BetterManagement.com
Over the course of the past several years, Dr. Turney has delivered a multitude of presentations and webinars focused on the operational use of ABC solutions such as cost reduction and quality improvement.  This article is a compilation of questions submitted on this topic

Question:
You mentioned trying your best to measure the outcome of administrative processes. Do you have an example of what you would recommend in order to translate the most value to the client in a situation where a straight quantitative answer is not available?

Answer:
I prefer to emphasize the positive. There is real value to identifying the activity, costing it, linking it to the goals of the department, and analyzing cost drivers associated with the activity. None of this information will be available about an administrative process prior to an ABC storyboarding initiative. It provides huge value to the client, even in the absence of other quantitative output measures.

Question:
What is a good business unit or department to target within an organization to run an ABC “Proof-of-Concept”?

Answer:
First, you need to identify areas where you are likely to gain results. For example, areas with cost or efficiency problems are good candidates. Second, you need to select areas that are technically feasible in a reasonable period of time. For example, a highly complex engineering area may take too long to provide results within the limited time-frame of a proof-of-concept initiative. Third, and lastly, you need to work in an area where you have the full and enthusiastic support and involvement of management. This is important because you will need to spend time with several members of the selected area during development of the storyboards, as well as during the follow-on value creation phase. For private sector companies, Profit Reveal 90 combines an assessment to target the highest business value, model building and profit realization and cost reduction to provide results within a fast 90 day period.

Question:
How can you measure the quality using the ABC Model?

Answer:
A measurement is an attribute of an activity or process. Just as cost is an attribute, so is quality. The challenge with quality is how to measure it, and how to determine specific measurements. In many cases, particularly in non-manufacturing settings, there may be no history of measuring quality, and therefore no data available. You must then start with estimates of quality measures, and set into motion the measurement of the quality of each activity.

Question:
For cost per unit of output, what capacity would you consider, particularly in the case of non-bottleneck resources?

Answer:
This is a great question and also a complex one to answer. Identifying capacity may not be necessary in a model that focuses on reducing cost or improving profits. If you wish to use the model to plan the use of resources, and to associate with activities only those resources that are used, then it is necessary to use modeling techniques such as time driven ABC or resource planning where the capacity of each activity is defined. From a reporting perspective, it is then possible to report the cost of excess capacity (for non-bottleneck resources).

Question:
In your experience, have you seen that in the operational ABC model, you could group multiple activities to an activity driver?

Answer:
For cost assignment purposes, you can group activities to a single activity driver in any type of ABC model. In an operationally focused ABC model, you will have more scope to do this because you will have more activities. You can also group individual activities into consolidated (or macro) activities prior to assigning their cost to cost objects using activity drivers. When you conduct a cost driver analysis in operational ABC (i.e. root cause analysis to find explanations of inefficiency and high cost), you will find that cost drivers are often common to multiple activities. This means that when you fix the problem associated with the cost driver, there will be improvement and cost reduction impact on several activities. You will aggregate these cost savings (plus time reduction and quality improvement) to determine the overall impact of fixing the cost driver.

Question:
How much participation is required by the business owners and stakeholders to conduct an accurate assessment?

Answer:
There must be enough participation to ensure that all the pertinent information they have is included in the assessment. Also, their participation will help achieve the buy-in and support necessary for the acceptance of the assessment recommendations and plan. From a practical standpoint, you will spend more time with those individuals whose knowledge, opinion and support are most critical to the success of the ABC assessment. Typically the assessment is completed in 2-4 weeks. We spend an average of 2 hours talking to the appropriate people and do some off-line analysis. If the assessment is extended to target results (such as in the Profit Reveal 90) it will last longer (say 90 days) but provide a positive return on investment.

Question:
Would the cost of maintaining the ABC model also be a factor to build a live ABC model? And for operational ABC purposes would one zoom in to the areas of interest by using this strategic model?

Answer:
My experience with ABC systems is that maintenance, if handled correctly, can be quite cost effective. You should look for opportunities to automate the maintenance process wherever possible, such as through bar coding or through computerized time collection, stored processes for analytics and queries, automation of data loads and the automated delivery of reports to portals. For the second part of your question, if you build the strategic model first, then you can use it to identify areas of high cost and improvement potential, and then “drill-down’” to get operational benefits in those areas through targeted ABC analyses.

Question:
In conducting the assessment, how much of the model can be defined through process/technology reviews versus business owner/stakeholder interviews?

Answer:
This is a great question. Our experience is that the mix is about 50-50. I would say that we get about 50% of the insight through process review and some analysis of financial and non-financial data. The remaining 50% comes from the interviews with stakeholders.

Question:
In any ABC adaptation, the results will point to non-productive activities and inadequate processes, i.e., someone is exposed. Therefore, whom do you target within an organization as your potential “sponsor”/”advocate”?

Answer:
The sponsor should always be the most responsible manager you can find. This may be the President, the Chief Executive Officer, or the Vice President or General Manager in the case of a division. It is also important to have a sponsor in each area where you are implementing ABC, such as the VP of Manufacturing, or the Head of the Department. The Chief Financial Officer or Controller also plays an important role, but generally as a champion and project leader. At Cost Technology, we have an established process for Value Creation, which includes titles, position descriptions and responsibilities of individual members of the team.

Question:
What is your advice to the people who do not want to be measured so they don’t cooperate to define the key activities?

Answer:
You have to minimize fear, distrust, and any belief that this is unimportant personally and to the organization. You can accomplish this with leadership, communications, and collaborative implementation methods (such as storyboarding) and other techniques.

Question:
How do you assign costs to processes (i.e. salaries, depreciation, cost allocations, etc.)?

Answer:
The costs of these resources are assigned using resource drivers. Resource drivers accurately measure the relative use of a resource by each activity. Please read the relevant Chapters in Common Cents for a more detailed explanation.

Question:
How do you ensure that outsourced options have costs that are aligned to your company’s costs or processes?

Answer:
Comparison will be difficult if the potential contractors do not report cost according to the activities in your ABC model. If you are large and powerful, or have a good relationship with your contractors, I suggest you ask them to report cost on an activity basis. You can always facilitate the process by offering to help. One of our consulting affiliates is a retired manager from Xerox who did this with over 70 suppliers to Xerox, and he did it very successfully, while achieving significant cost reduction.

Question:
Is it necessary to link the ABC model to the scheduling model?

Answer:
The scheduling model may provide certain data—such as the number of times scheduled per product—that may be useful for activity driver purposes.

Question:
If your first priority is to develop profitability for potential customers based on “unbundling” the company’s current and potential activities, should we implement the operational model first? Then implement the strategic model to develop customer specific ABC?

Answer:
No, if your first priority is customer profitability, you should develop a strategic model first. You can later create an operational ABC capability by drilling down into high cost areas revealed by the initial strategic model.

Question:
Collecting activity driver quantities for sales in an operational ABC is a huge undertaking because it is mostly based on time sheets. What would you recommend to reduce the cost of gathering the AD information?

Answer:
I would explore the possibility of automating the data collection. There will be some upfront cost and effort, but long-term it will be less time consuming. Software tools available today are capable of handling large quantities of data in short periods of time cost-effectively. Banks or telecoms, for example, have models that use billions of pieces of data associated with millions of customers and run in less than 10 minutes.

Question:
Does the ABC model require a permanent IT system?

Answer:
The answer is no. ABC sits outside the IT system. It is connected to the IT system, possibly via a data warehouse created specifically for this purpose. Data can be ported to ABC using automated links, and activity rates can be transmitted to the IT system for reporting and analysis purposes. ABC is not a system; rather it is an analytic tool.

Question:
Do we start by defining the main processes or should we start with activities?

Answer:
You start with the activities, and then determine which process each one belongs to.

Question:
If I want to apply StorySolve® as a technique to improve my ABC system, do I need training? Is there any book or training session where I can get more details about it?

Answer:
StorySolve® is a proprietary storyboarding method developed over many years by Cost Technology, Inc. The method is available for license, and can include technology transfer if you wish (i.e., training, guided facilitation, etc.). The license comes with a full complement of tools and documentation.

Question:
Can we implement ABC as a system of cost accounting rather than a model of cost reduction?

Answer:
Yes, you can use ABC for cost accounting purposes. Cost accounting—the method of determining the cost of sales and inventory cost in a manufacturing company—does not require accurate product cost. It can therefore be handled quite simply. If you have an ABC system in place, then it is totally appropriate to use it for costing purposes.

Question:
If you were to implement ABC in a manufacturing environment and you were asked why it’s important, how would you summarize the reasons? Also, what are the risks involved in the implementation?

Answer:
There are many reasons why you would implement ABC in a manufacturing environment. There must be a strategic or operational issue that needs accurate, understandable, process-oriented cost information to make the proper decision. In addition, this issue must have significant consequences in terms of problems (if not resolved) or benefits (if ABC is used). The risks involved in implementation are those of failure relating primarily to organizational issues (e.g., lack of leadership), all of which are controllable.

Question:
Some decisions need to be made based on forecast development. Do you have experiences with a forward looking approach to ABC? Is it manageable to build such a model?

Answer:
A forward looking model can be built using time-driven or resource planning techniques, and it can also be done using analytics. It can be done cost-effectively, but should be done in response to a specific business need.

Question:
Our organization is very resistant to change; it is very difficult to change from a traditional governmental accounting mindset to an ABC view of the organization and its processes. How can we get people “shifted” to the ABC mindset, especially those in senior leadership, who are often the most resistant to change?

Answer:
I have encountered the resistance to change you describe in government organizations. I recommend you combine the principles of change management with a proof of value to deliver immediate results. There is nothing like results to convert the non-believers! We have followed this approach in both government and private sector organizations.

Question:
How can we use operational ABC in power distribution companies that don’t have computerized accounting systems?

Answer:
You can do a process-by-process analysis using storyboarding. Storyboarding relies on cards, dots and other non-computerized media. You can load the data from the storyboards into Excel or other tools to allow further analysis.

Question:
I’m from Peru and due to the management culture and the fact that generally owners are managers, it’s very difficult to generate change and to develop Strategic ABC because they feel challenged. What would your advice be in this case?

Answer:
You need to find out what will cause them pain if they don’t implement ABC, and what will give them success if they do implement ABC, and create a plan to resolve their problems and give them success. Then you need to treat ABC as a change management initiative, and conduct the implementation in a way that will create high levels of buy-in (ideal is to give them results).

Question:
We have established ABC measures within our organization. In looking at their P&Ls, managers seem to be managing their expenses well; however, their cost per unit is not very good, so now they are losing interest in the ABC Costs. How do we keep the buy-in of the Operations Managers?

Answer:
I am not sure I fully understand your question. It appears that you are using ABC information for responsibility budgeting. This is a great use of ABC, but there can be many reasons why it is failing. One may be that managers are responsible for budgeted expenses—but not for activity costs—and are therefore paying attention to expenses and not activities. Another may be that the ABC numbers in the budget may be poorly formulated for budgeting purposes. ABC is a good analytical tool, but looking forward you need a different type of ABC model—one that utilizes the resource planning and capacity management information. Finally, it may be a simple training issue. If this does not answer your question, please contact me and I can schedule a quick discussion.

Question:
Is it possible that the process oriented cost reduction results in a cost transfer between functions instead of a real reduction?

Answer:
Yes, it is possible, and unfortunately it does happen. The key is to make sure that resources that are released by the process improvement are redeployed to productive work, or taken out of the organization. One of the reasons it happens is the absence of management attention to the resource issue. If the resources are not deliberately redeployed, they will quickly find other (not necessarily value-added) work to do. Another reason is that many ABC models lack the ability to separate unused resources into an excess capacity category. There are some simple fixes to this omission, but the ultimate solution is to upgrade the ABC model to a Resource Planning model.

About Cost Technology
Cost Technology designs and implements solutions to support fact-based decision making.  These solutions transform existing data into strategically meaningful and actionable insights in areas such as cost and profit management, financial forecasting, analytics, and performance management.  Since 1991, the firm has helped public and private sector organizations across the world improve performance by creating the knowledge needed to make every decision count.