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| Activity Based Costing and Performance Measurement "Putting balance in the scorecard" By Paul Sharman President, Focused Management Information Inc.
What ABC and Performance Measurement REALLY do Activity Based Costing (ABC) and Performance Measurement (PM) might, to many, seem to be different subjects. But to be effective, any system of measures must include integration of financial and non-financial measures at the three levels of performance; organization, process and activity. The world is abuzz with the claims of new found prosperity being achieved by organizations as a result of having implemented these new tools. But let's look beyond the hype and analyze what these new tools really do. In any organization, activities are the mechanism by which work gets done and performance is accomplished. If the purpose of measurement is to manage the performance of an organization, then the key to effective measurement is to understand activities. Yet the challenge for most practitioners is to discover how to do it. In our experience, there are practical, proven and robust approaches available to practitioners. Our goal is to provide you with these approaches. The evolution of measurement We have seen many examples of performance measurement systems that include traditional aggregate retrospective financial measures (ROI, ROS cashflow, etc) coupled with drill down into revenue and expenses in a fashion supported by normal general ledger structures. More recently we have seen broad acceptance of a more balanced perspective where financial measures are stacked up against customer measures, such as satisfaction and market share, internal process measures and people related measures dealing with such concerns as learning and growth. However even these improved systems fail to make the all important link from high level organization measures to ones that mean something to Joe and Fred and Susan, the people who are actually responsible to perform work activities. What is really required is a method of measurement so that people who do the work can know what is expected of them, how well they are doing and how what they do links to the strategic direction of the organization Who should implement? As the "black art" of strategy enters into the picture, implementation of ABC and PM assumes worrisome proportions. We frequently see organizations treat ABC and PM initiatives as separate and distinct. Accordingly, managers tend to parcel out responsibility to different groups in their organization. For example, it is often assumed that ABC implementation is a job for accountants. PM, however, is seen to be more strategic and, at the same time, operational, so people from operations departments are assigned responsibility to create the PM system. To make things really interesting, computing and telecommunications systems define the way in which we operate today and indeed they are critical to effective operationalization of ABC and PM. However, this dependence on software and telecommunications introduces yet another organization group into the fray, such that we see software influencing measurement systems logic. It is not uncommon to see people deferring to information systems departments' interests, which in turn is influenced by the software companies. The bottom line on all this is that knowledge gaps and lack of practical methodology make implementation of ABC and PM extremely difficult, only to be exasperated by departmental differences. This is no trivial matter. If people behave in a manner that is dictated by the way in which they are measured, then it follows that the future of your organization is at stake when designing and implementing a PM system. An effective PM system is a highly sophisticated web of logic in which the relationship of the strategic goals of the organization to the activities performed by workers is clearly defined and articulated. In this way all people at all levels of the organization and across all processes understand what is expected of them. In addition, the system must provide a balance between the perspectives of customer, financial and human aspects as well as deal with dimensions of time, quality and quantity. Often, it is useful to include comparative information on performance between business units or other organizations using a measurement methodology called best practices or benchmarking. All of these components combine into a multi-faceted, hierarchical mechanism with which to influence people to perform activities in a predictable and desired manner. We refer to the complete measurement solution where ABC is combined with PM as integrated performance measurement and management system (IPMMS). Super-human implementation or for anyone? Implementation of such sophisticated systems as IPMMS might appear daunting to most people. Generally, individual managers are very familiar with their own piece of the business, and so presume it requires almost superhuman traits to take on the responsibility to design a PM system. My associates and I don't think so. We have seen the power that can be mustered by cross functional teams when deployed by committed management. In addition to team power, proven methodology and project planning are critical elements for robust implementation of IPMMS. Although software companies have made valiant efforts to provide organized thinking on these subjects, they are constrained by the specific characteristics of their product. So a software company might not be the first place to look for information on ABC and PM. Caveat emptor! It is important to know that all aspects of activity based costing and performance measurement methodologies are known and documented in books and articles. However, for every good book or article there are many more that might be misleading. Our approach has been to develop methodology with leading academics and then to improve it by application in hundreds of organizations around the world. We also like to separate software decisions from design considerations. That way you are less likely to find that the software does not meet your business needs. We prefer to get the design organized in order to determine what software is the most appropriate for the job. Where to start Practical methodology is a must for practitioners who are initiating their journey with ABC and PM. Care must be taken to sort through available information in order to become conscious of the design issues and choices available. Be aware that the way to implement a complex system is to develop an approach that breaks the process into a series of small, logical steps, each of which contributes to the overall solution. Of course, architecture is at the heart of a robust IPMMS. Systems architecture is exactly what it says, someone has to take the time to examine organization strategies, processes and activities and develop an integrated design in which all of the objectives are addressed holistically. However, when designing an integrated system it is useful to have a number of initiatives happening at the same time. For example, when beginning it is completely logical to conduct a strategy review at the same time as ABC analysis and identification of core processes. This allows three major pieces of information to be used as the foundation (or analytical basis) to establish what processes use which activities and how well strategy is being served. We perceive activity as the fundamental building block in any organization. Activities are performed by resources (people, machines, buildings) in order to convert inputs into outputs. Activity outputs are orchestrated into chains (processes) and combinations (cost objects) in order to produce outcomes which are valued by customers. Depending on which attributes are most desired by customers, organizations add or modify activities to suit. According to the purpose and goals of influential people in an organization, different strategies will be pursued. This mechanism is at the heart of our highly successful implementation seminars. Seminars to get you started Our two seminars, "How to Implement Activity Based Costing" and "How to Implement an Enterprise Wide Performance Measurement System" are designed to provide a practical methodology for people who are serious about their responsibilities. We believe that organization change is about people inside the organization doing different things and doing the same things in different ways. This means that people inside the organization need to own their new ABC and PM solutions by participating in the design. The objective of our seminars and other services of Focused Management Information is to transfer skills and know-how to your people, so that they have the capability to build complex integrated performance measurement and management solutions. We invite you to join the thousands of other practitioners who have already attended our seminars and learn "how to do" activity based costing and performance measurement. If you have already begun implementation and are stuck, our seminars should clear up the problems. If you are wondering how to integrate the tools into a single architecture, our Performance Measurement seminar will answer the question. Our seminars are software neutral. Focused Management Information Inc. is a software objective company, which means we support software products from any supplier, as long as they work! Are you looking for software? Are you receiving phone calls from software sales people for ABC or "Balanced Scorecard" / Performance Measurement software? Check them out with us before you buy, we will be pleased to discuss how well the alternatives will best satisfy your business needs. Lastly, in addition to training, we have consulted with hundreds of clients around the world to actually implement these tools. We have incorporated key learnings from these clients into our workshops, so you get to short-cut your learning process and get results faster!
Author is Paul Sharman, President, |
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