Activity-based
costing software

The market explodes

Here are some of the features to look for,
and some tools to help you evaluate today's ABC software choices.

by Jim Gurowka

A year ago when CMA magazine last published an article evaluating activity-based costing software, the concentration was on five different software products. The reason for this was simple -- these were the main players in the market and any other ABC products had either too small a market presence or were considered lacking in some key features.

Since that time, the ABC software market has exploded and looks like it will continue to grow exponentially over the next couple of years. This is great news for us, the users of the software. Competition fosters innovation. We have already seen a major push by all the main players to copy each other's features and continue to offer new and exciting features. The distinction between ABC, ABM and even process-management software is beginning to blur.

While this boom in ABC software development and features is great for the marketplace, it is not, however, very friendly to software evaluations. Within months, any features' sheet may be drastically out of date. For this reason, we have decided to discuss the features you need to look for in the software, what to avoid, issues regarding support and responsiveness, and finally, provide you with templates which will allow you to evaluate the different software products and their vendors.

What's new

In the world of ABC software there have been many changes over the last year. Some of the changes have been minor -- small tweaking in the user interface or calculation speed, while other changes have been fairly significant -- reciprocal costing and dynamic linking to external applications. All the major vendors have released new versions of their products and we have seen a substantial increase in the number of firms competing in this field (see Chart 1). While small, independent firms tend to be the predominant players in the ABC software market, some of the larger consulting firms are still trying to sell their own versions of ABC software tied to implementation engagements.

The other big push we see is from integrated solution providers. Firms like SAP, JD Edward's and Lawson are all claiming to have dedicated ABC modules which integrate fully with their enterprise-wide solutions and can compete with the commercially available software. I will discuss the pros and cons of the enterprise-wide solution later in this article.

Improvements made

Perhaps the biggest improvement made over the last year is in the area of reciprocal costing. Reciprocal costing gives you the ability to create a loop in your activity relationships. For example, information systems (IS) provides support to all the human resources (HR) activities and HR has activities, processing payroll and pay benefits, which are assigned to all the IS activities. See Figure 1. Under the old approach, this would create a loop in the software model which would not be allowed. The software would try to allocate process payroll to support PC users, and support PC users to process payroll, and could not break the calculation loop, leaving it in an infinite loop. In a manufacturing environment, this is often not a major cause for concern because of the generally smaller amount of support activities, but in a service environment such as we see in banks, insurance companies and the Canadian Armed Forces, this becomes a major issue. These institutions tend to have a lot of employees who support the organization and not deal directly with the customer or the product produced. So far, only two of the significant ABC software products can now perform reciprocal costing -- these are HyperABC and Activity Analyzer. I see this as a major breakthrough and differentiator amongst the competing software. The market leader -- in terms of sales -- Oros ABC by ABC Technologies, has not yet, at the time of writing, announced when it will add this feature to its product, but prefers to suggest a work around.

Another major improvement has been in the area of linking with external databases and decision-support tools. This covers two broad areas: linking with external databases refers to the ability to dynamically pull information out of the ABC software and into products such as Microsoft Excel and Access. Some of the software even allows you to automatically update your ABC database from within these programs. Linking with decision-support-system tools (DSS) refers to the software's ability to design data cubes which can be used in products such as Cognos Powerplay, Pilot Lightship and Forrest and Trees. Some of the ABC software have modules which will automatically create data cubes formatted for Powerplay, while others link to alternative products such as Lightship. NetProphet from Sapling Corp. links to Forrest and Trees which it uses for its query, reporting and importing tool. These DSS tools then give you the ability to present ABC results in a very graphical manner, complete with the ability to drill up and down through the results.

These wonderful DSS tools appear to offer the most dynamic and exciting presentation formats imaginable, and they do. But they also offer substantial opportunities to drive users to the medicine cabinet in search of headache pills. The multidimensional, drill-down capability can be highly disorientating in an ABC model. I recommend that these tools should be used in a tightly controlled fashion, with tightly scripted presentation screens for all but the most sophisticated ABC users.

Several of the current ABC software products can link indirectly to external databases. Activity Analyzer, CMS-PC, FlexABM and Cost Control, because they are based on open Foxpro database structures, give you the ability to attach or link ABC data tables directly in Foxpro, Access and Excel. >From there you can develop custom reports and queries and even update your data directly in the database tables. Updating your ABC model via linked tables in one of these tools should, however, be avoided unless you are very proficient and knowledgeable concerning the table structure and relationships of the ABC model tables to each other. Otherwise it is very easy to corrupt your data table (trust me, I'm speaking from experience on this one).

The other way ABC software can link to external databases is through custom-designed link packages. These packages allow you to access certain fields of your data from within the external package. Armstrong-Laing's HyperABC Hyper-LINK to Excel and Access and the Oros Excel Link from ABC Technologies are two examples of these types of links. A word of caution is in order here with regard to these links. Make sure these links are compatible with your current and planned versions of your other application software. While HyperLINK can work under any of the latest versions of Excel, it will only work under Access 2.0, not Access 7.0. Oros Excel Link will only work under Excel 5.0 or earlier, not Excel 7.0.

These links allow the user to forego the built-in reporting capabilities of the ABC software. Vendors claim that they will never be able to meet every user's reporting requirements, so why not provide access to good external reporting tools and let the users define their own unique reports? This view sees the ABC software more as a sophisticated calculator than anything else. This view stresses quick and easy model building with the ability to export data to other tools. Personally, I like the ability to quickly print off reports within the ABC software as opposed to having to go out to another program, build the report, and then print it.

Still to come

Although there have been these significant enhancements to ABC software development, the perfect software still does not exist. Software vendors are continually upgrading their software and you can expect another round of enhancements to come out soon.

Those products which do not already have reciprocal costing should be working on adding that facility to their software. Other enhancements expected to be refined and improved upon include fully functional activity-based budgeting capabilities, scenario playing, links to flowcharting and process mapping software, and improved methods of electronic data capture. Some of the current releases of the software have these features already incorporated in them -- NetProphet has long had scenario playing capabilities; Activity Analyzer has a link to Visio; Oros has an electronic survey tool. Some of these features could be more robust, but, as people use them, they are providing critical feedback so that developers may evolve them. Most of the major ABC vendors are rushing these types of products to market as quickly as they can be developed.

What to avoid

Just as there are things you need to look for in your ABC software, there are also things you should avoid. ABC software should follow established ABC methodology. This means that resources are assigned to activities and activities are assigned to other activities or to cost objects. Activities should be assigned directly to cost objects through their own drivers and not aggregated into macro activities or processes before going to cost objects. You want the model to reflect what is happening in your organization and provide you with the detail to ensure total transparency of the results. You are trying to understand your costs and outputs better by modeling what is actually occurring within your organization. You do not want to lose that detail by allocating activities to cost objects using an aggregate process driver.

You want to choose the best ABC software on the market which fits your specific needs. The software needs to be adaptable enough to meet your requirements, not the other way around. As a general rule of thumb, consulting companies should be experts at consulting, and software firms should be experts at software development. Avoid purchasing ABC software which is tied

The DSS tools offer the most dynamic
and exciting presentation formats imaginable.
But they can also drive users to the
medicine cabinet in search of headache pills.

exclusively to a specific consulting firm. If you are considering buying software developed by a consulting firm, make sure you can buy it independent of any consulting work. Also beware of consulting firms that really specialize in one software product, because they will force your ABC solution to fit the software that they prefer, you might even not get a good solution. Your goal is to have the best ABC software and the best consulting services available ( if you decide you need consulting/facilitation help). If you do decide on getting help from consultants, you want them to maximize your model around your organizational needs, not their software's capabilities. Choose software specifically tied to a consulting engagement with care and caution.

Alternatively, there are small software companies, whose products are relatively specialized or immature, who only sell you their product if you buy their customization and implementation work. This is a good way for them to generate large consulting fees, but you have to be concerned whether you are getting the most cost-effective, or even the best, solution.

Integrated solution providers like SAP claim to have ABC modules which will link into other parts of their system and make ABC updates and reports a simple procedure. The fact of the matter is that ABC data typically is 15 per cent financial and 85 per cent operational data. Much of this operational data is traditionally not kept in formal general ledger or MRP systems. ABC systems are operational modeling tools, not financial analysis tools. Being linked to the G/L is not a major issue, since financial data is the easiest data to import into your ABC software. Don't be taken in by claims of automatic updating and "keyless" ABC modules. Be aware of what data you will need to collect and where it will come from before you buy into an integrated solution. Besides, with all the new linking and importing tools in the commercial PC-based ABC software, the potential benefits of integration become smaller and smaller.

In order for an integrated system to be effective, all parts of the integrated system need to be implemented before you can receive the true benefits of the integration. To get a system completely up and running to its fullest capacity will normally take a minimum of two to three years. ABC is all about helping you solve your critical business issues and using the information to make changes in the way you do business, immediately. Your competitors will not wait until you have a fully integrated system before they try to steal your business. You cannot wait either. ABC is a decision-support tool that needs to be designed for operational simulation modeling. It seems incongruous to build a rigid accounting-system-based structure that will be used with flexible decision-support analysis like activity-based budgeting.

Also consider what the main focus is of the integrated solution. It is rare that you find a company that is the best at everything it does. For these integrated, SAP-like companies, the ABC module is not their main focus. It is not reasonable to believe that their ABC module will be better than those offered from ABC software specialists. What you want is ABC software that meets your requirements and is the best choice for your ABC project in terms of methodology and flexibility.

Many organizations currently using SAP have chosen off-the-shelf ABC packages as their modeling tool, and use the SAP information to feed their model. This way they get the best of both worlds. If you still think the integrated solution is the way you want to proceed in the long run, use a PC-based tool to develop a prototype system which can be used immediately in the short term, and provide a robust architecture. This architecture can then be applied in the integrated solution in the long run, if you then choose to switch over.

Software issues

Methodology -- When choosing and evaluating ABC software, several issues need to be factored in. The first one concerns methodology. Make sure the software follows standard ABC methodology including being multi-dimensional, having three distinct levels -- resources, activities and cost objects, and allows for multi-dimensional profitability analysis (products, customers, channels...) as well as business-sustaining costs.

Compatibility -- Check the software compatibility with other applications. Ensure that the ABC software can link to your current versions of products such as Excel, Lotus and Access. If the ABC software is a 16-bit application, will it be able to communicate with your 32-bit applications and what are the consequences if it cannot? If the software vendors claim they link to all sorts of applications through ODBC connections, make sure the link to your present versions of the software is compatible. Ask to see these links in action on your machines before you buy.

Microsoft Office 97 brings new levels of incompatibility to ABC software. Because of the new file formats of Access, Excel and Word, many of the current linking tools will need to be rewritten in order to work in these new products.

Openness -- Many of t he ABC software systems available are built on closed or proprietary databases. This means that you have access only to those parts of the database which the software vendor allows you to access. This is especially critical in the report writer or links programs. Make sure access to every bit of the data in your ABC model is available through these tools. The more open the database is, the more certain you can be that you can access all of your data.

Architecture -- There are different ways the ABC software approaches modeling and design. The two different methods are, what I would term, a bill-of-activity approach, and a process-assignment approach. The bill-of-activity approach looks at what activities your organization spends its resources on,

ABC software can range from a low of
$2,000 to over $30,000 depending on the
software you choose. The most expensive,
is not necessarily the best.

and then accurately assigns those activities to the outputs of the organization. This way, you can look at any cost object and be able to "drill" up through activity drivers to their unique activities and then through these activities, through resource drivers, to their unique resources or accounts. This approach gives absolute transparency in your data at all levels and accurately reflects driver consumption and usage.

The process-assignment approach, instead, views all activities going to processes, and then these processes going to cost objects. Each process is assigned to cost objects using a driver that best describes the consumption of the process output, but loses the detail of what is causing the activities to be consumed by the cost objects. This makes for easier data collection and model building, but loses much of the detail you need for analysis. It is the outputs of activities, not processes, which cause resources to be consumed. You are trying to understand your costs and outputs better by modeling what is actually occurring within your organization.

The process-assignment approach appears to be the better approach to modeling and costing out processes which can then be used for process improvement and simulation of "what-if" scenarios. The fact of the matter is that the activity-assignment approach does just as good a job in process modeling. In addition to assigning activities to cost objects, you can also assign these activities to processes. This way you can cost and run "what-if" scenarios around process costs as well as have total transparency around cost object costs. The bill-of-activity assignment approach gives you the best of both worlds.

Price -- ABC software can range from a low of $2,000 to over $30,000 depending on the software you choose. The most expensive, is not necessarily the best. Make sure you evaluate the software in terms of features required and then, if price is an issue, start looking at a price-versus-features tradeoff. Buy only the features you need. A lot of the software come as base packages with add-on modules. Do not buy the whole suite if you do not think you need everything. Software is generally sold based on a price per single user. If this is your first attempt at ABC don't buy a 20-user licence right off the bat. Start small and add on user licences as you need them. Avoid the bulk-buy incentives up front, it is probable that you will never need them. Most often only two or three people actually use the ABC software, while everyone else uses the results.

Beware of maintenance fees. Most software vendors charge an annual maintenance fee of up to 20 per cent of the original purchase price of the software. Check to see what you are getting for this maintenance fee. If they don't deliver as promised, demand a rebate of the maintenance fees. Always make sure you are receiving value for the money you are paying.

Where to start

With all the options, choices and variables out there, where does one start? First of all, there is no rush. You do not need to choose your ABC software before you begin your implementation. The decision can be made as you get into the implementation and have some idea about what your model may look like, and what you expect out of the ABC software

For an initial implementation, I suggest that the ABC implementation team be the people who make the decision on what software to use. Their decision should occur after they have all received implementation training and a macro ABC structure architecture has been developed. This will help them get a rough fix on:

* Resource types and resource complexity.

* Number of activity centres.

* Approximate number of activities needed.

* Whether reciprocal costing is necessary.

* How many layers of assignment of activities to other activities exist.

* How many cost-object dimensions or levels exist, and if there is a need for a special naming convention.

* How many cost objects are required.

* If a bill of materials will be required.

* Bill-of-activity detail going to cost objects.

* Type of system used to extract operational data.

* Main users of the ABC results.

* Objectives of the ABC project.

* etc., etc., etc.

Start by developing a list of features that are important to your organization and rank these in priority from the most important to least important (see chart 2).

Next, begin to develop a comparison of all the different products you feel might match your needs. Charts 3 & 4 can be of help. Many software vendors will give presentations for you, or at least send informational packages. Use the information along with references from users of the software to develop a short-list. Make sure to talk with actual users of the software and solicit their candid, critical comments.

Once you have short-listed the software products, evaluate the vendors. See chart 5. A good, responsive vendor can make the difference between two equally matched software products. Compile all this information you have collected and make a decision. If you need to, there are many fine consulting firms which will help you with this decision-making process.

Switching software

The above evaluation process is applicable for new users of ABC software as well as current users. I often see companies who are still using the original ABC software they purchased many years ago because they are comfortable with it and know how to use it. With all the innovations happening every few months, you cannot be afraid to continually re-evaluate your current software selection. If there is now better software out there and if the current software you are using is inadequate compared to your needs, don't be afraid to switch software. Conversions are generally easy and may be worth it, if substantial improvement over your current software is achieved. Your goal is to produce the best results you can and, if you are using inadequate software, that may not be happening. Just as with any type of technology, you need to constantly keep abreast of changes and be prepared to update your software in order to obtain the best results with the least effort.

In summary, the world of ABC software is continually changing and evolving. Set out your goals and needs early and do your research into all the different options available. Find the software which supports your unique requirements. In the end, the software is not the most important part of your ABC implementation. It is a necessary requirement but should not overshadow the importance of developing the right methodology and designing an ABC architecture that meets your goals and needs. cma

Jim Gurowka, a former senior financial analyst at Volkswagen Canada, is an associate of Focused Management Information Inc., of Oakville, Ontario. He specializes in profit and performance improvement, and the integration of human performance systems with workplace change projects.