Wednesday, September 1, 2010

An ABC Initiative is only as effective as the software that supports it


For any change initiative or performance improvement initiative that is taken in an organization, it is always important that the goal of the initiative has to be finalized first. This is true for Activity Based Costing (ABC) initiative also. While finalizing this goal or objective, the organization should consider the requirement and target outcome of each functional group of the organization. Any conflicts that arise should be resolved against the common objective of the organization. During this part, there has to be management’s buy-in for the initiative as well as the objectives.

Whatever is the method used for this, the primary objective of the organizations for implementing ABC is to provide the various functions in the organizations better and more relevant information to help them take business decisions. For this it is not necessary to have good participation but it is also important that the software that is going to be used is supporting the overall and individual objectives as well as the expected outcome. Fortunately today’s software solutions have come a long way and are able to support this requirement. We will see here the requirements from a software solution to complete the ABC initiative successfully.

Features of the software solution

ABM modeling


Multidimensional Modeling - Dimensions are nothing but different aspects (attributes) of an object. For example a person can be differentiated as sex, color, height, hair, eyes etc. These are various dimensions with which we can analyze people. Similarly in an ABC assignment we need to know the costs or profitability of Products, Customers, Channels etc. We can further segment the customers by Age, Geography, Use of products etc. The expenses in the Resource group can be grouped by Region, Department and GL group. These are various examples of dimensions in an ABC model. The software solutions today are equipped with dimensional modeling. This type of modeling helps us to analyze results better. For example, we can view product profitability by customer, Channel profitability by product or product profitability by customer segment.

Multiple periods and scenarios – The ABM model should contain data for various periods. These periods could be various months or quarters etc. The ABM software can create hierarchy for the period. For example, Year-Quarter-Month. This hierarchy can be used in the OLAP reporting, where the results from various periods can be compared and variance can be reported. This hierarchy also helps to roll the data up from month to quarter to year and we can see the year-to-date data also.

Scenario is used to manage the variation in the data within a period. Scenarios could ‘Actual’ and ‘Budgeted’. Once the data is entered we can compare the like ‘Q1 2010 – Actual’ data with ‘Q1 2010 – Budgeted’ data and also find the variance. Here it is not only the variance in the expenses that are generally covered in the expense budget, but we can compare the Activity usage variance or resource usage variance, apart from the expense variance. Scenarios can also be used to create various ‘what-if’ scenarios for the future.

Cost flow – In ABC model the cost flows from resources to activities and then to cost objects. The ABC model creates the linkage between the ‘Source’ and the ‘Destination’. This linking is called as Assignment. The assignment can be done between two entities within same module (Resource, Activity, Cost Object) or between two different modules. The model can also perform ‘Reciprocating Assignments’. For example the assignment where HR provides services to IT and IT also provides services to HR. The other important component of the cost flow is the ‘Driver’. Driver defines the logic with which the cost should be as well as the amount of the cost to be flown to each destination point.




In this example ‘Salary & Wages’ is the source and the ‘Activity’ is the destination. ‘# of Hours’ is the driver name. 90, 20, 40 is the driver quantity for each activity. The driver name helps us to create the logic to collect the driver data. But the actual cost flows based on the driver quantity. The driver can be a simple one to enter the numbers or it can have the facility to create mathematical expression to calculate the driver quantity.

Attributes – Attributes help us to group the costs within Resource, Activity or Cost Object. Some examples of attribute are ‘Fixed_Variable’, ‘Value Add_Non Value Add’. With the Fixed_Variable attribute, we can get cost of products or activities grouped into fixed cost and variable cost. Similarly with Value add_Non Value Add, we can get cost of serving customers and within that the quanta of non Value add activities. The use of attributes helps us to analyze the data that leads us to root-cause analysis.

Data Integration with source systems

This is one of the most important features of the ABC software solution. The ABC software solutions provide the facility to enter the data interactively, but it would be a time consuming activity for a real life model. The ABC software provides the facility to bring the data from various sources like GL, CRM or any other software solutions. There is some data like # of hours, which not every organization collects electronically. This type of data is collected using small web based solution. All this information is collected in a set of structured tables and called as ‘Staging tables’. From these tables the data can be pulled into the ABC software. There are various ETL (extract-Transfer-Load) tools that are available in the market and can be used for this purpose.

Reporting

The ABC model should be created to provide the appropriate information for taking the business decisions. This is achieved using various reporting techniques. ABC Software has various reporting techniques. First of all, it provides the facility of analyzing data interactively using the GUI (Graphical User Interface). Here we can see how the costs are flowing. The other way of analyzing is using the report templates. The most important is the OLAP analysis. In this the software creates a ‘cube’ using the dimensions that are created in the model and we can create various views depending upon the analysis we want to perform. The views are very similar to the ‘Pivot tables’ that the spread sheet software does. We can select multiple dimensions like Product v/s Customer, Customer v/s Activities etc. I have explained here with two dimensions only for simplicity, but we can as many dimensions as we wish. For example we can analyze the data for Product v/s Customer v/s Channel. The most important requirement before OLAP analysis is that we should have a question in our mind; otherwise we see only numbers in the pivot table that may not make any sense to us.

Data export to other solutions


In the earlier stages the ABC software solutions were desktop solutions. They were used by a single person. After that they became ‘enterprise-wide’, where multiple users create and analyze the model simultaneously. This is now moving onto the SaaS style application. Whatever is the type but it has to have the facility to export the data as the output from the ABC model is useful for various other solutions like CRM. The BI solution is based on a large warehouse where data from various sources some and then transferred to other solutions. Again the staging table can store the calculated data from the ABC model and we can use any ETL tool to export it from the staging tables.

At last the most important part is the actual decisions to be taken and implemented within the organization. ABC is like a thermometer, it can tell us the temperature. We have to analyze the data and take proper action. The change management is very important to implement the action plans.

4 comments:

  1. Rajen,

    SAP BusinessObjects Profitability and Cost Management, alongwith its interface into the SAP Business Suite (ERP, CRM, SCM etc) definitely provides a great framework to realize the vision of the type of activity based costing initiatives that you have mentioned. More importantly, these initiatives bring value when business can realize benefit through profitability analysis by product, customer or other dimensions they want to understand their information.
    Thanks for your good post
    regards
    Muthu Ranganathan

    ReplyDelete
  2. I saw some research that was conducted about 10 years ago. The study concerned companies who had created costing models that employed some aspects of ABC. It was found that around two thirds of respondents had built the models using non-ABC tools. The balance used bespoke software such as Oros, Activa, HyperABC, ProDecapo, SAP module etc (not an exhaustive list).

    The majority of modellers used Excel or a Database solution.

    In addition I have read other research which suggests that 2/3 of IT projects produce results which fall below the initial expectations of the instigators. This is a general figure which relates to all projects, not just ABC projects and I make no claim as to the relative success of ABC implementations compared to the average. I would note that "fall below the initial expectations" does not imply outright failure; rather this should be interpreted as any satisfaction level below fully met expectations.

    The features that you list are virtually standard now in all the major vendor software. I'm not sure about the benefit of listing the essential features without giving consideration to what the ABC model is supposed to achieve.

    For example - multi-period/scenario is redundant if the model is intended to provide one off insight which the use to which many models are put.

    Multi-dimension is a feature that becomes meaningful in relation to output in an OLAP cube. In itself it creates a layer of complexity that frequently confuses marginal users of the software.

    Not that I'm against any of these features, but I want to stress the fundamental point that no software tool can be a solution until you have defined the problem. If you don't do that then the project cannot succeed.

    ReplyDelete
  3. Does anyone can tell me which is the usage of OutputQuantityUE field in Account staging table ?

    thanks in advance.
    best regards,

    Jimmy

    ReplyDelete
  4. Jimmy

    CAn we take this offline? Could you pl provide me your mail I will write back to you. My mail id is patilrajendra3@gmail.com

    Regds

    Rajen

    ReplyDelete