It Ain't the Software

"- an Article on ABC Software"

By Jim Gurowka

Partner,

Focused Management Information Inc.

It seems a common thought within organizations these days is that we need to implement Activity Based Costing therefore the first thing we need to do is buy some of that ABC software, get some training from the software company on ABC and start filling in the boxes.

Unfortunately that is precisely the wrong way to go about an ABC implementation. Yes, you need to make the initial decision to implement an Activity Based Costing system within your organization. Yes, you absolutely need to buy specialized ABC software. Yes, you should most likely receive software training from the software company. And yes, there will be a time when you need to fill in information in the software but NO, it must not follow in that order if you want the implementation to be a success.

Specialist ABC Software is PART of the solution

More and more, we are seeing ABC software as the device which stores the architecture of your ABC system and calculates the results. Many organizations are using front end tools to collect and manipulate the source data before it gets batch imported into the software. These same companies are then turning around and using OLAP (On Line Analytical Processing) and EIS (Executive information systems) tools to report, display and manipulates the results data. The ABC software stores the relationships and calculates the dollar flows through the model.

This is not to say that the ABC software is trivial or unimportant. Exactly the opposite. As tools are developed which allow for easy input and analysis of the data, the role of the ABC software becomes one of being able to accurately and efficiently model your organization and adapt as the organization changes. Especially as your ABC analysis grows.

And then ABC goes Real-time...

The implications of this shift to frequent updates and the greater importance being placed on the ABC results for decision making means that you as an ABC implementor, better make sure you correctly structure your ABC system and then choose the ABC software which will best meet your needs and business issues in both the short and long term. Most organizations only get one chance to implement an ABC system throughout the organization. Make sure the software does not cause you to miss that opportunity.

Your organization is unique from every other organization out there. While you may have many common characteristics and activities as well as share the same marketplace with many other firms, you are unique in your own ways. Your activities, the level of detail of activities and cost objects and your specific reasons for implementing ABC will be different from everybody else. In addition, your desired method in getting information into the software and viewing the results from the analysis will be different and will probably change over time. For example, you may begin your first prototype manually entering most of the data and viewing the results through static Excel spreadsheets or on paper based reports. Over time, the goal is to automatically capture and import all the ABC base data and then display it on line using an OLAP tool to allow you to analyze results and do simulations with it as well as drill up, down and through the information.

Activity Based Costing is not about implementing a new software product. It is about using a new decision making tool to solve key business issues.

Y our progression to this state as well as the uniqueness of your organization screams at you to pick your ABC software wisely. Do not rush into the decision. Do not make your decision based on what the software salesperson tells you and do talk to other users of the software.

Activity Based Costing is not about implementing a new software product. It is about using a new decision making tool to solve key business issues. This means that you need to be very clear about what your business issues are, which ones you think the ABC can help address and which ones it cannot.

How you can evaluate software

From there you need to understand your organization structure, the level of activity detail you wish to analyze, what types of sorting and grouping you wish to do in the software, what level of expense detail you wish to use and what your reporting environment is. Some organizations decide to go into great detail in terms of activity analysis especially if their main goals are process improvement and cost reduction. Some of the software is very good at handling a lot of detail, others are not. If you want to sort and group your activities and cost objects in a variety of different ways, make sure you purchase a software which allows for numerous attributes or tagging.

Some organizations feel that they need to put every employee or distinct job class in the model design while others feel that employee cost by cost center is sufficient. The choice depends on wage stratification and it does have an influence on which software you choose.

What is important is that you choose an ABC software which meets your needs and follows your implementation methodology.

There are many different ways to implement an Activity Based Costing system. The methodology and approach you choose should be supported by the software. In fact, the software should help you along your implementation path. If you choose a software package which meets all your needs and helps you in your implementation steps, the software learning curve is greatly reduced and the software will aid you in your actual design of your ABC system.

If, on the other hand, the software prevents you from doing all the things you want to do and does not follow your implementation steps, then the software can act as a hindrance to you and potentially negatively effect your desired outcomes and timetable.

Choose wisely and take your time choosing

The moral of the story: choose wisely and take your time choosing. ABC software does not need to be selected until you are well into your project. The right ABC software for you should support all your goals, be powerful enough to handle the scope of your model and should help lead you along the implementation path. It must be able to support your desired architecture and implementation approach. This requires you and your team to fully understand all the dimensions of your project before you select the software.

Activity Based Costing software is simply an enabling device to help you successfully implement and then use the results of your ABC analysis to make a difference in the way you manage your business. The software is necessary but not the central part of an implementation.

Author is Jim Gurowka, Partner,

Focused Management Information Inc.

Contact him at: jgurowka@focusedmanagement.com