I want to use SAS’ recent announcement of our Cost and Profitability Management solution as an opportunity to highlight an often overlooked but valuable application of activity-based costing: business process reengineering. But first, just a brief description of Cost and Profitability Management’s new breakthrough capability: In-memory model calculation.
SAS’ decision to rename SAS Activity-Based Management to SAS Cost and Profitability Management wasn’t just a cosmetic alteration. In-memory model calculation is a game changer when it comes to activity-based costing. An order of magnitude performance improvement – not just 2X or even 4X, but ten times faster. Complex models that used to take an hour or overnight to update can now be run in a fraction of the time. In order to best take advantage of this performance increase, SAS now not only provides automatic data integration with SAS Visual Analytics for immediate reporting and deeper analysis, we also added a What-If simulation capability (in-memory, of course) that lets managers play with costs and attributes to their heart’s content, saving their variants without impacting the integrity of the underlying model.
Alright, enough with the previews, let’s get on with our feature presentation. Activity-based costing has always had the potential to add value to a wide variety of functions and processes. I previously covered many of these in this post (“Activity-Based Management: The gift that keeps on giving”), but just to recap a few of the key points:
- Benchmarking processes and functions for efficiency and re-engineering
- Identifying a weak link in the Supply Chain
- Developing a Shared Services model
- Matching products and customers to the best channel
- Market and Customer Segmentation for cross-sell and up-sell
- Identifying idle resources and excess capacity
- Providing the “return” component of a risk/return KPI
- Supporting a regulatory approval process
- Activity-based planning and budgeting of resources and capacity
- Simulate changes to resources costs and process changes
- IT charge-backs and carbon emissions management
- Moving from Cost Centers to Profit Centers
Not only is there value here for finance, product management, operations, marketing and IT, even the executive suite can get in on the act via that last bullet point – the ability to utilize profit as a metric throughout the organization, not just at the highest, consolidated levels. But it’s the aspects of process reengineering touched on in the first item that I want to dive deeper into this time around.
Consider the importance and magnitude of most business process reengineering projects. The time, the money, the systems, the consultants – usually driven by some compelling external or internal concern – an acquisition, a new product line, competition and a topsy-turvy market, the need to innovate or improve quality, to change the corporate culture, to simplify, to cut costs drastically. To transform the business.
Much hard work and consternation will go into the restructuring decisions – what to combine, what to reduce, where to invest, what to leave unchanged. Work flows are simulated and reimagined and remade, the work itself is analyzed and time studied and reconfigured or perhaps outsourced as core competencies are revaluated and reprioritized.
Even if the CEO has a single, clear vision of what they want to accomplish, translating that into a specific organizational redesign entails the evaluation of perhaps dozens of alternatives, often on a trial-and-error basis. Finally, after all the hard work has transpired, the new processes are documented, policy is updated, the switch is thrown and the Newly Reengineered Company is announced to the world.
Wouldn’t be nice if you could support this reengineering process with something more quantitative than just flow charts? Wouldn’t it be nice if there was some way to quantitatively compare the alternatives other than with high-level spreadsheets? Wouldn’t it be nice if a detailed financial impact could be assigned to both the revamped individual processes and to the restructured system as a whole?
Well, there is such a methodology, and it’s been in the management repertoire for several decades now: activity-based costing. While you are redesigning the processes why not run $$$, costs, through the restructured work flows? Ideally you would benchmark your current process first, just to assure that all your proposed changes are making headway in the right direction. Then you would have your process reengineering team work hand-in-hand with your activity-based costing and process modelers, creating financial simulations to match the proposed process changes.
What you will get in addition to a gut feeling, an educated guess or some highly suspect and highly rounded spreadsheet numbers about how effective the process redesign will turn out, will be some fairly hard numbers on what each process will now cost and how it will impact the cost and profitability of every brand and product. Instead of restructuring with merely the hope and goal of lowering costs by 20%, you can make that 20% a hard target and model towards it with every process redesign step you make until you get there.
I can understand, however, why this hasn’t become standard practice quite yet. Until SAS took activity-based costing in-memory, it may have been too cumbersome for businesses needing to restructure quickly. But now with SAS Cost and Profitability Management, two terms you would not have thought you’d hear together in the same sentence, “agility” and “activity-based costing”, are there for you to make the most of as your transform your organization into an industry leader.