Harvard Case - Accounting for Customer Solicitation at Workday, Inc.
"Accounting for Customer Solicitation at Workday, Inc." Harvard business case study is written by Graeme Rankine. It deals with the challenges in the field of Accounting. The case study is 11 page(s) long and it was first published on : Aug 1, 2016
At Fern Fort University, we recommend Workday, Inc. implement a comprehensive cost accounting system that incorporates activity-based costing (ABC) principles. This system should be designed to accurately capture the costs associated with customer solicitation activities, enabling Workday to make informed decisions about resource allocation, pricing strategy, and sales force management. Furthermore, we recommend developing a robust performance measurement framework that aligns with the company's strategic goals and provides clear insights into the effectiveness of customer solicitation efforts.
2. Background
Workday, Inc. is a leading provider of cloud-based enterprise resource planning (ERP) and human capital management (HCM) software. The company faces significant challenges in managing its customer solicitation activities, particularly as it expands into new markets and segments. The case study highlights the company's reliance on a traditional cost accounting system that fails to accurately capture the full costs associated with customer acquisition. This lack of visibility into the true cost of acquiring new customers hinders Workday's ability to make strategic decisions regarding sales force allocation, pricing, and marketing investments.
The main protagonists in this case are:
- Anne Robinson: The Vice President of Sales, who is concerned about the accuracy of the company's cost accounting system and its impact on sales force management.
- Mike O'Connell: The Chief Financial Officer, who is responsible for the company's financial reporting and is skeptical about the need for a more sophisticated cost accounting system.
- David Lee: The Director of Marketing, who is responsible for developing and executing the company's marketing campaigns and is interested in understanding the return on investment (ROI) of these campaigns.
3. Analysis of the Case Study
The case study presents a classic example of the limitations of traditional cost accounting systems in a dynamic and complex business environment. Workday's current system relies on a simple allocation of costs based on revenue, which fails to capture the true cost of acquiring new customers. This is particularly problematic for Workday, given its diverse customer base and the varying levels of effort required to acquire different types of customers.
To address these challenges, we recommend applying the framework of activity-based costing (ABC). ABC is a management accounting method that aims to allocate costs to activities and then to products or services based on the consumption of those activities. By implementing an ABC system, Workday can achieve the following:
- Accurate Cost Allocation: ABC helps to identify and allocate costs more accurately by tracing them to specific activities, such as sales calls, marketing campaigns, and customer onboarding. This provides a more realistic picture of the true cost of acquiring new customers.
- Improved Decision Making: With more accurate cost information, Workday can make better decisions regarding resource allocation, pricing strategy, and sales force management. For example, the company can identify the most profitable customer segments and tailor its sales and marketing efforts accordingly.
- Enhanced Performance Measurement: ABC enables Workday to develop more effective performance metrics, such as customer acquisition cost (CAC) and return on marketing investment (ROMI). These metrics provide a clear picture of the effectiveness of customer solicitation activities and allow for better tracking of progress towards strategic goals.
4. Recommendations
- Implement an Activity-Based Costing (ABC) System: Workday should implement an ABC system to accurately capture the costs associated with customer solicitation activities. This system should include the following steps:
- Identify and Define Activities: Identify all activities involved in customer solicitation, including sales calls, marketing campaigns, product demonstrations, and customer onboarding.
- Assign Costs to Activities: Allocate costs to each activity based on the resources consumed, such as employee time, marketing expenses, and travel costs.
- Allocate Costs to Customers: Allocate costs to individual customers or customer segments based on the activities consumed by each customer.
- Develop a Robust Performance Measurement Framework: Workday should develop a comprehensive performance measurement framework that aligns with the company's strategic goals and provides clear insights into the effectiveness of customer solicitation efforts. This framework should include:
- Key Performance Indicators (KPIs): Define and track key performance indicators (KPIs) that measure the effectiveness of customer solicitation activities, such as CAC, ROMI, customer lifetime value (CLTV), and sales conversion rates.
- Regular Reporting and Analysis: Develop a system for regular reporting and analysis of KPIs to monitor progress, identify trends, and make adjustments to sales and marketing strategies.
- Invest in Technology and Training: Workday should invest in technology and training to support the implementation and ongoing use of the ABC system and performance measurement framework. This includes:
- Cost Accounting Software: Implement cost accounting software that can track and analyze costs associated with customer solicitation activities.
- Salesforce Automation: Utilize salesforce automation tools to track sales activities, customer interactions, and sales pipeline.
- Employee Training: Provide training to sales and marketing personnel on the use of the ABC system and performance measurement framework.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Implementing an ABC system and a robust performance measurement framework aligns with Workday's core competencies in software development and its mission to provide innovative cloud-based solutions to businesses.
- External Customers and Internal Clients: The recommendations address the needs of both external customers, who benefit from a more efficient and effective sales process, and internal clients, such as sales and marketing teams, who gain better insights into the costs and effectiveness of their activities.
- Competitors: By implementing an ABC system and a performance measurement framework, Workday can gain a competitive advantage by making more informed decisions regarding sales force allocation, pricing strategy, and marketing investments.
- Attractiveness - Quantitative Measures: The implementation of an ABC system and a performance measurement framework is expected to result in significant benefits, including:
- Improved Profitability: By accurately allocating costs and identifying the most profitable customer segments, Workday can improve overall profitability.
- Increased Efficiency: The system will help to identify and eliminate inefficiencies in customer solicitation activities, leading to cost savings and increased productivity.
- Enhanced Customer Satisfaction: By providing a more efficient and personalized sales experience, Workday can improve customer satisfaction and loyalty.
6. Conclusion
Implementing an activity-based costing system and a robust performance measurement framework will enable Workday to gain a deeper understanding of the costs and effectiveness of its customer solicitation activities. This will allow the company to make more informed decisions regarding resource allocation, pricing strategy, and sales force management, ultimately driving improved profitability and sustainable growth.
7. Discussion
Other alternatives not selected include:
- Maintaining the current cost accounting system: This option would be less costly in the short term but would continue to provide an inaccurate picture of the true cost of acquiring new customers.
- Implementing a simpler cost allocation method: This option could be less complex than ABC but may not provide the same level of detail and accuracy.
The recommendations are based on the assumption that Workday is committed to improving its cost accounting practices and making data-driven decisions regarding customer solicitation activities. The recommendations also assume that Workday has the resources and commitment to implement the necessary changes.
8. Next Steps
- Form a Project Team: Establish a cross-functional project team consisting of representatives from finance, sales, marketing, and IT to oversee the implementation of the ABC system and performance measurement framework.
- Develop a Detailed Implementation Plan: Develop a detailed implementation plan that outlines the specific steps, timelines, and resources required.
- Pilot Test the System: Conduct a pilot test of the ABC system and performance measurement framework in a specific business unit or customer segment to ensure its effectiveness and identify any potential issues.
- Roll Out the System: Once the pilot test is successful, roll out the ABC system and performance measurement framework to the entire organization.
- Monitor and Evaluate: Continuously monitor and evaluate the performance of the system and make adjustments as needed to ensure its ongoing effectiveness.
By taking these steps, Workday can ensure the successful implementation of an ABC system and a robust performance measurement framework, leading to improved profitability, efficiency, and customer satisfaction.
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Case Description
Recently, software-as-a-service (SaaS) companies have attracted considerable attention from the investment community because their services were sold to customers on a subscription basis and services were delivered over the internet through applications on mobile phones, tablets and other portable devices. Because software provided by SaaS companies required considerably less investment in infrastructure (servers, software engineers) than traditional software vendors such as Oracle and SAP, they were affordable to far more companies. And because of a much larger total addressable market, over 200 SaaS had gone public through initial public offerings (IPO) in the last five years to take advantage for the demand for SaaS applications by small and medium-sized companies. Southern Cross LLC, an investment fund with over $20 billion under management, had established a SaaS portfolio to which it planned to add several high quality companies. Once such company under consideration was Workday, Inc. Workday provided cloud-based human capital management (HCM) and financial management (FM) computer applications to customers for an upfront subscription fee. Southern Cross had assigned Andrew Ferris, a recently hired MBA graduate, to evaluate Workday. Workday solicited customers for its software offerings through its direct sales organization. Southern Cross's portfolio manager had asked Ferris to scrutinize the company's accounting methods, particularly its revenue and expense recognition methods. Upfront revenue recognition and capitalizing and amortizing some indirect outlays were well known methods for enhancing a company's bottom line.
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