By Baselinemag  |  Posted 2004-05-28 Print this article Print

MCI rolled out new cost-analysis software as part of its recovery from massive accounting fraud and the biggest bankruptcy in U.S. history.


Before its bankruptcy, WorldCom's processes clearly were not up to snuff. An internal audit found the company had inappropriately transferred more than $9 billion of access-cost expenses to capital accounts between 1999 and 2002. Of course, finance officers make choices like this, and even the best financial information systems would not be able to catch or flag such activities. "It's the people you have and the structure for reporting," says Richard Tilton, CEO of Greenacre Asset Advisors, a New Jersey firm that provides financial consulting to bankrupt firms. "The software by itself can't prevent this kind of manipulation."

The problems were not rooted in the controls a well-maintained information system can provide. The company kept its accounts on SAP's R/3 financial and operations planning software, which MCI had adopted just before it was acquired in 1998 by WorldCom. "It's not like they had outdated systems," says Joe D'Amico, senior managing director with FTI Consulting, a business-consulting firm specializing in distressed companies that was hired to sort out the balance sheets involving WorldCom's subsidiaries.

But information systems are only as good as the information managers who run them. It took Capellas, then, to lead the charge last year to start analyzing profit and loss for each business unit. Figuring out how to apportion costs fell to John Nolan, MCI's vice president of planning and analysis, and an 80-person team of financial analysts.

The challenge Nolan's group faced in mid-2003 was how to compile enough detail to accurately divide expenses previously lumped together—such as selling, general and administrative expenses—among the company's three business units. Such SG&A amounted to $1.6 billion, or 30% of revenue, for MCI's most recent quarter, which ended in March.

The group already had a head start. For an earlier project that analyzed product-line profitability, Nolan and his team had decided to use "activity-based" cost management, an accounting method that tracks expenses based on the day-to-day activities employees perform, rather than as lump sums. Those activities would be further subdivided until they were associated with a specific unit or product line (the "cost owner").

In early 2002, the group e-mailed spreadsheets to 200 business managers, asking them to assign costs to activities in their units. "That way, it's not just the finance department making up the numbers," Nolan says.

The process took six months. Even so, much of the data was either inaccurate or incomplete. The answers also were stored on spreadsheets, which was not a viable method of gathering information every quarter for consolidated financial reporting.

The group decided to replace the spreadsheets in December 2002, eventually settling on software that tracks costs by activity, from SAS Institute of Cary, N.C. The software, Nolan says, can break down a given cost into several components and attribute that breakdown to more than one person or operating group.

WorldCom began implementing the SAS application, known as SAS Activity-Based Management, in June 2003 and sped up deployment to 8 weeks from 13. The driving reason: The company's business analysts realized they could use the SAS software to compile financial results by segment for an audit that was submitted on Sept. 8 to the U.S. Bankruptcy Court at its Chapter 11 hearing.

About two dozen SAS consultants and MCI employees worked nights and weekends to get the software up and running by the deadline. The shortened timeline meant the model didn't have the level of detail Nolan wanted—it drilled down costs only three levels, for example, instead of five—but he says the model has since been updated to include additional information.

The SAS application isn't fully automated yet. Until it is, analysts must manually import information from different sources, including the SAP system (for data such as salaries and computer-equipment expenses) and the homegrown MCI billing system (for revenue-related information).

But Nolan says simply building the activity-based cost model has contributed to "consciousness raising" among MCI's managers, who are becoming more attuned to which costs will go into a given service. That way, pricing for a new service, such as an unlimited calling plan, can be assessed more accurately. The initial cost-analysis reports provided to business-line managers has left them thirsty for more, says Nolan: "I knew what kind of data I needed [for financial reporting], but one of the surprising things was that the need and desire for information throughout the organization was so strong."


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