Cost allocation emerging as a strategic lever and finance transformation priority for Asia’s finance leaders

• Only 31% of finance leaders surveyed are in the process of finance transformation, key challenges faced include change management, finding the right implementation partner and funding concerns 

• 55% of surveyed Asia finance leaders rate cost allocation as important in supporting current priorities 

• Four challenges in cost allocation: process, data, technology and people 

As finance leaders come under increasing pressure to enhance their finance operations and make data-driven decisions, effective cost allocation is emerging as a priority for organizations.

According to a survey between Ernst & Young LLP (EY) in Singapore and the Chartered Accountants Australia & New Zealand (CA ANZ), in the current business environment where resilience and sustainability are key, finance leaders are putting a hold on finance transformation. The survey of more than 90 finance leaders across Asia, covering Hong Kong, Malaysia, Philippines, Singapore, Thailand and Vietnam, found that less than a third of respondents (31%) are in the process of finance transformation. The top challenges faced in their finance transformation journey include change management (39%), finding the right implementation partner (26%) and creating a business case to obtain funding (25%).

The survey found that strategic priorities among finance leaders have shifted. 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.

Ronald Wong, EY Asean Financial Accounting and Advisory Services Leader, says:
“Cost allocation is a crucial component in finance transformation, especially for companies focusing on revenue growth. 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. 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.”

Four challenges in cost allocation: process, data, technology and people

The survey highlighted that there are four key challenges that companies face in successfully managing their cost allocations: 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.

Wong says: “While every organization 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. The generally limited appreciation of operations and not having relevant and accurate operational data on a timely basis restricts organizations’ 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 half (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.

Wong says: “While technology alone does not define the success of cost allocation, it is an important means to improved outcomes. Thus, it is important for finance leaders to familiarize themselves with the emerging technologies that are fit for purpose, so they can look into harnessing them to help enhance performance. Additionally, 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.”

-ends-

About EY

EY is building a better working world by creating new value for clients, people, society and the planet, while building trust in capital markets.

Enabled by data, AI and advanced technology, EY teams help clients shape the future with confidence and develop answers for the most pressing issues of today and tomorrow.

EY teams work across a full spectrum of services in assurance, consulting, tax, strategy and transactions. Fueled by sector insights, a globally connected, multi-disciplinary network and diverse ecosystem partners, EY teams can provide services in more than 150 countries and territories.

All in to shape the future with confidence.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. EY member firms do not practice law where prohibited by local laws. For more information about our organization, please visit ey.com.

This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.