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

Question:
How do you sell the proposition to management to continue developing ABC in their organization when they want a pay back on the initial ABC implementation?

Answer:
The answer is to give them an initial payback and, in doing so, inspire them to continue with ABC long-term. This is why at Cost Technology, Inc. we emphasize rapid results in phase one of the implementation, and sustainable results in phase two. Our experience is that when you can demonstrate results that more than pay for the cost of the first round, senior management are able to reassess the project risk and are very confident about moving forward. However, you need to plan the implementation carefully and ensure that the results are realized. We use our Value Creation methodology to ensure this happens.

Question:
What are some of the specific capabilities that the existing tools provide that allow you to develop models so much quicker?

Answer:
Cost Technology’s assessment exercise helps us frame the issues and scope out the model in terms of decisions that need to be addressed by it. The ability to develop models quickly comes from the quality of modern tools and the learning curve we have gone through over more than two decades of ABC implementations. ABC software is a specialized tool for ABC—everything is designed to support model building. The ABC technician can focus on the model-build rather than customizing the tool (as he or she would have to do if using, say, Excel). Also, the use of storyboards and web-based tools speed up data capture and analysis (including on-line real-time validation of the model), whereas old-fashioned interviews are very time-consuming and repetitive. In addition to the quality of the tools, we are just much better at implementing ABC. What used to take 6-9 months now takes 2-3 months for the initial project.

Question:
Are there any examples of insurance companies that have successfully used ABC/M for cost reduction?

Answer:
There are several case example of the use of ABC in insurance, and we have developed ABC successfully in insurance companies. The biggest difference is not technical—implementation is very similar—rather it is the change management issues. Change in insurance has historically been glacial and you may need significant effort to successfully foster change around ABC. In the insurance industry, the practice of analyzing customer behavior – tends to support the use of ABC. For example, you can now use ABC to supplement your intelligence about customers and derive the cost to acquire, cost to serve and cost to retain your customers.

Question:
Why is it so hard for service companies to see ABC as a perpetual cost system as manufacturing companies do? There is no manufacturing company without a cost system, but there are a lot of service companies without them.

Answer:
I suspect that one of the reasons is that ABC is often still sold as a costing system, and manufacturing companies are the only ones with costing systems. The reason for this is that manufacturing companies have inventory, and, according to Generally Accepted Accounting Principles (GAAP), the inventory must be valued. This involves determining how much cost goes into cost of goods sold and how much remains in inventory in the balance sheet. Service companies do not carry inventory and therefore have no reporting or regulatory need for a costing system.

In its earliest days, ABC was developed—and pitched—as a better cost accounting system. We quickly learned, however, that ABC is really an analytic tool that provides support for management decision-making. And service companies need ABC the analytic tool just as much as manufacturing companies do. I personally would not sell anyone on ABC as a costing tool. The lower percentage of service companies with ABC may also be due to getting started later—the earliest ABC implementations were largely in manufacturing organizations. But they will catch up soon.

Question:
What are some ways ABC can help in CRM? Like profitability, what are other areas?

Answer:
Great question! CRM can provide a lot of useful data about customers, but, without ABC it cannot inform management on the relative profitability of customers. Nor can it provide diagnostic information about the source of cost, nor support the analysis needed to identify ways of improving profitability and reducing customer cost. As we mentioned in a previous answer, you can combine ABC with CRM to derive the cost to acquire, cost to serve and cost to retain individual customer categories. You can also use this and customer profitability intelligence to make decisions about price-service-support-technology offerings to different customer categories.

Question:
I am working towards developing an ABC process and am anticipating resistance by production management. Does a small project pilot on a department for purposes of selling the concept make sense?

Turney’s Answer:
Yes it does, but I would make sure that the pilot is a “proof of concept” pilot. This means it will provide results that will ensure enthusiastic support for ABC amongst the production management. You will need to carefully pick the target area and method to provide the required results. We use often the storyboarding method in situations where realized cost reduction will close the sale.

Question:
Can you be more explicit about storyboarding being the primary method used by Johnson & Johnson?

Answer:
Johnson & Johnson Medical used storyboarding in to identify non-value added activities. This was very successful, and prompted our efforts to design an ABC-solution using storyboards. We added discipline and additional information to the storyboarding method. For example, the Johnson & Johnson method did not involve costing the activities, which is critical to prioritization decisions and removing resources from the process.

Question:
We have implemented ABC, yet our management suggests that we don’t have “True” ABC because we haven’t captured every operational activity via bar coded transactions or similar means. Are there ABC implementations that you know of that capture and manage that level of detail? How do we respond?

Answer:
Your answer has to be that implementing ABC is a process that goes on over time. Your initial implementation must have provided a lot of good information that is useful to management. I would expect your ABC cost to be quite accurate even without the use of bar coding. However, management may want ABC to provide more detailed operational cost data that can only be provided with bar coding.

Question:
Could you explain the key aspects of implementing storyboard methodology?

Answer:
Planning is a key issue in storyboarding. Proper planning will ensure the selection of the right areas for storyboarding as well as provision of the right data. As far as method is concerned, we use a structured method that is proven to provide results. A key factor here is to combine the structured method with a group of knowledgeable people from the work area. Another key factor is to use experienced facilitators. Always work towards realized cost savings in the region of 20-30% of the analyzed cost.

Question:
Can you give me the name of your latest book?

Answer:
Common Cents (Second Edition) is the latest book. This is published by McGraw-Hill and is available on our web site. I also contributed a Chapter in Jonathan Hornby’ recent “Radical Times Requires Radical Action” which focuses on the value of ABC in surviving and recovering from the current economic recession.

Question:
Can you identify any special problems related to service type industries such as banks, hospitals, schools, etc.?

Answer:
Regardless of the type if business you work in, it is important to develop an understanding of the industry you are in and the specifics of your company (processes, systems, products, services, customers, markets, business issues etc). This is particularly true in health care where specific experience and knowledge is often considered important. Beyond this I consider ABC to be a fungible method that works pretty much in the same way in any type of industry. One common problem in most industries is that the true profitability of customers is not known and support costs are not traced logically to services.

Question:
I wonder how you explain to top management that every time you make a process improvement from ABC, you should be able to reduce the unit cost of products and services?

Answer:
If the changes to the process reduce activity requirements and therefore cost, one would naturally expect the cost of products that use the process to go down. The only way that the cost of other products could go up is if the resources freed up in the first process are redeployed to other processes without a commensurate increase in volume through those processes. The cost increase may be due to a technical error where resources freed up as a result of the ABC analysis are not treated as temporary excess capacity. Your ABC software tool is an ideal vehicle for doing the analysis to provide the understanding for these changes.

Question:
Can you address the role of combined drivers?

Answer:
Activity drivers must accurately measure the consumption of activities by cost objects. In some cases accuracy is best reflected by combining two measures.

Question:
How to integrate ABC with other enterprise wide initiatives like Six Sigma, etc.?

Answer:
The key here is to recognize that ABC in support of Six Sigma will be quite different from a strategic model that supports, say, customer profitability. ABC can significantly help Six Sigma by providing cost information which helps set priorities (choosing Six Sigma projects) as well as providing supporting analysis (such as cost driver analysis of problem areas). I recommend using the ABC model to set targets, and the storyboarding method to provide the detail, analytical support, and team-based method to fit best with Six Sigma, continuous improvement, business process reengineering etc.

Question:
What platform do you recommend SAS ABM software? Why?

Answer:
SAS ABM works on any system platform—SAP, Oracle and many different ERP systems. The software comes with a variety of data tools and choices for data integration. The goal for a sustainable system is to create full automation to reduce on-going maintenance effort and cost.

Question:
I have not had any measurable success in full implementation but am now developing resource modules across my organization for use in current budget management. I am hoping success and visibility in this area will get buy in from the various managers. Are there any dangers in this approach that I may be overlooking?

Answer:
If you are able to simplify the budgeting process you will have accomplished something value added. However, I am not sure that success in budgeting translates into buy-in to ABC. You will need to build on your credibility in budgeting and deliberately cultivate an interest in ABC.

Question:
Do you have any examples/cases from forecasting/short term planning ABC models? And how these are linked to continuous planning and scorecarding?

Answer:
ABC is a complementary tool for scorecards. Our experience is that as many as 25-30% of measures in a balanced scorecard are derived from ABC. If you wish to do more research into this area, I recommend a case study that explains and describes the process of linking of ABC to scorecards (the ABC Technologies case study available from the University of Virginia).

Question:
I am trying to do an ABC model for a contracting office. As of now, we are more cost focused than customer focused in our measures. Are there any bench marks in industry that you could recommend to help establish better performance measures for customer service in contracting? To clarify, we are concerned with cost, obviously. However, if our mission is to improve customer service, how do we measure for this effectively?

Answer:
The heart of an ABC model is, of course, the activity. And the activity can be measured in more ways than just cost. In addition to cost, you might consider measuring lead time—the elapsed time from the start of the work to the completion of the work and the forwarding of the output to the customer—and also quality—a measure of how well the output meets the requirements of the customer. When we do storyboarding we routinely measure cost, time and quality measures for each activity and process. In terms of customer focus, ABC allows you to measure customer profitability and use measures like cost to serve, cost to acquire and cost to retain with a goal of improving customer service and provide more value to them.

Question:
Is ABC an appropriate method to compare costs in government to private companies? Can ABC be used to justify not out-sourcing?

Answer:
This is one of the most useful applications of ABC in government at this time. A good ABC model can provide all the cost information you need to measure the cost reduction associated with outsourcing a process. Make sure your analysis includes the reduced cost of support by secondary activities as well as the direct cost savings of the outsourced process. Don’t forget that none of your cost savings assumptions will be correct unless management follows through and redeploys the freed-up resources. We have success stories from government where ABC resulted in insourcing work rather than outsourcing work.

Question:
Which would be the best approach to go from Activity Based Costing to Activity Based Management and have the top management support?

Answer:
The best approach is to include Value Creation in the ABC implementation. We recommend an initial phase that yields rapid results, and then a more extended implementation that will provide sustainable results. This captures management’s immediate attention and support, and then successfully builds on it leading to a truly successful performance management system.

Question:
Question a little out of the main subject but if it is possible, I would like to know if you suggest implementing ABC/M prior to VCA or VCA prior to ABC/M.

Answer:
I recommend implementing ABC before doing an application such as Value Chain analysis. It is critical that you have the ABC information available from the beginning for use in the application.

Question:
FTE’s or time spent in each activity is an important driver in ABC implementation. How do you obtain good information from employees when they think the information they offer may be used against them?

Answer:
The key to obtaining accurate measurements of time is to use a collaborative group technique in the context of proper leadership and communication. A collaborative group technique—such as storyboarding—does not have the fear and mistrust that is typically associated with interviewing. Strong leadership and the communication of why the employees are participating in the initiative are critical. Sometimes accounting can be regarded as the “enemy” and care may be needed in defining roles and establishing purpose and motivation. Technology also has a role to play in reducing the time and effort required for on-going data capture.

Question:
How to avoid the impact from bad accounting practices?

Answer:
Accounting limitations can be important, but, given time, a workaround can usually be found. For example, if the model is organized by function or process, and the general ledger is not, it will be necessary to break out the resources using estimated data. Inaccuracies—such as in the fixed assets—are more difficult to correct. Missing data—such as in the overhead areas in government agencies—can also be problematic.

Question:
Do you know of any ABC implementations in which the volume of data that bar coding every transaction is being done and/or is justified?

Answer:
Bar coding can be very useful at providing operational data that can be used for activity drivers and performance measures in the ABC system. It may be essential in a manufacturing setting for use of a 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.