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Designing Cost Measurement System in A Small Scrum Based Software Company Using Activity

Based Costing Model (Case Study: ABC Company)

Eko Agus Pramono S.Kom. ¹, Erma Suryani S.T, M.T, Ph. D. ² Department of Information Technology Management

Faculty of Business and Technology Management Institut Teknologi Sepuluh Nopember (ITS)

Surabaya, Indonesia

eko.pramono@gmail.com ¹, erma.suryani@gmail.com²

All businesses focus on profit. Therefore, the use of costs in the company needs to be managed as efficiently as possible. For this reason, companies need a system that can measure the benefits of cost usage. The efficiency measurement is even more important in small-medium enterprises as it can increase a company’s sustainability.

In small software companies with Scrum methodology, the team is encouraged to participate in backlog completion regardless of their competency level. The cost implication of the task being done by a non-expert team member can be higher than when the company hires more employee with specific expertise.

This paper proposes the use of Activity Based Costing to measure the cost per task time in Scrum companies. By measuring the efficiency of task assignment (the right person for the right job) and cost-effectiveness (shorter worktime for smaller cost), the process can be reviewed and companies can move towards a leaner process that improves their sustainability.

The research is done in ABC Company which implements Scrum. The research also considers the cost driver in the company and the value expected for the activity. The design validation shows that the system can be used more than just cost measurement, but also measuring resource usage, and indicating employee's competencies for strategic planning.

Keywords: Activity Based Costing, Lean, Scrum, Value Analysis.

I. INTRODUCTION

The concept of reducing expenses is coined by Womack and Jones as Lean Thinking[29]. It works by eliminating

“waste” in the company, which can be waiting time, overprocessing activities, or a waste of human resource potential. It was inspired by the work of Toyota manufacturing company and other large enterprise models. However, the need for reducing waste is even more apparent in the small- medium enterprise (SME) as they are more limited in financial and resources[15]. Unfortunately, this limitation is also the reason why changes required for implementing Lean are difficult for SMEs. This also confirmed by other research where the failure rate of Lean changes can be as high as 60%

to 90%[18].

Despite the risk of failure, the idea of Lean thinking is still gaining popularity among small businesses. The benefits of Lean and success stories have been documented in many research[2]. By implementing Lean, SMEs can improve process innovation, product innovation, financial performance and environmental performance[14]. The intense competition

of today’s industries means that companies that don’t do continuous improvement would fail. This improvement that Lean brought would improve SMEs’ chance of sustainability [21]. To be successful in Lean implementation, SMEs need to focus on in house elements which require a less financial investment [16]. One of the best practice of Lean on SME is multifunction employees. When the team is able to do multi- function, they can spread the workload more evenly, eliminates waiting time and increase productivity.

However, multi-functionalities can have the opposite effect of removing waste as it can cause ineffective utilization [3]. The ineffectiveness can be in a form of underutilization of skills or overutilization of capacity. When an employee is responsible for multiple tasks, his time is divided, resulting in the overutilization of capacity. While working on one task, the availability to work on another task is reduced. There is also a risk underutilization of skill, When employee work on an oversimplified task, an employee might lose their specialties since they don’t have enough time exercising their skills.

Therefore, in order to manage multi-functionalities, a company need a measuring tool to compare the benefit.

This paper proposes the use of Activity Based Costing to analyze the cost and benefit of multifunction employees in Scrum based company. The use of Activity Based Costing for measuring value has been done for the downsizing process [19]. However, the value measurement was for past activity.

The design proposed here is used to estimate the value of task planned ahead. The intended purpose is not for downsizing the company, but to review the assignment process for better task distribution. The design has been implemented in a small software company as one of the management tools.

II. L^ITERATURE REVIEW

Scrum is one of the Agile methodologies for software development. It was first introduced in 1996 by Ken Schwaber as a way to control chaos in software development [22]. The chaos occurs because software development is too complex and unpredictable to be planned exactly in advance.

Therefore, instead of careful planning, Scrum encourages the

“do what it takes” mentality to finish a goal. The methodology was formalized in 2001 to reintroduce flexibility, adaptability, and productivity into the development process[23]. Scrum is implemented as an iterative, incremental skeleton. Since then, research on Agile development has been increasing and many

companies have found success in implementing Scrum. By 2017, Scrum is the most used Agile methodology [27].

As with other Agile methodologies, scrum requires small team member and promoted a ‘lean’ mentality which suitable for SMEs[7]. Scrum team only consist of a Product Owner,

Scrum Master, and Development Team[24]. The Development Team itself is kept small with the recommended size between three to nine members. A team member is cross- functional which again suitable for SMEs. Despite this small mentality, Scrum is easy enough to understand as it has similarities with traditional software process [5].

Figure 1 Scrum Framework[25]

Figure 1 shows the framework of Scrum that shows processes inside Scrum based on the Scrum Guide by Ken Schwaber. A project or product is divided into several small requirements called backlog. The size of a backlog must be small enough to be completed by the team in one development cycle called sprint. Before sprint starts, a backlog is refined through sprint planning where the scrum team reviews how backlog can be done in one sprint. During the sprint, the team coordinates closely and frequently through daily Scrum meeting. When the sprint is completed, the team review the result and retrospect the process for improvement of the next sprint. By following this framework, Scrum offers measurable productivity, regular feedback, visible progress, low bureaucratic overhead, and good quality. These advantages make Scrum the most preferred by customers [4][ 7] [9] [27].

Since the introduction, research on Scrum has increased.

By 2010 there are 1551 papers published in 63 countries[7].

Some improvement of Scrum has been introduced as well to adopt Scrum to specific needs. One suggested improvement is combining Agile methodology with Lean principles to get benefit from both worlds[26]. For example, requirement changes are always welcome in Agile but Lean also describes how to minimize requirement changes[10]. Agile development is more suitable for developing a special product on volatile demand, while Lean process is more suitable for developing a standard product in stable demand [28]. In terms of focus, the Agile process focuses on service level, while Lean process focuses on cost reduction [20].

As with other Agile processes, Scrum process is not Lean process. Scrum focuses more on increasing the burndown rate which is the number of backlogs done in each sprint, rather than reducing waste. Shahzeydi et all suggest measure and manage as one of the practices to be adopted to Scrum. As one of Scrum principles multifunctionality needs to be measured and managed as well. In Scrum, there is no expertise separation. Each team member can take a task which is not

their expertise for the sake of completing the backlog [24].

The amount of time spent on a task is less important, as Scrum only specify Sprint which is the period backlog must be completed. For lean principle, the resource who does the task need to be identified, and his work needs to be measured.

The use of Activity Based Costing for measurements has been studied for years. Activity Based Costing was proposed by Johnson and Kaplan in 1987 to help management, planning, and decision planning that cannot be solved with traditional accounting [11]. The purpose of Activity-Based Costing is not for reporting based on Generally Accepted Accounting Principles, but to provide information for Management [8]. However, Activity Based Costing requires too much effort to implement, therefore difficult to be implemented by SMEs [1]. Kaplan then proposed Time Driven Activity Based Costing, which simplifies the Activity Based Costing model [12]. It only requires two parameters:

the unit cost of supplying capacity and the time required to perform a transaction or an activity. The implementation of Time-Driven Activity-Based Costing for SMEs potentially increase the company’s value without the burden of Activity Based Costing [17].

Activity Based Costing can also be used for strategic planning. In 1992, Activity Based Costing has been used for downsizing planning on Naval Shipyard in South Carolina[19]. The shipyard uses a combination of Activity Based Costing and values analysis, to investigate which activities don't provide value, and therefore can be removed.

Time Driven Activity Based Costing can also be used to view opportunities in Healthcare [13]. The value analysis is proposed in this paper to measure the activity benefit compared to its’ cost.

III. DESIGN

As the purpose of lean is to identify the value stream, the first step for designing a system that can measure the value of

activities is identifying the business process. Figure 2 shows the development process of this case study. The company uses a design-based approach as the software development process. It’s chosen because the company focuses on communication with customers, and design would give many

opportunities for communication to occur. When design gives enough information, the team would analyze for any insufficient information for planning. After planning, the team continues with development, testing, and deployment.

Design Analyze Develop Test Deploy

Figure 2 Design Driven Development Process By having the processes mapped, the value of each

activity can be compared. Activity which has to be performed before other activities would normally have a higher value. In addition to this comparison, the reason for activity execution should also be considered for value analysis. The more reason for activity is done and the more critical activity for the project, the higher the value given. Table I lists some activities in the case company and reason for execution. The reason list is an adaptation to the value analysis for downsizing [19].

TABLE I SAMPLE OF ACTIVITIES AND REASON

Activity Reason

Expenses Report,

Monthly Report Required by rules or regulation

House Keeping, Public

Relation Required for business or office

Coordination Meeting Critical for project Design, Analyse, Story

Formulation Required for decision making, Required by other activity, Improve Quality Architecture,

Framework, Research on required tech.

Required by other activity, Improve Efficiency Create a template,

Refactoring Improve Efficiency Testing, Bug Fixing Improve Quality

In order to measure the effectiveness of the activity, the value is measured based on the time complete. Maximum value can only be achieved when activity is done in a timely manner. For example design for a season-greeting can only have value if the design is complete before the season started.

Below is the formula for value calculation.

V = 𝑊 − (𝑇 − 𝑍)

𝑍 × 𝑊 Where :

• W is the Expected Value for activity

• T is the total time of the specific activity

• Z is the average/expected time for the activity With this simple formula, an activity can lose its’ value if it takes twice longer than average time needed.

The next step is to design data relation based on scrum model and Time-Driven Activity-Based Costing model which can gather all information for value measurement. The use of a data model can help to understand the data structure, while still representing the real world situation. The model must support the scrum process while keeping the activity cost logged. The entity-relationship (ER) diagram is chosen as it can give semantic information on the real world while keeping a natural view of data [6]. Figure 3 shows the ER diagram of Activity-Based Costing on Scrum project.

Resource

Backlog Project

Activity Type Template Rate Availability

Does Activity

For

Time Cost Value Average

Time

Expected Value Size

Priority

Contains

Refers To

Reasons of importance

Figure 3 Entity relation diagram for Scrum activity-based costing IV. RESULT

In Scrum, the cost of the project depends on the cost of backlogs. The cost of backlog depends on its’ size which can be can be small, medium, large, or Epic. Combined with Lean principles, the cost of backlog also depends on the resources that be part of the scrum team and the activities that are done for the backlog. Using Activity-Based Costing model, the cause of cost increase in a scrum process can be recorded as cost drivers. The design of this case study shows that the cost drivers of scrum project in this model are the number and size of backlog items, type of activity, number of resources, resource rate, and time of work. Improvement can be indicated by the reduction of cost, time, and the number of activities done, and type of activities done for similar backlog size and similar project requirement.

The Time Driven Activity Based Costing can also be used to find an indication that resource is underwork or overwork by comparing the time of work on activities and the resource’s availability. The system can also be used to indicate if the resource is underskilled by examining the value of resource activity compared to the position, level, and rate.

A resource with a higher position should work on the higher value activity. For example, a senior developer should be working on design more than working on housekeeping activity. An undervalued resource is an indication of the waste of resource potential.

By adding a time category to the activity value calculation, The loss of potential can be detected. When the employee works outside of this competencies, the average value of activity would not be achieved. This can be used as indication resources don’t have the right competency or their expertise not yet at the expected level. The benefit and cost of having employees work outside their competencies can then be compared. Resource growth can also be indicated by the increase of value when the resource is doing a similar activity on a different backlog.

These data of resource competencies, working conditions, and cost can be used by management for strategic planning and improvement towards the leaner process.

V. CONCLUSION

In small companies, resources may often work on multifunction and cross function. However, this also means the employee is working outside their competencies. The benefit of working multifunction need to be measured to make sure waste is eliminated.

The scrum process that promotes small developer team and multifunctionality makes it ideal for SMEs. However, a scrum in itself does not measure the cost and risk of the multifunction team. In other words, Scrum does not focus on the lean process. As the scrum mature, the lean process can be achieved by doing continues improvement within the team.

The use of Time Driven Activity Based Costing for SME in this case study, can help to gather financial data and determine which process is costing in the scrum process and the team can plan for improvement. The addition of Activity Based Costing Model on scrum management tool provides more data other than just financial data for improvement.

Resource’s skill growth can also be monitored. With this data, the company can work toward a leaner process that ensures its’ sustainability.

VI. FUTURE WORK

This system is by no means complete nor perfect.

Following up this research, the system can be used to gather data for further analysis and create better cost estimation process. The Activity Based Costing model on scrum can be combined with the Constructive Cost Model and other cost analysis.

The value measurement is also not complete and cannot be used as a performance indicator. It is only intended to measure the value of activity done by expert compared to the non- expert. However, a junior developer should not be expected to perform at the same level as a senior developer, therefore cannot use the same time measurement that currently used in the system.

In order to expand the system with a performance indicator system, further research needs to be done on a value measurement system. The resource’s level and other criteria might need to be added to the measurement formula. A game theory analysis can also be added to ensure fairness on

employee’s performance measurement, and to ensure each party benefits from the system and does not cheat.

This design has only been implemented in one case study of a Scrum software development company. It is not intended to fit all scrum based SMEs. Other cost drivers may need to be added, and the entity relationship diagram may need to be tailored differently depending on the environment of the SME.

The value calculation used in this research is also specified for this case study, other SMEs might have different value calculation

Further research on the use of activity-based costing and value analysis for SMEs are needed to confirm general usage and benefits of Activity Based Costing for Scrum.

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