities or
activity pools. Typical resource drivers include Medical Fees, policy issue costs, cost
incurred on procurement of new business, call centre expenses etc. Resource drivers
provide activity cost information that can be immediately used to identify and prioritize
cost improvement opportunities.

2. Activity Drivers: They are the basis for assigning activities or activity pools to cost
objects. ABC uses activity drivers (also called cost drivers) for costing of products lines,
products, services, customers or projects. Examples of activity drivers include mortgages,
cost of maintaining toll-free numbers, training cost for agents, number of policies sold,
number of branch offices, etc. Activity drivers provide product, service or customer Bills of
Activity that can be used for costing, pricing, customer profitability analysis, target costing,
shared services or strategic planning.

3. Revenue Drivers: They are the factors whose change causes an increase or decrease
in the revenue of a product, service or customer. In addition to the volume of policies sold,
typical revenue drivers would be number of advertising placements, number of lapses in
new business etc. Combinations of cost drivers (type 1 and 2 above) with revenue
drivers can be used to analyze and predict profitability.

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Why Activity Based Costing?

ABC acts as an enabler for management to make decisions from an informed and objective
basis. It can illuminate the path of corporate decision-making. If undertaken thoughtfully, the
significance of this can be immense. Like a powerful flashlight, ABC provides information
that allows vastly improved insight into the potential impact of decisions and structural
business issues. As the famous dictum: “It is better to be approximately correct than precisely
inaccurate”.

ABC is analytical management methodology; it is not

an accounting exercise, nor is it a software-driven fix to Activity Based Costing:
management problems. Since it builds upon the · More accurate cost
deficiencies of traditional product costing techniques management
caused by the misallocation of overhead costs, ABC
methodology
may be thought of as the highest evolution of cost
accounting to date.
· Focuses on indirect costs
(overhead)
ABC provides improved data to the business in financial
· Traces rather than
metric form. It can be implemented by businesses for a allocates expense
variety of reasons – some more innovative than others. category to the
ABC can have three primary uses: particular cost object
· Makes “indirect”
1. As a tool to aid strategic decision-making expenses “direct”
2. As a lens into the business process, allowing
resources to be more efficiently allocated and to enable cost-reduction
3. As an allocation mechanism: transfer pricing internal and external to the organisation.

Let us look at examples of some successful implementations of ABC:

Case Study 1: A large multi-line insurance company in Canada1

The company provided individual and corporate life insurance, group retirement services
and benefits management services. Its “Claims Division” provides drug and dental claims
management and claims adjudication to companies across Canada. The company faced
increased competition and customer demand. Its profit margin decreased due to increased
costs and decreased revenue per unit. Under these circumstances, the company was
forced to (a) reduce cost, (b) reduce time taken to process claims, and (c) increase due
diligence performed on claims. After a quick review, the company realized that different
centers were using different procedures and adapting different standards for the same
process. The time taken and the resource utilized also varied across centres for the same
process.

An ABC analysis undertaken in the company revealed significant differences in activity costs,
process costs, cycle time, transaction volumes and unit costs both within the same location
and across different locations. These included: (a) Unit costs for the same activity varied by
more than 300% between different centers, (b) Unit costs varied by type of claim and the
experience of the claim adjudicator, (c) Vast differences were found in the efficiency of different
processing centers and call centers, (d) Some locations were able to process the same
number of claims with fewer personnel than other locations, (e) The benchmarking process
enabled the company to determine the present level of efficiency compared to the most
appropriate level, and (f) The activity costs and performance enabled operations management
in assessing the right value of the activities performed within group claims.

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Remedial measures introduced helped the company realize significant reductions in

operational costs within the Claims processing areas. The ability to compare activities
performed in different locations enabled operations management to set up best practices
observed in every location and achieve desired results.

Case Study 2: Second largest P&C insurer in US2

Since its inception, the company had built its business around one of its strengths, a huge
network of company and independent brokers. Yet, the personal insurance business was
changing. Rival companies touted cheaper rates through direct marketing, the Internet and
other more efficient channels, resulting in bigger players missing growth opportunities. The
company wanted to change its strategy to become a more multi-channel, multi-product
corporation.

To do this, the company instituted a huge growth initiative while re-evaluating its operations.
They needed a solution that could identify categorical improvements in critical areas of
operations which would assist the top management in overcoming corporate inertia and
resistance in other areas. As a test case, they decided to model the application process for
life insurance policies. They needed a tool to understand what the process was costing
them and what they could expect it to cost in the near future. Using ABC, the company was
not only able to identify key bottlenecks in the process, but was also able to eliminate several
activities at the process centres which reduced staffing requirements.

The success of ABC in one area has prompted the company to begin wider implementation
to model and analyze operational processes, in order to identify and make operational
improvements.

Case Study 3: Global Insurance Company1

A global insurance company decided to implement ABC for tax purposes – that is, to determine
its allocation methodology for external transfer pricing purposes. With increasing scrutiny
being the norm in many of the major fiscal jurisdictions, this business wanted to ensure that
its charges to its overseas affiliates were accurate and defensible to tax authorities. ABC
ensured that the services provided to all overseas affiliates were tracked through the ABC
system, resulting in charges directly related to the economic benefit received by the recipient.
The end result was that the Group was able to lower its effective tax rate.

Implementation of ABC – issues and a road map

Change in insurance industry used to be glacial – although not any more now – and an
insurer may need significant effort to successfully foster change around ABC. For example,
ABC can be used to supplement intelligence about customers and derive the cost to acquire,
cost to serve and cost to retain them.

At first, let us be clear on one aspect. ABC is not a software solution. Neither does it seek to
replace the existing accounting system. It is a new (and a better way) of looking at the
existing data in a company. ABC will only produce relevant data if that is how it is structured.
Therefore, it is imperative for an implementing company to be clear on what do they wish to
understand and how do they view their business? From an economic and business
perspective, this means understanding the business and its “drivers”. It is also important to
identify those factors which cause a variation in cost per transaction unit (for example, a
contract) – the “deltas”. Identifying and understanding these “deltas” will essentially

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determine the business views that need to be analyzed by the ABC process and will provide
management with useful information.

A typical implementation model for ABC has been shown below. It illustrates the various
steps that may be involved in ABC implementation. The individual components and the
associated issues have been discussed that may arise in the implementation. A well designed
data warehouse strategy goes hand in hand with this implementation model.

Estimate Activity Migration Activity

Identify Key
“Resource Costing to Based
activities
Cost drivers” ABC Model Management

ABC – an implementation framework

1. Identify Key Activities: In this stage all the activities performed are identified. It is
imperative to distinguish between activities and tasks that people perform. An activity is
defined as a process having a definite starting and end points; that which takes an
input, adds some or the other value to it and converts them into outputs.

2. Estimate Resource Cost Drivers: Each activity,

Resource Cost Drivers:
captured in the first stage, consumes some
resources to be performed. In this stage, the
• Products (cost centers) - Unit
cost accounting of all the resources that
costs by product help with
contribute towards an activity is done. This data
is readily available in the general ledgers of the price setting.
company. However its extraction can be a • Customers - Use if
tedious task, as it is common to find the costing production is tailored to the
information in granular details running to needs of a particular
accounts and sub-ledger levels. This step is customer (custom orders).
often the under-estimated cog in the process. • Location - Can organize
The capture of costs of all the resources can be costs by regional offices.
a very time-intensive job. Simultaneously, this
ABC allows cost analysis by
is a very crucial initiative, as getting the wrong
any cost object, not just
number can have serious repercussions in the
later stages. Simultaneous to cost accounting, traditional cost centers.
time tracking for various activities selected in
the first stage is very important.

The Extract Transform and Load (ETL) logic in the warehouse has to be properly
designed for suitably sourcing and cleansing the data.

3. Activity Costing: With the data from departmental budgets and time tracking, each
activity can be costed appropriately. The business is now ready to be analyzed from a
process perspective. Managers can now see how time is being spent – whether on
value add items or non-value adds activities. It also evokes thoughts on outsourcing of
non value adding, resource-heavy activities. Coupled with this exercise, the data needs
to be captured on a very granular level. In particular, volumetric data, such as number of
policies need to be made available at this stage in order to be able to run an ABC
model. Typically, the costing information can be captured in process specific data marts.
These marts necessarily will have a cross-functional jurisdiction. The data marts will
include the individual transactions at the most atomic level coupled with the cost drivers

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associated with them. The data model in these marts will be dimensional in nature with
Customer, Products, Locations and Resources acting as core (or conformed)
dimensions. This dimensional nature of the model will lend itself to support the multi-
view approach mentioned earlier.

4. Migration to ABC Model: Once the data is in place, the next step is to migrate the model
to an ABC system. The atomic data in the warehouse can now be analyzed using
various On-Line Analytical Processing (OLAP) Tools. These tools can render information
in a user friendly and secure fashion for consumption by the decision makers. The
users can fire ad-hoc queries for pivoting the information in various ways.
An ABC system can either be stand-alone or a part of a suite of software available to the
business. An important point at this stage is to ensure the consistency of the ABC
model with other models in the company. Ensuring this consistency is important to
ensure that the data captured by other models are not lost when merged with the new
ABC model.

5. Activity Based Management: The first immediate benefit of ABC is that it allows you to
cost transactions. Most current ABC software have unit costing functionality, however,
for calculating the cost of a particular unit transaction, the help of an OLAP tool is
required. Once done, comparison with the traditional cost accounting methods and
other vale added analysis can be carried out. ABC helps create opportunity for a variety
of analytical opportunities, for example, the “S-Curve” analysis, Customer segmentation
analysis, in-source versus outsource decisions.

General
Ledger
DM1
Policy
Management OLAP

DM2
CRM Costing
Data
Warehouse Strategic
Time Reporting
Tracking
DMn
External
Data
Data
Mining

Activity Based Costing – Business Benefits

The single most problem in measuring ROI from ABC is lack of properly structured data.
The true profitability of customers is not known and support costs are not traced logically to
services. If the changes to the process reduce activity requirements and therefore, costs,
one would naturally expect the cost of products that use the processes to go down. This will
not happen only if the resources so freed, are redeployed to other processes without a
commensurate increase in volume through those processes. The cost increase may be
due to a technical error where resources freed up as a result of the ABC analysis are not
treated as temporary excess capacity or redeployed at some other resource-absorbing task.
Such peaks and troughs in resource engagement across multiple activities are best
demonstrated using ABC analysis.

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The benefits of ABC implementation do not end here. A proper implementation of ABC
provides a host of new analyses of your data:

1. Activity analysis: ABC provides a new perspective on the costing information. Rather
than absorbing the costs, they are laid bare for the management to look at. An activity is
analyzed in terms of each of its attributes:

Productivity
a. Turnaround Time: time taken to complete an
activity Value
b. Value-add: what is the importance of the activity Add
in the final product delivery? What will be the
Cycle Time
effect / impact of its discontinuation?
c. Productivity: Output generated per hour (or any
other unit of time)
d. Predecessor/successor: which activities are
presently required to precede or succeed.

2. Benchmarking: The activities so analyzed can be used to benchmark the cost center or
the organization as a whole against other cost centers in the same organization or
against similar organizations in the industry. Key attributes to compare are cycle time
and productivity. In Insurance industry, benchmarking has been found to be very common
for customer satisfaction. However, very few insurers have sought to benchmark their
finance function. Despite questioning the merit of benchmarking costs and distribution
effectiveness, most companies expected to increase its use in these areas1

3. Value-added analysis: Activity analyses on their value add can evoke questions on its
importance in the entire activity life cycle. Activities with nil/low value-add can be picked
up as ideal cases for their elimination (using Business Process Reengineering) or their
outsourcing.

4. “S-Curve” Analysis: The “S-Curve” analysis allows a business to rank each service or
product by profitability to determine which product/customer segments are the most
attractive. In this, the products are ranked according to how ABC costing compares with
traditional costing. Where products are over-costed, ABC reveals hidden profits.
Conversely, where ABC costing is above traditional costing, hidden losses are revealed.
For one bank where this analysis was carried out after ABC implementation, it was
discovered that seven out of their top ten products (by volume traded) were over-costed
by traditional accounting. Given that popular products are usually “marker” or “comp”
products, i.e., those that the customers use to compare prices across competitors, over-
costing these products and by implication, overpricing these products can have
significant implications on market share.

Given the information, there is a valid reason to pursue a different strategy that of reducing
the price of these products to attract clients to the bank and to attempt to increase market
share (obviously dependant upon the price elasticity of these products).

5. Customer Segmentation Analysis: ABC data also permits more rigorous customer
segmentation analysis. Clients can be segmented based on multiple criteria, e.g., average
life-time value and cost-to-serve. A high demanding customer may not necessarily be

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the most profitable one. Using ABC, customer can be incisively segmented so that the
profitable segments would enjoy quality interaction at touch-points and the high-cost-to-
serve customers are migrated to less costly touch-points like self-service on the web.

6.Business Process Re-engineering: ABC is a major source of information for BPR. With
the attributes of each activity within a process at the desk of management, the decision to
reengineer it becomes easier. It also helps to focus on the key activities, while eliminating
or outsourcing the others.

7.“Insource” versus “Outsource” Decisions: ABC provides a very good source of information
for helping in “insource” versus “outsource” decisions. This is especially true for certain
IT activities such as PC support etc., which might be considered for outsourcing. The true
resource cost of performing these activities can be accurately costed through ABC. For
financial institutions where IT accounts for a large allocation of the yearly budgets, this is
a significant benefit. We have also found that financial institutions have increasingly been
using ABC budgeting to effectively plan their budgets and their resource requirements.

Conclusion
The goal of ABC is to accurately estimate the cost incurred in providing different products/
services of an organization. However, the process of developing an ABC system is slow and
requires feedback from all levels of management. The key information collected is on
activities (and their attributes), resource drivers and activity drivers. The final product is
information on unit costs for each product supplied or each service rendered, and tools to
determine breakeven prices and quantities, and flexible budgets.

Activity Based Costing is not, however, an exact science. The result achieved depends
heavily on how well is the concept sold to the employees in an implementing company.
Effective sponsorship is a pre-requisite for any ABC initiative to be successful. The sponsor
and his/her position within the organization will largely determine the use of ABC – and
ultimately, its success. Effective sponsorship and how the rationale for ABC adoption is
communicated to employees are very important since employees are typically responsible
for feeding information to the ABC model. The level of sponsorship will determine whether
the ABC initiative is viewed as a “cosmetic change” in the way the employees do their
everyday work, or as a “cultural” evolution in the business place. A survey 1 by
BusinessFinanceMag.com found that two-third of organizations said that senior management
to buy-in, resource constraints and time constraints were the biggest obstacles to global
deployment of ABC – illustrating that organizational dynamics are still the main factors in the
success or failure of a project.

Apparently, ABC appears to be the preserve of cost accountants, and hence there seems to
be little, if any, use of the business users or the technologists in the whole exercise. Our
experience points to the contrary. For a successful implementation of ABC all the three –
business users, accountants and IT personnel need to synergize their efforts and learning.

Although the usage of ABC is becoming more prevalent, ABC has yet to become standard
industry practice, let alone the norm for the financial services sector. A general industry
survey found that 27 – 44% of the corporations were using ABC.2 While 15% of the
corporations surveyed were adopting ABC in isolation, between 27 – 44% of the respondents
acknowledged that they were using ABC albeit in conjunction with other initiatives such as

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Business Process Reengineering and Customer Profitability Metrics etc.

Wipro Technologies (www.wipro.com NYSE: WIT), established in 1981 is a part of the US $

720 Million Wipro Limited. Wipro is a global provider of IT & BPO Solutions in areas of
business like;

• Insurance
• Banking and Finance
• Retail, Logistics and Distribution
• Utilities and Energy
• Manufacturing
• Healthcare
• Telecom

Revenues for the year ending March 31st, 2002 were $475 million. Wipro has registered a
Cumulative Annual Growth Rate of 45% in revenues in the last five years.

Wipro has more than 25 offices spread across the globe. Apart from India it is present in the
USA, Canada, Japan, UK, France, Germany, Switzerland, Finland, Netherlands and Sweden.

Wipro Technologies, along with its BPO subsidiary Wipro-Spectramind, currently employs
more than 16,000 professionals.

Wipro is the first software services company in the world to get the coveted SEI CMM Level 5
and SEI CMMi Level 5 Certification. Wipro is also the world’s first PCMM Level 5 company.

About the Authors

Deepak Mohan, Functional Consultant, Insurance Solutions

Deepak has ten years of experience working in diverse functions such as underwriting,
claims administration, accounting, distribution management and IT applications in Insurance
with one of the largest life insurance companies in India. He has been involved in process
reengineering consulting for leading insurance companies.

Deepak is a postgraduate in History and holds an M Phil Degree in Economic History. He

can be contacted at [email protected]

Hemantkumar Patil, Consultant – Data Warehousing and Business

Intelligence

Hemant has rich experience of over 9 years in architecting and executing projects in the
areas of Data Warehousing and Customer Relationship Management. In the Data
Warehouse practice of Wipro, he is spearheading the development of Business Intelligence
solutions specifically for the insurance industry.

Hemant holds a Masters Degree in Business Administration with a specialization in Finance

and a Bachelors Degree in Electronics Engineering. He can be contacted at
[email protected]

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WHITE PAPER Activity Based Costing for Strategic Decisions Support

References
1 “The Insurance Imperative”, KPMG Consulting, January 2000.

2 Quoted in Joseph McKendrick, “Your Best Customers May Be Different Tomorrow”, Bank
Technology News, July 2001, Vol 14/No 7

3
“How Activity-based Costing benefited Sun life Insurance?”, from http://
www.themanagementor.com/kuniverse/kmailers_universe/finance_kmailers/cfa/
abc3.htm
4
“Redesigning Allstate’s Life Insurance Process with Hyperion Activity Based Management”,
Hyperion at Work, www.hyperion.com, 2000

5 Dr A Rafiq and Dr Ashish Garg, “Activity-based Costing and Financial Institutions: Old
Wine in New Bottles or Corporate Panacea?”, Journal of Bank Cost and Management
Accounting, vol 15, no. 2, 2002.

6 “The Insurance Imperative”, KPMG Consulting, January 2000.

7 BusinessFinanceMag.com, Noteworthy – May 1998.

8 E.Shim and A Stagliano, Journal of Cost Management, 1997. While 15% of corporations
are adopting ABC in isolation, between 27 – 44 % of respondents acknowledged that they
were using ABC albeit in conjugation with other initiatives such as Business Process
reengineering (BPR) and Just-in-Time Management (JIT).

About Wipro Technologies

Wipro is the first PCMM Level 5 and SEI CMMi Level 5 certified IT Services Company globally.
Wipro provides comprehensive IT solutions and services (including Systems Integration, IS
Outsourcing, Package Implementation, Software Application Development and Maintenance)
and Research & Development Services (hardware and software design, development and
implementation) to corporations globally.

Wipro’s unique value proposition is further delivered through our pioneering Offshore
Outsourcing Model and stringent quality processes of SEI and Six Sigma.

Wipro in Insurance
Wipro has been working with insurance majors, in both Life & Non-life segments, and
Brokers, in the US, Europe and UK to address their requirements. Wipro has dedicated
offshore development centers for some of its insurance industry client’s.
Wipro has over the last few years built technical expertise and gained deep business
understanding of the insurance industry. It has been executing a large variety of IT projects
spanning a breadth of processes in the Insurance sector like

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WHITE PAPER

• Sales and distribution, and Marketing

• Underwriting
• Policy administration
• Accounting
• Claims processing
• Back-office processing
• Broking applications
• Reinsurance
Wipro’s Insurance Solutions vertical maintains separate pool of functional consultants that is
manned by personnel from the insurance industry. This practice has a mix of experienced
professionals from Life, Non-Life and Broking. The average experience of these functional
consultants is in the range of ten to twelve years in the insurance industry. These professionals
have worked in various roles on large projects with clients in US, Europe, Japan and Asia-Pacific.
The advantage that these consultants provide to our clients is their appreciation of the
linkages between business processes and functions and the impact of one on the other.
They
• Provide the delivery teams with industry knowledge
• Reduce client time in explaining business to delivery teams
• Bring industry best practices to clients by
• Interaction with analyst groups
• Participation in industry seminars
• Evaluate offerings available in the market

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Innovative Solutions, Quality Leadership Page : 15 of 15