What is Activity Based Management (ABM)?
Activity Based Management is a methodology that can be defined as, ‘A discipline focusing on the management of activities within business processes as the route to continuously improve both the value received by customers and the profit earned in providing that value’. If we convert this definition into more practical terms we can say that the purpose of Activity Based Management is to provide insights that enable decision makers to make more effective business decisions.
The types of decisions it can influence are;
A) Marketing, sales, customer service groups get to know what products and which customers or channels to focus on to improve profitability
b) Able to pinpoint why certain products, customers and market segments are unprofitable
c) Why company profit margin would suffer
d) Get to know where one can cut costs without negatively impacting operational performance
e) Can identify opportunities to improve processes and reduce costs
f) Can achieve business objectives and stay within the budget
g) Able to improve the product or service value because one doesn’t know the cost of non-value added activities
h) Customers are not unhappy because they do not think their departments are overcharged
i) Can justify budget and service value because one gets to know what his/her service is really costing to deliver
j) Able to improve service value because one knows the cost of non-value added activities
Modeling stage in an ABM assignment
Activity Based Management is a framework, which can be used and a particular design could be chosen to provide one or more deliverables mentioned above. Because of this the design of the model becomes important. According to me the model design includes,
a) Define the business need that drive the project
b) Engage with the stakeholders
c) Develop the organization’s capabilities to support and use ABC/M
d) Understand the business processes
e) Identify the decisions that need to be taken and how they are taken
Even if you have the best of the technology available, if the model is not designed properly, it would not give the required information for decision making. I have seen people moving from simple spreadsheet models to sophisticated software solution for ABM, but they just convert the spreadsheet model in the software, without understanding the capabilities of the tool. As a concept ABM is very ‘fluid’. One has to really use the past experience to convert the concept into an ‘ABM Model’, so as to deliver the information needed by the organization with required granularity. A ‘Paper model’ should be always prepared and validated.
Role of technology in ABM assignment
Since the evolution of the concept ABC, people have struggled to keep the project up and running. This was due various reasons like a detail model, data availability and of course (un)availability of the technology. Starting from the spreadsheets to stand alone software solutions to built-in module in ERPs to enterprise wide solution to pre-build solutions in BI, the availability of the technological solutions have also changed over a period.
Technology plays role in ABM project in multiple ways;
a) Sustaining the ABM model – In earlier days the ABM model used to be created for a particular business challenge. Once the model was created and possible information received from the model, the ABM project used to end there. Those who were using it for a longer period could not update the model frequently. The software solutions have helped the organizations to run the model more frequently and with an ease.
b) Modeling business complexity – The concept of costing was to calculate ‘Product Cost’. So ABC also in its initial stage calculated the product profitability. This was possible using the spreadsheets. As the business changed with multiple products, channels and customers etc., they wanted profitability of not only products, but channels, customers also. This is practically not possible using spreadsheets; you require proper software solution for that. In current scenario the industries like Banking, Telecom , Retail need the profitability at the account level, subscription level and SKU level respectively. This means at least few million cost objects. This is possible today with the technology.
c) Flexibility in modeling – None of the businesses are static. There are various changes happening in every business. New products are introduced, new plants are installed, new channels are created, new customers are added etc. The ABM model has to be updated accordingly. The methodologies in ABM have also changed over a period from ‘single-stage-ABC’ to ‘multi-stage-ABC’ to ‘time-driven-ABC’ etc.
d) A calculation engine - What ABC primarily does, it calculates costs. These costs could be for products only, customer wise product cost, channel wise customer wise product cost etc. A typical ABM model has to calculate at least half a million assignments. To calculate the cost at these levels one needs a very robust calculation engine. A reporting environment
e) Data integration – Now a day, almost all the industries have implemented generic or industry specific transaction processing system (read as ERP). Few have also implemented Supply chain (SCM) or Customer relation solutions CRM). This is getting converted into the warehouse and BI solutions. With this most of the data required by the ABM model is already available in one or the other solution. With the data integration tools that are available, make the transfer of the data easy. This has helped to sustain the ABM models, update the data more frequently and pass on the ABC results to the solutions like Customer Lifecycle Value (CLV).
Final comments
1) Model design is more critical than technology, but technology is also important if ABC/M is to be institutionalized and maintained as part of an organization’s management system.
2) Technology also makes it possible to integrate ABC/M with other solutions.
3) Model simplicity (without sacrificing fundamental relevance) is important if management is to understand and use its outputs
4) Although creating Excel-based models for “crunching” mass quantities of day-to-day data may be a nightmare, developing such models for periodic updating and projecting future cost scenarios is actually pretty simple using specific technological solutions.
