A Q&A with Dr. Peter Turney
BetterManagement.com

Over the course of the past several years, Dr. Turney has delivered a multitude of presentations and webinars focused on maximizing the value generated by ABC implementations.  This article is a compilation of questions submitted on this topic.

Question:
Have any of your efforts to implement ABC at a company failed? If so, what was the key cause of failure?

Answer:
I can’t think of any of our efforts that have failed, but we have worked for organizations who have failed with ABC for reasons beyond our control. The reasons are many, but are predominantly organizational—e.g., lack of leadership, financial distress etc. This experience has led us to be “smarter” in the way we orchestrate our client work—for example, by utilizing collaborative methods that require leader participation.

Question:
What is a typical time frame for an assessment?

Answer:
An assessment can last from a few days to 90 days, depending on the scope and complexity of the organization, the scope of the assessment, and the desired results. The 90 day time frame—called Profit Reveal 90—delivers rapid results and a positive ROI on the project.

Question:
Do you find the ABM sites, using ABC for cost reduction, run models on a monthly or quarterly schedule? How would you respond if management sponsors are asking for your ABC model?

Answer:
The primary reason for running frequent model updates in a cost reduction environment is to reflect the changes in resource deployment and activities resulting from cost reduction efforts. Quarterly updates are probably sufficient, but if the model is fully automated, monthly updates will be no more costly than quarterly updates.

Question:
What are some examples/case studies for service industries?

Answer:
You will find several service case studies in the Performance Center at www.costechnology.com. My preferred service case study is the Deluxe series. While this is a manufacturing company, the case focuses on the service side and illustrates a thoroughly modern ABC system that delivers results.

Question:
How do you address a large R&D operation that works on numerous one-time projects and does complex research that often produces an output that is difficult to measure?

Answer:
Very carefully! We find the storyboarding technique works well because the key is to understand and analyze the processes and the cost associated with the processes.

Question:
I can see a business case for ABC in manufacturing. What about for software firms? Do you recommend or know of many cases where ABC systems exist here? We also provide BPR services…do you foresee any benefits?

Answer:
We have done a number of ABC applications in software companies. The revelations—such as in the actual versus perceived profitability of products, services and customers—is just as stunning in software as it is in manufacturing. ABC also helps with high cost processes, which seem to be a problem in software companies.

Question:
Is the assessment different for a Government agency?

Answer:
The process you go through in a Government agency is exactly the same as in a manufacturing company. The issues, processes, and products and services are quite different, but these are identified and analyzed as part of the assessment. Our experience is that Government agencies can realize significant benefits from an assessment—the design of the ABC is such that it addresses the major goals, the storyboarding sessions provide some significant cost savings and the value creation process assigns responsibilities to teams to achieve the cost savings. So the basics are still the same as manufacturing, and realized savings should be part of the program.

Question:
How are ABC and ABB connected?

Answer:
Very closely. ABB is really a forward looking version of ABC. It is used for resource planning (based on a sales forecast), capacity analysis, and scenario analysis to support decision making. It is important not to make it too complex, and use analytics in combination with ABC to deliver the forecast information cost-effectively..

Question:
Is it essential to use an ABC/M software during and after implementation? If so, what software would you recommend?

Answer:
Yes, yes and yes. If you don’t believe me, step into a time machine and return to 1986 and experience the pain yourself. During the initial model build, and then going forward into systems integration, maintenance, and web delivery of reports and information, you will give thanks every day that you use ABC software. We use SAS ABM, SAS Profitability Management and MyABCM. The choice of a software tool is specific to a particular organization, its business needs, complexities, systems requirements and budget.

Question:
In my company, I feel that ABC is a “nice thing to have” but is not used to help make good business decisions. I think that this is because the company did not complete the proper assessment but went forward with the implementation process. How do we now make the adjustments so that ABC is a valuable process in the business?

Answer:
I am glad you are asking this question because it means it is not too late to salvage ABC. The exact answer will depend on an assessment of the reasons for failure, and the requirements going forward. A common problem is failure to define the business purpose and to design the ABC system specifically to meet this purpose. Other problems are tactical and usually fixable.

Question:
What sort of dialogue with a prospective client typically precedes the conclusion or suggestion that ABC is needed? As an adjunctive question, what are the indicators of an organization in need of ABC?

Answer:
There are two types of dialogue. One type is with financial or accounting people who know about ABC and will be responsible for implementing it. Here the discussion usually centers implementation issues such as the approach to implementation, the  choice of software tool, budget etc. The other type is a dialogue with the management who own the business problem such as pricing, supply chain or customer profitability. Here the issue is what is happening because of the absence of ABC, and how ABC can correct the problem.

Question:
We can see how ABC can assist private industry, how can ABC be applied to government entities to increase efficiency?

Answer:
Every organization has processes with activities (mostly with significant degrees of misalignment and inefficiency), resources deployed to do the work (with alignment and capacity issues), and outputs and customers of the outputs. A government entity is no different in this regard than any other organization. Like private industry, government entities have strategic and operational issues that require ABC, such as budget shortfalls, pressure to outsource, etc. Our assessment determines the design of the ABC and identifies the specific areas that need to be analyzed. Our experience is that government entities can experience significant savings from ABC when using the storyboarding method.

Question:
Are there any best-practice ABC models available for specific industries? Which industries?

Answer:
Best-practice models provide good illustrations of industry-specific models. With one exception, it is unusual for these models to form a template for model implementation. This is because organizations differ significantly in business need, organization structure etc, so the ABC model will be different. The exception is in large organizations that have similar businesses or processes in different geographic locations. In these cases a best-practices model will be cost-effective in model ABC system role out.

Question:
What is the biggest opposition to the implementation of ABC in both the public and commercial sectors?

Answer:
Anyone can oppose ABC, and opposition may come from accounting or from operations. The root causes of opposition are FEAR. IGNORANCE and the ABSENCE OF LEADERSHIP. These causes can be addressed through the use of change management, effective implementation techniques and training. .

Question:
Do you have any experience performing ABC activities for Federal Agencies and or Department of Defense Organizations (DoD)?

Answer:
Yes, we have had many very positive experiences in Federal Agencies and the DOD. It may take longer than in the private sector, but with the right methods, ABC can be very successful. We have had particular success with storyboarding to identify cost savings in the US military sector both in the USA and overseas.

Question:
Building on the earlier question regarding frequency of running the model, if supply chain management sponsors are asking for the ABC model to provide detailed cost of jobs, which ran on, say, nightshift this past weekend, is it best to say ABC does not provide such real-time job costing information, and other systems such as shop floor control should be developed to get such detailed cost?

Answer:
This is a challenging question that raises philosophical as well as systems issues. My answer depends on what your sponsors want to use the information for. If the purpose is real-time operational control—such as adjusting the temperature of the process to keep it within specifications—there may not be any value to real-time cost information. On the other hand, if your sponsors want to price the jobs to the customer, then you want real-time ABC cost. This real-time cost should be up-to-date from a process standpoint, but not real-time process cost (this may not be possible to compute). However, you can apply activity driver rates to each job to get a real-time job cost which can be used for pricing purposes.

Question:
Thanks for the great information! How easy/common is it to integrate ABC with business intelligence applications or solutions?

Answer:
You will need to be more specific in your question. What type of business intelligence applications do you have in mind? ABC is an analytic solution that sits in the same domain as business intelligence and should be fully compatible with any form of business intelligence. For example, ABC could fit well with data mining products to generate intelligence on customer profitability. Reports can be surfaced via portals and performance measures can be surfaced on maps. Cost measures can be routed to scorecards which can also be integrated into the business intelligence framework.

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.

A Q&A WITH DR. PETER TURNEY

Over the course of the past several years, Dr. Turney has delivered a multitude of presentations and webinars focused on maximizing the value generated by ABC implementations. This article is a compilation of questions submitted on this topic.

Question: Have any of your efforts to implement ABC at a company failed? If so, what was the key cause of failure?

Answer: I can’t think of any of our efforts that have failed, but we have worked for organizations who have failed with ABC for reasons beyond our control. The reasons are many, but are predominantly organizational—e.g., lack of leadership, financial distress etc. This experience has led us to be “smarter” in the way we orchestrate our client work—for example, by utilizing collaborative methods that require leader participation.

Question: What is a typical time frame for an assessment?

Answer: An assessment can last from a few days to 90 days, depending on the scope and complexity of the organization, the scope of the assessment, and the desired results. The 90 day time frame—called Profit Reveal 90—delivers rapid results and a positive ROI on the project.

Question: Do you find the ABM sites, using ABC for cost reduction, run models on a monthly or quarterly schedule? How would you respond if management sponsors are asking for your ABC model?

Answer: The primary reason for running frequent model updates in a cost reduction environment is to reflect the changes in resource deployment and activities resulting from cost reduction efforts. Quarterly updates are probably sufficient, but if the model is fully automated, monthly updates will be no more costly than quarterly updates.

Question: What are some examples/case studies for service industries?

Answer: You will find several service case studies in the Performance Center at www.costechnology.com. My preferred service case study is the Deluxe series. While this is a manufacturing company, the case focuses on the service side and illustrates a thoroughly modern ABC system that delivers results.

Question: How do you address a large R&D operation that works on numerous one-time projects and does complex research that often produces an output that is difficult to measure?

Answer: Very carefully! We find the storyboarding technique works well because the key is to understand and analyze the processes and the cost associated with the processes.

Question: I can see a business case for ABC in manufacturing. What about for software firms? Do you recommend or know of many cases where ABC systems exist here? We also provide BPR services…do you foresee any benefits?

Answer: We have done a number of ABC applications in software companies. The revelations—such as in the actual versus perceived profitability of products, services and customers—is just as stunning in software as it is in manufacturing. ABC also helps with high cost processes, which seem to be a problem in software companies.

Question: Is the assessment different for a Government agency?

Answer: The process you go through in a Government agency is exactly the same as in a manufacturing company. The issues, processes, and products and services are quite different, but these are identified and analyzed as part of the assessment. Our experience is that Government agencies can realize significant benefits from an assessment—the design of the ABC is such that it addresses the major goals, the storyboarding sessions provide some significant cost savings and the value creation process assigns responsibilities to teams to achieve the cost savings. So the basics are still the same as manufacturing, and realized savings should be part of the program.

Question: How are ABC and ABB connected?

Answer: Very closely. ABB is really a forward looking version of ABC. It is used for resource planning (based on a sales forecast), capacity analysis, and scenario analysis to support decision making. It is important not to make it too complex, and use analytics in combination with ABC to deliver the forecast information cost-effectively..

Question: Is it essential to use an ABC/M software during and after implementation? If so, what software would you recommend?

Answer: Yes, yes and yes. If you don’t believe me, step into a time machine and return to 1986 and experience the pain yourself. During the initial model build, and then going forward into systems integration, maintenance, and web delivery of reports and information, you will give thanks every day that you use ABC software. We use SAS ABM, SAS Profitability Management and MyABCM. The choice of a software tool is specific to a particular organization, its business needs, complexities, systems requirements and budget.

Question: In my company, I feel that ABC is a “nice thing to have” but is not used to help make good business decisions. I think that this is because the company did not complete the proper assessment but went forward with the implementation process. How do we now make the adjustments so that ABC is a valuable process in the business?

Answer: I am glad you are asking this question because it means it is not too late to salvage ABC. The exact answer will depend on an assessment of the reasons for failure, and the requirements going forward. A common problem is failure to define the business purpose and to design the ABC system specifically to meet this purpose. Other problems are tactical and usually fixable.

Question: What sort of dialogue with a prospective client typically precedes the conclusion or suggestion that ABC is needed? As an adjunctive question, what are the indicators of an organization in need of ABC?

Answer: There are two types of dialogue. One type is with financial or accounting people who know about ABC and will be responsible for implementing it. Here the discussion usually centers implementation issues such as the approach to implementation, the choice of software tool, budget etc. The other type is a dialogue with the management who own the business problem such as pricing, supply chain or customer profitability. Here the issue is what is happening because of the absence of ABC, and how ABC can correct the problem.

Question: We can see how ABC can assist private industry, how can ABC be applied to government entities to increase efficiency?

Answer: Every organization has processes with activities (mostly with significant degrees of misalignment and inefficiency), resources deployed to do the work (with alignment and capacity issues), and outputs and customers of the outputs. A government entity is no different in this regard than any other organization. Like private industry, government entities have strategic and operational issues that require ABC, such as budget shortfalls, pressure to outsource, etc. Our assessment determines the design of the ABC and identifies the specific areas that need to be analyzed. Our experience is that government entities can experience significant savings from ABC when using the storyboarding method.

Question: Are there any best-practice ABC models available for specific industries? Which industries?

Answer: Best-practice models provide good illustrations of industry-specific models. With one exception, it is unusual for these models to form a template for model implementation. This is because organizations differ significantly in business need, organization structure etc, so the ABC model will be different. The exception is in large organizations that have similar businesses or processes in different geographic locations. In these cases a best-practices model will be cost-effective in model ABC system role out.

Question: What is the biggest opposition to the implementation of ABC in both the public and commercial sectors?

Answer: Anyone can oppose ABC, and opposition may come from accounting or from operations. The root causes of opposition are FEAR. IGNORANCE and the ABSENCE OF LEADERSHIP. These causes can be addressed through the use of change management, effective implementation techniques and training. .

Question: Do you have any experience performing ABC activities for Federal Agencies and or Department of Defense Organizations (DoD)?

Answer: Yes, we have had many very positive experiences in Federal Agencies and the DOD. It may take longer than in the private sector, but with the right methods, ABC can be very successful. We have had particular success with storyboarding to identify cost savings in the US military sector both in the USA and overseas.

Question: Building on the earlier question regarding frequency of running the model, if supply chain management sponsors are asking for the ABC model to provide detailed cost of jobs, which ran on, say, nightshift this past weekend, is it best to say ABC does not provide such real-time job costing information, and other systems such as shop floor control should be developed to get such detailed cost?

Answer: This is a challenging question that raises philosophical as well as systems issues. My answer depends on what your sponsors want to use the information for. If the purpose is real-time operational control—such as adjusting the temperature of the process to keep it within specifications—there may not be any value to real-time cost information. On the other hand, if your sponsors want to price the jobs to the customer, then you want real-time ABC cost. This real-time cost should be up-to-date from a process standpoint, but not real-time process cost (this may not be possible to compute). However, you can apply activity driver rates to each job to get a real-time job cost which can be used for pricing purposes.

Question: Thanks for the great information! How easy/common is it to integrate ABC with business intelligence applications or solutions?

Answer: You will need to be more specific in your question. What type of business intelligence applications do you have in mind? ABC is an analytic solution that sits in the same domain as business intelligence and should be fully compatible with any form of business intelligence. For example, ABC could fit well with data mining products to generate intelligence on customer profitability. Reports can be surfaced via portals and performance measures can be surfaced on maps. Cost measures can be routed to scorecards which can also be integrated into the business intelligence framework.

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.