Questions on information technology and personnel costs

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Part A

In a globally competitive environment, the use of information technology has become vital for organisations that are looking to retain a competitive advantage over others. The failure to embrace information technology and to develop it in an efficient manner can lead, not only to missed opportunities, but can actually be severely detrimental to a company's position, as meanwhile its competitors fully embrace the opportunities available to them. As well as using information technology to gain additional customers, information technology can also be used to make internal processes more efficient. In an environment where consumers expect products and information, instantaneously, it is necessary for organisations to embrace this by having instantaneous systems in place and this requires advanced information technology. In this paper, the focus is on the way in which Tesco has developed its data, knowledge and information management processes, in order to retain a competitive advantage over other organisations such as its competitor, Morrisons. This paper will then go on to consider a particular difficulty faced by the company in relation to information management and will consider recommendations as to how it can develop this aspect of management, for the future.

The main area of analysis in this paper is of the Tesco Direct sector of the company, which focuses mainly on non-food products being delivered directly to customers via online purchases. It has been noted that Tesco Direct generates in excess of 220,000 orders every week, showing that there is a huge body of people recognising the benefits of the Tesco Direct offering and its efficiencies.

Franco Bruno, the IT manager at Tesco stated: "Until recently we had too many internal staff members contributing content. To overcome the problems this could lead to, we have started to use workflows so that only key staff members can approve final product content". This recognises the fact that, although Tesco Direct has been a great success, there are also substantial difficulties associated with managing this type of arrangement.

Tesco's new non-food website, Tesco Direct, is using a web content management system from software supplier Interwoven as its single source of product data [1] . Interestingly, it was noted that the Tesco Direct offering has grown at a rapid rate and was readily accepted by consumers, but the back-end functionality was not keeping pace.

The Tesco Direct offering has several different aspects from the consumer interface which is the website that individuals see and order through, to assistant manager stock and ensures that the correct items are available for delivery, within the timescale, as promised on the website. For example, consider a scenario whereby 10 different consumers are all using the website at same time and all ordering the same product. The website needs to be updated, instantaneously, to ensure that any unavailability becomes apparent, immediately. As well as ensuring that the company can fulfil the demands of the consumers, there is also a large amount of data that is collected through this website and can be used for marketing purposes as well as stock control. Factors such as automated reordering can be worked into the system, thus offering greater control of the stock levels.

One of the main competitors of Tesco in general is Morrisons, and the two companies are very different in the way that the users' online presence and the type of data and knowledge that is processed through information management tools within the organiation. By looking at Morrisons's website, it is firstly noted that it does not sell electrical products in the same way that Tesco does, so there is an automatic fundamental difference, already. However, even looking beyond this it is noted that the Morrisons website does not allow consumers to purchase items online and the website is simply used as a means of giving information, rather than collecting data or facilitating any form of transaction. It seems, therefore, that Morrisons is potentially missing out substantially in this area. Not only is it unable to encourage online purchases, but it is also unable to collect data relating to its consumers, which can be used both on and off-line. Furthermore, stock management relies on each individual store gathering data and sending it to a central location, whereas with Tesco this is done immediately as the back-end of the website. That said, the process followed by Tesco has created its own difficulties and these will be considered below.

This website is a critically important information source for the company. The benefits in terms of encouraging consumers to purchase online and the ability, therefore, to reach a much wider base of consumers who may not be able to make it to a store or would not be prepared to purchase large items and transport them themselves are clearly recognised. The real issue here, however, is the way in which the company uses the information that is inputted by the consumers through the website [2] .

One of the primary advantages of this type of approach is that when consumers order items, they have their own unique login and their purchasing patterns can be tracled, with offers then being targeted directly at the most appropriate consumers. This is something that Tesco also does through its Clubcard and is very successful at it. By collecting these types of data, it is then possible to centralise the data and look at new product ranges as well as potential promotions. Consider a situation, for example, whereby one consumer makes purchases at key times every year to coincide with events such as Christmas, but also birthdays within their family. By taking this information on board, it is possible then to send promotional vouchers to that individual in preparation to encourage them to continue to use the website. It may also become apparent that certain individuals will have a tendency to purchase certain goods alongside other goods and this again can influence the choices of promotions [3] .

A second information strand that emanates from the website is that of assisting with stock management. This potentially has several difficulties associated with it, e.g. it is possible for simultaneous ordering to take place and also stock level can be very variable, depending on trends and seasons. With in excess of 200,000 orders a week it can be relatively easy to see how the situation could, potentially, get out of control as it will not be possible to replenish stock at the required speed. If consumers attempt to place an order online and regularly find that they are not able to do so, due to stock level, it will have a negative impact on the impression that they have of the company and therefore this is the key challenge that has to be dealt with, going forward.

Based on this scenario, several recommendations are being made regarding how the information gathered should be used to mitigate the difficulties and also the practical issue of how the process takes place. It had been suggested that a simultaneous inventory management process needs to be put in place, so that it automatically updates, the moment than an order is placed. This involved the information coming from the consumer being collected immediately and fed into an automated system that is centrally held. Consideration should also be given as to whether the prices should be variable, depending on what consumers are actually ordering and their general loyalty to the store and also the availability of the stock.

Whilst using the information for wider marketing purposes, it is clearly a beneficial way of gathering data through the information management process, but the real challenge is in ensuring that the orders can be fulfilled and also that the information being gathered is used effectively, internally, when it comes to the difficult area of stock management and stock replenishment.

It is, therefore, recommended that those involved in inventory management should be highly involved in the data that is being collected using this front-end link with the consumer. This task is essential, not only from the point of view of retaining a positive reputation with consumers, but also for keeping costs to a minimum where reordering frequency and storage fees are concerned. If goods are required to be transported a much greater distance, then there are likely to be costs associated with this transport, and by using the data in an instantaneous manner, these costs can be kept to a minimum.

Information technology and the data that could be gathered from these processes are becoming more and more complex. Organisations such as Tesco are fully embracing this by encouraging greater communication between the consumer and the company. By offering consumers the opportunity to shop online, information is being collected which can be used very efficiently within the organisation to market and also to manage stock. It is in this area that the real challenge exists for the future, particularly when it comes to efficient stock management or reducing costs associated with holding a large inventory. Tesco is in a strong position to grow and expand this area and to reduce its costs, while also offering a fantastic service to the consumers that it serves.


Hadfield, Will, Tesco takes Direct route to effective data management, Computer Weekly, 31 October 2006, Available at: [Accessed 5 December 2010]

Holsapple, Clyde W., Handbook on Knowledge Management: Knowledge Matters, Volume 1 of Handbook on Knowledge Management, Birkhäuser, 2004

Khosrowpour, Mehdi, Challenges of Information Technology Management in the 21st Century: 2000, Information Resources Management Association International Conference, Anchorage, Alaska, USA, May 21-24, 2000, Idea Group Inc (IGI), 2000

Task B

One of the main assets for any organisation is its staff and as such they are also likely to be one of the main costs associated with the running of a company. In many cases, the organisation will find itself relying heavily on staff members to develop the business and to produce profits; therefore, it is essential for financial information relating to these costs to be appropriately managed. Whilst financial data generally focuses on the balance sheet, profit and loss statement and cash flow, the cost of staff and staff development permeates all three issues and warrants management in its own right.

Throughout this paper, the focus is on the way in which personnel costs are identified and managed, as well as how they are potentially controlled, in order to deal with the long-term development and profitability of the organisation. The role of the management accountant will be considered, along with the general underlying principles when it comes to managing financial information relating to personnel costs. This paper will then go on to look at the other cost implications, as staffing costs have an impact across the board and the information gleaned from personnel management will also feed into other cost decisions. The paper will then go on to consider how personnel costs are managed, during difficult times, and offer recommendations for those responsible for personnel management in their role.

The issue of staff costing and staff decisions will generally fall within the domain of the management accountant team in conjunction with others such as human resource managers. Management accountants are the individuals within an organisation who pull together vital data that can then be used by the management team for assessment purposes and for making decisions. For example, the management accountants will provide data in terms of efficiencies and profitability and it is this data that is a vitally important for those who are making staffing decisions. There are several differences between this type of role and the role traditionally played by the financial accountants. For instance, management accountants provide internal information, rather than information to be used by shareholders and also have the role of looking forward and assisting managers in making decisions for the future. For example, when it comes to staffing, the management accountant is likely to provide data on how profitable certain teams are in any given month, and this will allow the management team to make recruiting decisions, particularly where the company operates in a seasonal industry.

Considering in more detail the issue of personnel costs and how financial information can feed into fundamental decisions made in relation to staffing, it is clear to see that staffing costs are at the centre of many other financial decisions such as the costs that will be charged for a particular service or product. One very basic example exists when looking at the profit per employee. Consider, for example, an organisation that makes a profit of £2 million and has 1,000 staff. This would mean a profit per staff member of (2,000,000/1,000) = £2,000. If staff levels are to increase to 1,200, it would therefore be expected that profit levels would eventually rise to £2,400,000, although it should be noted that this would not be instantaneous. This is, of course, an oversimplification of the issues and it may be determined that although an increase in staff levels would not generate the same profit per employee, it would nevertheless generate a positive profit impact and therefore would be worthwhile, or it may generate better long-term prospects. However, these kinds of data that are made available will produce guidance on increasing staff levels as a means of increasing profitability [4] .

Another strand of human resource management includes ensuring that those staff members who are on a salary or who are paid by the hour are generating the appropriate level of income to the company. This is most clearly seen in professional service organisations, for example, with accountants or lawyers who are charged to clients by the hour. Therefore, it is possible to ascertain at the end of every week exactly how much money each individual has brought into the company and this can be fed into performance management processes. For example, in a professional services firm where an individual is charged to the client at £150 an hour, they may be given a target of generating £3,000 worth of income per week or 20 chargeable hours. The actual target that they meet could be affected by issues such as lack of availability of work, but also lack of efficiency, for example, they may be working 40 hours, but only being able to charge for 20 hours, due to lack of training or lack of qualification. By requiring individuals to complete timesheets and to record their activities, valuable information is provided to the management team, not purely on staff costs, but also on where there may be inefficiencies and where profitability could be improved, without increasing staff levels. It may be the case, for instance, that additional training on a specific software package would result in the individuals becoming more efficient, generating more profit and thus an increase of profit per employee would be seen.

As well as the specific staff costs which can be analysed in terms of wages and the amount of money that is being brought in by each individual employee, there are wider implications that can emanate from financial information associated with human resource costs.

For example, when considering the price that should be charged for a certain product or service, the labour that is placed into that individual product or service is calculated as a direct cost. Consider a situation where a product is being manufactured and it takes four hours of staff time at £7.50 an hour; the direct costs associated with the manufacturing of this product would be £30 and this figure will be used alongside other costs such as the materials, in order to ascertain the direct costs associated with the product. Furthermore, there would be indirect costs which would be the staff members who are associated with the general running of the organisation, but not directly put into a specific product or service. Typically, this would be individual such as the administrative staff and sales staff or human resource staff themselves. By apportioning these costs to each individual product or service, an indirect cost will also be obtained and this will feed into the price that would ultimately be charged for the product or service. Information from staffing issues will also be used to plan for the long-term future of an organisation, for example, ensuring that there is succession in place in terms of junior members of staff, following on from the more senior members of staff who may move on or retire [5] .

Staffing costs and efficiencies are also used when it comes to difficult decisions such as redundancies and the more acceptable issue of rewards. In many organisations, it is common for incentives to be linked to staff performance in some ways such as the profit each individual provides to the business. Taking the previous example of a service industry where an individual is tasked with charging 20 hours a weeks, should they complete over 20 hours per week, they gain a percentage of the additional profit; therefore, the data associated with staff will be necessary to facilitate this and to ensure ongoing employee motivation.

As mentioned previously, financial information relating to personnel costs and staffing levels can also be used to assist an organisation during difficult times. The most obvious of these situations is during periods where the organisation is required to downsize or make redundancies. It is highly likely that, during this period, the information that has been gathered in relation to staff efficiencies will form at least part of the decision-making process. Clearly, where such important decisions are being made, it is vital that the information is reliable and accurate and maintaining this type of data on an ongoing basis is a key role for the management accountants and human resource professionals [6] .

As well as the issue of potential redundancies, the financial information relating to staff costs can also be used for broader implications and decision-making processes such as which projects to push forward with and which to discontinue. It may be that when assessing the direct or indirect costs associated with the product, it becomes clear that certain products are no longer as profitable as others. Therefore, by shifting the emphasis or product mix, labour costs can be changed in such a way that makes the company more profitable, without the need to make any recruitment changes.

From a more long-term point of view, these types of data can also be used for making long-term employment and resource decisions such as taking on new graduates, which does not immediately improve profitability, but may do in years to come. Essentially, the information that is derived from the staff costs feeds into every aspect of the organisation's choices and should be given its due importance, particularly during difficult periods such as financial recession.

Of the applications that can be associated with the managing of staff costs and the information associated with these costs, the most obvious of these is the fact that the company can ascertain just how profitable it is, based on the number of employees and whether or not increasing the number of employees would have the impact of increasing profitability or, in fact, whether cuts could be made, without reducing profitability. Apart from the most obvious link between profitability and staff levels, the costs associated with staff have a much wider range of issues. It was noted, above, that staff costs can directly impact on the prices that will be charged for products and services; therefore, information needs to be gathered accurately and assessments such as whether or not more staff would result in lower costs being incurred can be considered.

Therefore, it is, recommended to organisations that they pay greater attention to analysing staff costs, not purely from a monthly cost perspective, but rather focussing on the implications that these costs have on other aspects of the organisation. By undertaking a much more detailed analysis, areas of inefficiency can be ascertained and this can shift the strategy of the organisation, particularly if it is shown that one specific product or service is simply not producing the profitability levels of others.

Of critical importance is the fact that this type of information can often be used to feed into difficult management decisions; therefore, it is vital that the data is collected, on a regular basis, and is done in a way that is fair, transparent and accurate. Failure to do so could potentially result in de-motivation from employees and could even lead to a legal case should somebody be made redundant unfairly. Bearing all of this in mind, it is recommended that the management accountant team gains a much greater understanding of the relationship between staffing costs and other aspects of the organisation's decision-making, such as training budgets and recruitment, so that the data can be used to its maximum effect in all aspects of decision-making and not purely in relation to staffing decisions [7] .

It is concluded that managing financial information in the context of staff costs is an absolutely fundamental part of any organisation, regardless of whether or not it is seen to be as such. The management accountant is responsible for gathering the data that feed into management decisions and therefore they should work closely with human resource professionals, in order to make sure that the correct decisions are being made in relation to staffing levels, staff training and recruitment, where appropriate.

Given the potentially acrimonious and difficult issues that may need to be dealt with, such as reducing hours or even redundancies, it has been identified that accuracy and reliability is critical. Therefore, this should be the initial factor focused on by both the human resource team and the management accountancy team.