Profit-Margin Math: Leveraging ABM Data for Exceptional BPM Results
What does a commercial organization do with the customer profit information? In other words, what actions can an organization take to increase its profits? Some customers may be so unprofitable that the company will conclude that it is impractical to try to achieve profitability with them. These customers should be terminated. After all, the goal of a business is not to improve customer satisfaction at any cost but rather to attempt to manage customer relationships in order to improve long-term corporate profitability.
ABM-Calculated Outputs Provide a Subset of a Scorecard's KPIs
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Operational ABM supports an organization's BPM system by measuring the costs of the output of processes. Management uses it to drive productivity and improve asset utilization. Most organizations have very little insight about their outputs -- not the obvious products and standard service lines they deliver to end customers, but rather the internal "outputs" of the work their organizations perform. For example, internal outputs reflect the work effort and cost to generate sales calls, processed invoices, processed customer complaints, returned goods, etc. These examples are not the "work activities" that employees perform. They are descriptions of the results after the activities have been performed; in other words, they are the outputs of work. A collection of outputs leads to "outcomes" -- products, services, and the like -- a more macro result for which cost can also be calculated.
So where does ABM fit in? ABM can assign attribute tags to activity costs, such as cost of quality measures or valued-added codes, to focus on what activities need attention. ABM also does a great job tracing resource expenses to all sorts of internal outputs. This does not mean that the work processes producing these outputs are unimportant. It simply means that many people react more to the visibility of output costs than they do to the process costs to which the work activity costs belong.
In short, when unit costs are trended or compared with other unit costs, employees and managers gain more insight. They can benchmark to deduce whether they have a best or worst practice. Per-unit-of-each costs should not only be included as KPIs in the balanced scorecard's financial perspective but should also appear in the other perspectives as well. While unit costs represent dollar figures, they are much more like a representation of the equivalent resources the unit measure consumes, in this case stated in terms of money.
ABM Converts Data Into Business Intelligence
When used in conjunction with a BPM system, ABM should not be promoted as an improvement program, or users may perceive it as a temporary fad or "project of the month." Instead, ABM simply reflects the economics of how an organization behaves and consumes its expenses as calculated costs, such as for products, services, processes, channels, and customers. The information the ABM calculation engine reports should always be the input for something else, such as for performance measurement scorecard systems. Exhibit 3 illustrates from an IT perspective how an ABM system developed by SAS imports data from transactional financial and operations systems and then pushes the data into other business process systems, including a scorecard and customer relationship management system.
For example, within a large mutual fund company, management recognized that it is much more costly to acquire new customers than to retain existing ones. Knowing it must efficiently utilize its already-scarce resources, the company decided to deploy them to serve its more profitable customers. Its marketing and sales personnel shifted from pursuing increased sales volume at any cost to pursuing profitable sales volume. And the chief marketing officer (CMO) now requests customer profitability data from the CFO to target marketing strategies to microsegments of customers and optimize the company's increasingly targeted marketing campaigns -- regardless of the communication channel (e.g., e-mail, call center, mailing brochures) -- to achieve the highest ROI per campaign. This is another example of integrating the solution suite of BPM methodologies.
But don't confuse ABM with performance measures. ABM is not the measurement system. The output of ABM can be an important input of performance measurements in a scorecard system, and the presence of ABM data can stimulate greater numbers of actions.
Certainly, ABM is not a prerequisite for designing and using a BPM scorecard system. Scorecards are much more about communicating strategies to employees and increasing alignment of the work with overall corporate strategies. But the introduction of ABM data can populate the scorecard framework with robust and high-octane information that can give executives a much better sense of how well the organization is aligned with its strategies right now and how this information will influence the bottom line down the road.
With fact-based, relevant cost data from ABM systems, managers and teams can see things they've never seen before, and some of it might not be pretty. Often organizations are surprised when they realize the consumption patterns from their cost structure. As with scorecards, finding someone to blame or punish is not the point of having ABM data. It is important to treat ABM data responsibly. The key is to use the ABM data as a guide to better decisions, and the data for performance measures as a valuable benefit. Senior management's attitude is critical in successfully implementing a balanced scorecard. They should view the strategy map, scorecard, and ABM as supportive tools for remedies, not for punishment or embarrassment.
ABM Is a Cost-Reassignment NetworkIn complex, support-intensive organizations, there can be a substantial chain of indirect activities prior to the work activities that eventually trace into the final cost objects. These chains result in activity-to-activity assignments, and they rely on intermediate activity drivers in the same way that final cost objects rely on activity drivers to reassign costs into them based on their diversity and variation. Given the existence of integrated activity-based costing/management (ABC/M) software, the direct costing of indirect costs is no longer -- as it was in the past -- an insurmountable problem. ABM allows intermediate direct costing to a local process, an internal customer, or a required component that is causing the demand for work. ABM software is arterial in design. Eventually, via this expense assignment and tracing network, ABM reassigns 100 percent of the costs into the final products, service lines, channels, customers, and business-sustaining costs. In short, ABM connects customers to the resources they consume -- and in proportion to their consumption. The ABM cost-assignment network in exhibit 1, on page 37, consists of three modules connected by cost-assignment paths. This network calculates the cost of cost objects (e.g., outputs, product lines, service lines, customers). It is basically a snapshot view of the business conducted during a specific time period. (Life-cycle costing is associated with a customer relationship management topic, customer lifetime value.) Resources, at the top of the cost-assignment network, enable the company to perform work because they represent all the available means that work activities can draw on. Resources can be thought of as the organization's checkbook; this is where all the period's expenditure transactions are accumulated into buckets of spending. Examples are salaries and operating supplies. These are the period's cash outlays and amortized cash outlays, such as for depreciation, from a prior period. During this step, the applicable resource drivers are developed as the mechanism to convey resource costs to the activity. "Expenses" and "costs" are not the same thing. All costs are calculated costs. Recognize that assumptions are always involved in the conversion and translation of expenses into costs. The assumptions stipulate the basis for the calculation. Expenses occur at the point of acquisition with third parties, including employee wages. This is when money (or its obligation) exits the company. At that moment, "value" does not fluctuate; it is permanently recorded as part of a legal exchange. However, all costs are calculated representations of how expenses flow through work activities and into outputs of work. In sum, resources are traced to work activities. During this step, the applicable resource drivers are developed as the mechanism to convey resource expenses into the activity costs. A popular basis for tracing or assigning resource expenses is the length of time that people or equipment spend performing activities. Note that the terms "tracing" or "assigning" are preferable to the term "allocation," because many people associate allocation with a redistribution of costs that have little to no correlation between source and destinations. Thus, some firms cynically view overhead cost allocations as arbitrary. The activity module is where work is performed,where resources are converted into output. The activity cost-assignment step contains the structure to assign activity costs to cost objects or other activities, utilizing activity drivers to accomplish this assignment. Cost objects, at the bottom of the cost-assignment network, represent the broad variety of outputs and services where costs accumulate. The customers are the last final-cost objects; their existence creates the need for a cost structure in the first place. Cost objects are the persons or things that benefit from incurring work activities -- the "what" or "for whom" work is performed. Examples of cost objects are products, service lines, distribution channels, customers, and outputs of internal processes. Once established, the cost-assignment network is useful in determining how the diversity and variation of things, such as different products or various types of customers, can be detected and translated into how they uniquely consume activity costs. |
Gary Cokins is global product marketing manager for performance management solutions at SAS and a well-known expert in performance and cost management.
