Rhonda will evaluate potential cost-saving alternatives and provide a preliminary analysis within two weeks. She contacts Sanjay Delphi, the project manager for the companys India facility. Rhonda believes that in addition to outsourcing, increasing the use of electronic payments in accounts payable is another viable way to reduce costs. Rhonda made notes on information regarding expenses relevant for the analysis, including the severance policy (see notes with tables).

Rhonda also pulled up the organization chart to list all of the various accounting functions as well as their annual expense budgets (Table 1). She assembled information on the staff in each of the accounting functions, including their salaries, benefits, and possible severance based on the years of service and prepared a summary by function (see Table 4).

Given the two-week turnaround time for the analysis, Rhonda gets to work on analyzing the alternatives: outsourcing and electronic check processing.

Outsourcing AP and Bank Reconciliations

Rhonda reviews some general information on outsourcing and finds that global outsourcing has grown rapidly. She calls Delphi to discuss the services performed at the servicing center in India. Delphi informs Rhonda that the service center currently provides some IT support for the insurance operations in the United Kingdom, Belgium, and France; performs some customer service functions; and also recently added a few accounting functions. Delphi emphasized that the service center is just beginning to add staff with accounting expertise and has minimal knowledge of IFRS and Canadian tax laws.

Rhonda determines that the first step in her analysis is to identify which accounting functions would be the best candidates for outsourcing and then analyze the financial and logistical feasibility of doing that. She prepared a matrix to assist her in analyzing which functions would be the most appropriate to outsource. Her matrix takes into account required skill levels, local knowledge (of the tax laws for example), compliance risk, technological support, and the need for direct management oversightwhich may be difficult due to distance and differences in time zones. She concludes that the accounts payable and bank reconciliation functions are the best candidates for initial consideration.

The accounts payable function has a separate manager while the bank reconciliation function reports to the manager of general accounting. The Bank Reconciliation Department prepares 50 reconciliations per month (600 per year), and the Accounts Payable Department processes 50,000 checks per month (600,000 per year). Rhonda reviews the annual expense budgets (provided in Table 2).

Rhonda sends Delphi an email and requests information on the accounts payable and bank reconciliation service functions. Delphi responds that the charges for outsourced services for accounts payable and bank reconciliation are a base monthly fee of $1,250 for each function ($15,000 per year) plus $0.65 per payment for processing accounts payable and $200 per bank reconciliation. Delphi also informs Rhonda that the Canadian-based operations would need to maintain staff to coordinate the transfer of information. Based on a similar project being undertaken by the companys UK operations, Delphi estimates that one staff member within the Accounting Department should be sufficient to support both accounts payable and bank reconciliations. Delphi and Rhonda discuss the necessary skills. Rhonda believes that retaining the accounts payable manager, who likely has the necessary skills, would be a good solutionand she uses that assumption for her analysis. The accounts payable managers annual salary is $75,000. The allocated benefits charge is $18,750. Rhonda estimates that the cost for a personal computer, supplies, travel, and all other expenses (excluding postage) would total $15,500. She assumes that the salary, benefits and other expenses associated with the manager would be allocated 65% to accounts payable and 35% to bank reconciliations based upon the estimated time requirements to support each function. Rhonda does not include the allocation of rent, corporate expenses, or 50% of IT support in her cost-reduction estimate. Delphi also provides the data transfer and connectivity specifications to discuss with the IT Department. Josephine Young, of the IT Department, analyzes the requirements and informs Rhonda that they would need to improve connectivity and alter the time of the batch processing for accounts payable. She estimates there would be a one-time cost of $100,000 plus $2,500 per month for improved connectivity. The change in the batch processing time will also cause an increase in personnel costs of $2,500 per month. But there are no additional technology requirements for outsourcing bank reconciliations. If the company only outsources bank reconciliations, the team has assumed that the bank reconciliation department will need to retain the most experienced employee to support the process. The most experienced employee in the department has eight years of service, a salary of $48,000, health insurance costs of $5,000, RRSP contributions at 5%, and payroll taxes of 7.65%. In addition to the savings in salaries and benefits for the positions eliminated in bank reconciliations, it is also estimated that there would be a savings of $8,000 in total for expenses other than salaries and benefits. The one time initial costs would consist of severance costs for the positions eliminated.

Automating Electronic Payments

Rhonda performs some background research on electronic payments. She finds that the use of electronic payments has increased substantially as the number of checks used in business-to-business transactions rose. The use of paper checks decreased by 5% from 2016 to 2019. The estimated savings from using electronic payment instead of paper checks ranged from 20% to 90%. Since the accounts payable function issues all its payments as checks, Rhonda believes that there may be significant savings if the company made greater use of electronic payments. She finds that the bank charges an average of $0.125 per electronic payment. As a means to estimate the potential impacts, she contacts Company XYZ which recently switched to an electronic pay system. Company XYZ averaged 2 minutes in labor per manual check and only 1.5 minutes for each electronic payment. For recurring payments, Company XYZ experienced an 80% time savings annually. To support her analysis, Rhonda requests and receives a report showing the number of the companys checks that are recurring to vendors as well as those to employees and business partners, which are good candidates for electronic payments (see Table 3). Based on her preliminary analysis, Rhonda estimates that the company could process up to 50% of its current payments electronically. Using the results for Company XYZ as a proxy, she estimates that electronic payments would reduce processing time by 25% for each electronic payment. Since recurring payments require minimal work after initial set-up, the potential estimated time savings is 80%. Since 16% of payments are recurring, labor savings would be possible. Rhonda estimates that electronic payment processing would reduce staff, with associated reductions in salaries and benefits as well as other associated costs. To estimate the impact on staff, she uses 10 employees processing 600,000 checks annually and assumes that 50% of the payments could become electronic. To calculate the potential savings in salaries and benefits, she assumes that the staff reductions would involve less-experienced staff and represent 15% of total salaries and benefits for accounts payable. She estimates also that there would be savings in personal computer (PC) costs, IT support, and other costs of $1,775 per employee. Additionally, there would be a reduction in postage costs in direct proportion to the reduction of the number of checks. These savings would be partially offset by an additional cost of $0.125 for each electronic payment that replaces a check. Further, she uses the information from Table 4 to estimate that severance costs would represent 15% of the maximum eligible severance for accounts payable.

Table 4: Summary Employee Information for Severance Calculations

Tax Department:	Number of Employees	Weeks of Eligible Severance	Total Annual Salaries	Benefits Load
Department head and assistant	2	32	$250,000	$62,500
Federal Tax	8	142	802,000	200,500
Provincial Taxes	12	192	812,000	203,000
Controllers Department:
Department head and assistant	2	28	285,000	71,250
SEC Reporting	7	132	525,000	131,250
IFRS Reporting	7	104	575,000	143,750
Regulatory Reporting
Regulatory Reporting	6	82	525,000	131,250
Management Reporting	6	82	455,000	113,750
Cost Accounting
Cost Accounting	6	82	385,000	96,250
General Accounting	10	146	628,000	157,000
Accounts Payable	10	166	470,000	117,500
Bank Reconciliation	5	66	215,000	53,750
Accounts Payable	10	166	470,000	117,500
Bank Reconciliation	5	66	215,000	53,750
Financial Reporting & Analysis Department:
Budgeting	4	54	325,000	81250
Financial Analysis	8	102	685,000	171,250

Note: When calculating severance using the total salaries, you must first find the average weekly salary (salariesumber of employees/52 weeks) and multiply by the number of weeks of severance

The severance and continuing benefits for the accounts payable manager total $18,750, and the severance and continuing benefits for the most experienced staff member in bank reconciliations is $14,000.

The benefits load of 25% of salaries is designed to represent the costs to provide health, dental and vision insurance, the employer contribution to the RRSP plan, and employer payroll taxes.

1. The companys share of health benefits averages at $5,000 per employee.

2. The employer portion of payroll taxes is 7.65% of salaries.

3. The company contribution to the RRSP plan is 5% of salaries. The company severance policy calls for two weeks of salary for each year of service.

Question:

What would the impact be on AH CANs costs for the next year if the two accounting functions are performed in India instead of in Canada.? (Be sure to include severance in the one-time costs, using information from Table 4 and assume zero inflation).

Assurance Henri is a multinational insurance company with its headquarters in France and annual revenue ranking in the top 50 companies globally. The company has significant operations in Canada, Europe, Japan, and Australia, and the operations in each country are separate insurance companies that operate with a large degree of autonomy Recently, Assurance Henri (AH) established insurance operations and a servicing center in India. The servicing center in India primarily provides some information technology (IT) support for the insurance operations in the United Kingdom, Belgium, and France. Recent global political and economic issues significantly decreased the profitability of AH, thereby putting pressure on management to reduce costs. AH's operations in Canada (AH CAN) sell life and annuity products and represent approximately 20% of the group's life and annuity revenues. AH CAN has approximately 3,000 employees, with about 1,000 employees based in the Montreal headquarters. The remaining employees are located at the company's service centers in Ottawa, Vancouver, and Edmonton. For an insurance company, there are four key line items on the income statement: premium revenue, investment income, benefits/claims expense, and operating expenses. Operating expenses provide the greatest opportunity for short-term improvement in earnings since the other line items are less controllable or the impacts of changes emerge over a long period of time. AH CAN has underperformed Assurance Henri International (AH INTL) in earnings and cost efficiency during 2019, which is concerning for the management of AH CAN and for its shareholders who have seen the stock price down nearly 30% since the beginning of the financial and economic issues in 2016. AH CAN measures operating efficiency based on the expense ratio, which is operating expenses divided by premium revenue. In 2014, AH CAN went through a restructuring that reduced personnel overlap and inefficiency. Through the restructuring, AH CAN reduced the workforce by 4%, reduced operating expenses by 5%, and improved the expense ratio from 12.7% in 2014 to 10.1% by 2017, 14% better than the expense ratio of 11.7% for AH INTL. While operating expenses have grown modestly at 2% since 2017, the expense ratio for AH CAN increased from 10.1% in 2017 to over 12.5% in 2019, worse than the 12.1% for AH INTL. Rhonda Michel is a vice president responsible for financial planning and analysis at AH CAN in Montreal. In her role, Rhonda and her team evaluate all significant projects with financial implications. After reviewing the first quarter preliminary revenue and earnings, it is imperative for the company to find ways to reduce expenses to improve earnings. She set a goal of a 10% reduction in operating expenses. If AH CAN achieves that goal, she estimated that the company would return the expense ratio to a value below 11% and operating earnings would return to 2016 levels. Before engaging the rest of the organization, Rhonda would like the functions she manages to take a leadership position in the cost reductions-notjust recommending cost-reduction actions but also providing examples to show they are effective. She wants to reduce accounting expenses by 10% overall to be in line with the company's overall target. She also would like to see a payback period of two years or less for any one-time costs. Table 1: Accounting Department Expense Budget Summary Function Number of Employees Annual Benefits Load All Other Federal tax preparation Provincial tax preparation Tax management $176,500 170,000 72,500 Total Budgeted Expenses $1,179,000 1,185,000 385,000 68,750 158,750 Controller SEC reporting IFRS reporting Regulatory financial reporting Management reporting Cost accounting General accounting Accounts payable Annual Salaries $802,000 812,000 250,000 285,000 525,000 575,000 525,000 455,000 385,000 628,000 470,000 215,000 325,000 685,000 $6,937,000 $200,500 203,000 62,500 71,250 131,250 143,750 131,250 113,750 96,250 157,000 117,500 53,750 81,250 171,250 $1,734,250 126,250 118,750 106,250 98,750 100,000 393,750 61,750 88,750 108,750 $1,849,500 425,000 815,000 845,000 775,000 675,000 580,000 885,000 981,250 330,500 495,000 965,000 $10,520,750 Bank reconciliations Planning and budgeting Financial analysis Totals 93 Table 2: 2020 Detailed Expense Budget for Accounts Payable and Bank Reconciliations Accounts Bank Expense Payable Reconciliations Salaries $470,000 $215,000 Benefits load 117,500 53,750 Rent and related 64,000 42,000 Supplies 16,750 1,750 PCS 12,000 6,000 IT support 11,500 6,000 Postage 270,000 Travel and entertainment 11,500 3,000 Corporate expenses 8,000 3,000 Total $981,250 $330,500 Table 3: Summary of Checks Processed per Month Business Partners/ Employees (probably electronic) 17,000 34% Recurring 8,000 16% Checks (monthly) Percentage All Others 25,000 50% Total 50,000 100% The corporate expense allocation is for the company cafeteria and an on-site gym; the company's costs are unlikely to fall if staff in the Accounting Department is reduced. PCs are leased, and the company can return them with no penalty: 50% of the IT support costs are variable and can be saved when the PCs are eliminated. The postage costs in accounts payable would not change by offshoring or relocation as the checks would be printed and mailed from the company's office in the U.S. Assurance Henri is a multinational insurance company with its headquarters in France and annual revenue ranking in the top 50 companies globally. The company has significant operations in Canada, Europe, Japan, and Australia, and the operations in each country are separate insurance companies that operate with a large degree of autonomy Recently, Assurance Henri (AH) established insurance operations and a servicing center in India. The servicing center in India primarily provides some information technology (IT) support for the insurance operations in the United Kingdom, Belgium, and France. Recent global political and economic issues significantly decreased the profitability of AH, thereby putting pressure on management to reduce costs. AH's operations in Canada (AH CAN) sell life and annuity products and represent approximately 20% of the group's life and annuity revenues. AH CAN has approximately 3,000 employees, with about 1,000 employees based in the Montreal headquarters. The remaining employees are located at the company's service centers in Ottawa, Vancouver, and Edmonton. For an insurance company, there are four key line items on the income statement: premium revenue, investment income, benefits/claims expense, and operating expenses. Operating expenses provide the greatest opportunity for short-term improvement in earnings since the other line items are less controllable or the impacts of changes emerge over a long period of time. AH CAN has underperformed Assurance Henri International (AH INTL) in earnings and cost efficiency during 2019, which is concerning for the management of AH CAN and for its shareholders who have seen the stock price down nearly 30% since the beginning of the financial and economic issues in 2016. AH CAN measures operating efficiency based on the expense ratio, which is operating expenses divided by premium revenue. In 2014, AH CAN went through a restructuring that reduced personnel overlap and inefficiency. Through the restructuring, AH CAN reduced the workforce by 4%, reduced operating expenses by 5%, and improved the expense ratio from 12.7% in 2014 to 10.1% by 2017, 14% better than the expense ratio of 11.7% for AH INTL. While operating expenses have grown modestly at 2% since 2017, the expense ratio for AH CAN increased from 10.1% in 2017 to over 12.5% in 2019, worse than the 12.1% for AH INTL. Rhonda Michel is a vice president responsible for financial planning and analysis at AH CAN in Montreal. In her role, Rhonda and her team evaluate all significant projects with financial implications. After reviewing the first quarter preliminary revenue and earnings, it is imperative for the company to find ways to reduce expenses to improve earnings. She set a goal of a 10% reduction in operating expenses. If AH CAN achieves that goal, she estimated that the company would return the expense ratio to a value below 11% and operating earnings would return to 2016 levels. Before engaging the rest of the organization, Rhonda would like the functions she manages to take a leadership position in the cost reductions-notjust recommending cost-reduction actions but also providing examples to show they are effective. She wants to reduce accounting expenses by 10% overall to be in line with the company's overall target. She also would like to see a payback period of two years or less for any one-time costs. Table 1: Accounting Department Expense Budget Summary Function Number of Employees Annual Benefits Load All Other Federal tax preparation Provincial tax preparation Tax management $176,500 170,000 72,500 Total Budgeted Expenses $1,179,000 1,185,000 385,000 68,750 158,750 Controller SEC reporting IFRS reporting Regulatory financial reporting Management reporting Cost accounting General accounting Accounts payable Annual Salaries $802,000 812,000 250,000 285,000 525,000 575,000 525,000 455,000 385,000 628,000 470,000 215,000 325,000 685,000 $6,937,000 $200,500 203,000 62,500 71,250 131,250 143,750 131,250 113,750 96,250 157,000 117,500 53,750 81,250 171,250 $1,734,250 126,250 118,750 106,250 98,750 100,000 393,750 61,750 88,750 108,750 $1,849,500 425,000 815,000 845,000 775,000 675,000 580,000 885,000 981,250 330,500 495,000 965,000 $10,520,750 Bank reconciliations Planning and budgeting Financial analysis Totals 93 Table 2: 2020 Detailed Expense Budget for Accounts Payable and Bank Reconciliations Accounts Bank Expense Payable Reconciliations Salaries $470,000 $215,000 Benefits load 117,500 53,750 Rent and related 64,000 42,000 Supplies 16,750 1,750 PCS 12,000 6,000 IT support 11,500 6,000 Postage 270,000 Travel and entertainment 11,500 3,000 Corporate expenses 8,000 3,000 Total $981,250 $330,500 Table 3: Summary of Checks Processed per Month Business Partners/ Employees (probably electronic) 17,000 34% Recurring 8,000 16% Checks (monthly) Percentage All Others 25,000 50% Total 50,000 100% The corporate expense allocation is for the company cafeteria and an on-site gym; the company's costs are unlikely to fall if staff in the Accounting Department is reduced. PCs are leased, and the company can return them with no penalty: 50% of the IT support costs are variable and can be saved when the PCs are eliminated. The postage costs in accounts payable would not change by offshoring or relocation as the checks would be printed and mailed from the company's office in the U.S