Developing a costing system for a digital technology service firm

Abstract

Companies are adopting digital technology at a rapid speed, with business spending on technology transformation reaching an outstanding $1.25 trillion in 2019. Founded in 2015, the case study principle is a fast growing South African based global digital technology service firm that offers software developing services. Emanated from the view expressed by the firm's Chief Executive Officer, the current costing mainly focuses on firm growth which was a priority in the past, without giving consideration to the appropriateness of the costing system. Within the context of the systems theory, this study investigated the current costing model of the case study principle to establish a reliable system that will improve cost management and provide data for informed decision-making in an effort to maximise value and to remain relevant in the market. Digital service firms are relatively new as a business concept. Other than manufacturing and other well-established service firms, the processes/systems of a typical digital service firm are not widely known. Consequently, the literature lacks examples of practices to allocate and manage cost in such a firm. This necessitated the investigation, including activity-based costing (ABC) as an alternative to the current costing system. Documents (e.g. general ledger, cost reports and budgets) were obtained and studied. Furthermore, semi-structured interviews were conducted with five senior employees, of which the collected data was manually transformed (coded) using a spreadsheet. With an inductive approach, principles of action design research were followed to build an improved costing system. After the coding of the interviews' responses into themes, there was a clear indication that time was the main factor for each participant. The digital technology service firm's internal operations are all about time consumption and the profit that the specific service/department delivers. Therefore, each service that the firm provides for their clients differs, as it depends on what the specific client wants/requires from the firm. The study concluded that time-driven activity-based costing (TDABC) could be implemented as an alternative costing method in the digital technology service firm, by connecting it to their Enterprise Resource Planning (ERP) system. Based on the concluded research, it is therefore crucial for the firm to fully buy into the TDABC to ensure that the costing system is implemented successfully. What is also important is that the system will be much more beneficial, as digital costing will arise, which will enable the firm to save costs and reinvest it back into the firm.