In honor of the United Nations World Statistics Day (October 20, 2010), let’s not leave finance out of the party. In fact, let’s continue with our focus from last time on the analytical and decision support payback afforded by Activity-based costing, perhaps the most underappreciated finance tool for adding value in our post-industrial economy. If we could somehow start from scratch without the legacy of industrial-age standard cost allocations weighing us down, ABC would hands down be the methodology of choice. Whether you are in the financial sector, healthcare, insurance, telecommunications, software, pharmaceuticals, or one the myriad of high-tech design and manufacturing companies, trying to make good decisions about product pricing, production and sourcing options, marketing, bundled services, process efficiency, or customer relations by broadly allocating indirect costs on the back of an insignificant level of direct costs is near impossible. You are truly flying blind, or at best, by the seat of your pants, if your true product or customer cost and profitability is off by twenty, thirty, or fifty percent from the reported numbers in the ledgers. But fortunately, this issue is not an unknown-unknown, it’s a known-unknown, and ABC/M can turn it into a known-known in short order.
There are an incredible number of opportunities for applying the insights of ABC/M to the decision support process. Here are just a few examples:
- Moving from Cost Centers to Profit Centers
- Providing the “return” component of a risk/return KPI
- Benchmarking processes for efficiency and re-engineering
- Supporting a regulatory approval process
- Identifying a weak link in the Supply Chain
- Deploying a Shared Services model
- Matching products and customers to the best channel
- Market and Customer Segmentation for cross-sell and up-sell
- Evaluation of lease/buy and outsource decisions
- Identify idle resources and excess capacity
- Simulate changes to resources costs and process changes
- IT charge-backs and carbon emissions management
- Activity-based planning and budgeting of resources and capacity
As you can see, there are more than a dozen entry points for ABC/M to tackle more than a dozen business problems. Unexpectedly though, even for the companies that install an initial deployment of ABC, they still underutilize ABC’s capability by stopping after solving their original problem, which is even more surprising when you consider the training, skills, and competency developed during the primary project phase. If, however, you are serious about moving your finance organization from mainly a transactions focus to predominantly a value-add, decision support orientation, ABC/M is the gift that keeps on giving.