Outsourcing to allow a business to focus outsourcing

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Unformatted text preview: margin, Low cost to serve. Aggressive: Low gross margin, High cost to serve. Graphically represented: H Margin L Passive Cheap Savvy Aggressive L Cost to Serve H Passive customers are considered to be the best while Aggressive customers are considered to be the worst. Cheap and Savvy customers may or may not be profitable since they sit on the line of profitability (the orange line on the graph). The ultimate goal of any entity is to try and move all customers to become passive customers. Entities should not divest from unprofitable customers unless they have tried every single method to try and increase their profitability. This is because it is much easier to retain a customer than it is to attract a new one. It may be more profitable to let the customer go unprofitable for a while than attracting a new customer. Strengths and Weaknesses of CPA CPA is good in that: • • • • • It recognises that a customer’s profitability is not dependant on how much they purchase. It helps build profiles on profitable and unprofitable customers. It helps to transform unprofitable customers to profitable ones. It helps in marketing in that it is easier to decide what needs to be done. It can help determine better delivery, pricing and support options for each customer. However CPA is weak in that: • • • It is based on historical data It ignores the future It does not distinguish between new and repeat customer revenue Life Time Value Analysis Life Time Value (LTV) Analysis is an alternative and complementary method to CPA. LTV analysis measures the long ­term profitability of customers. The idea is that profits from each customer increase the longer they stay with you. It is determined by six factors: 1) 2) 3) 4) Acquisition costs – Costs required to gain a customer such as discounts, packages etc. Base profit – This is fixed and unchanged. Per customer revenue growth – Increase by making loyalty programs etc. Operating costs – Efficiency increases with longer term. Management Accounting 2 – Semester 2 2010 21 Managing Customer Relationships 5) Referrals – Referred customers are of higher quality. 6) Price premium – Old customers don’t mind price rises as much. A desirable customer will have good profitability now in the CPA and also good profitability in the future in the LTV analysis. But there may also be other decisions. An entity may decide to deal with an unprofitable entity because it greatly increases the entity’s reputation. It may also stay with them because it has a social obligation to do so. In short, an entity may stay with an unprofitable customer for a variety of reasons that override the decision to not continue business with them. Management Accounting 2 – Semester 2 2010 22 Managing Supplier Relationships Managing Supplier Relationships Background Suppliers are entities that the company relies on to provide inputs, which help complete processes within the company. Businesses can better focus on what they are good at by creating long ­term strategic links with suppliers. For example, a university’s job is to teach students and have teachers researching. Thus, jobs such as cleaning, making food in the cafeteria etc, are not core components of the firm and can be outsourced. Outsourcing To allow a business to focus, outsourcing of activities to a third party is common. However outsourcing carries possible exposure to higher costs and greater risk since a supplier is now able to access the entity’s assets. There are four steps in outsourcing: 1) 2) 3) 4) Decision: What activities do you want to outsource? Process: Whom do you want to outsource to and how will you find them? Relationships: What kind of relationship should you be building with the supplier? Transaction costs: Evaluate the total costs of dealing with this supplier. Outsourcing Decision The outsourcing decision is usually deciding on the type of outsourcing, which determines the level of integration between the entity and the supplier. It can be easily summarised with this graph: In ­House None Partial High High High High Low Low Turnkey (Integral) Responsibility for Project Influence on Supplier Costs Influence on Staff, Technology & Materials Need for Experience Possibility of Delay Dependence on Supplier Low Low...
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