The 7 Habits of Highly Effective ABM’ers
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17 August 2013 - 22:49, by , in Activity-Based Cost Management, No comments

How long would it take to build a house if you were given unlimited resources? If you have ever attended a Stephen Covey “7 Habits of Highly Effective People” workshop, you know that the answer is a mere 2 hours and 45 minutes. While it will take you longer than 3 hours to successfully build your Activity Based Management (ABM) information system, many of Covey’s “habits” provide us insight how best practice organizations are optimizing and sustaining ABM results.

  1. Read, Read, Read
You have likely grown familiar with the acronyms ABM and ABC since their inception in 1986. Magazine articles, newsletters, software advertisements, and workshop brochures regularly remind you of the topic. Yet in reality, ABM is still a very young technology. While the majority of implementations reside in PC-software models, ABM is rapidly maturing into fully integrated solutions at organizations such as Compaq Computer and Charles Schwab Brokerage. As a result, more and more valuable case study and best practice information is becoming available for everyone to use. Information to use for optimizing and sustaining your own organization’s ABM results.

What you don’t know is as important as what you do. Read everything that you can get your hands on regarding ABM and ABC. Fill your knowledge voids. Once limited to a small handful of journals, ABM is now a regular topic in industry specific magazines such as PROGRESSIVE GROCER, SUPPLY HOUSE TIMES and the AMERICAN SUPPLY ASSOCIATION NEWS.

Ask your librarian to do quarterly database searches for new ABM books, magazine articles, and newspaper accounts. For example, Peter Drucker’s new book MANAGING IN A GREAT TIME OF CHANGE has an entire chapter on how senior management should use ABM information. And don’t overlook the Internet. A recent word search on the World Wide Web turned up 100’s of ABM articles.

  1. Educate, Educate, Educate
Case studies recently published in the JOURNAL OF COST MANAGEMENT highlight that too much emphasis has been placed on ABC software selection. Conversely, inadequate emphasis has been directed to the selection of resources for ABC education and training. The 1995 case study survey of 143 ABM implementations reported that two types of education are required for success: (1) implementation team activity analysis training to improve the quality of software input; and (2) general employee training on “how to” read, interpret, and use the unfamiliar reports that are the output of ABM software .

To successfully implement, optimize, and sustain ABM, you must educate your executives, staff experts, and general employees on the principles, methodology, and many uses of ABM information.

  • Prior to implementation, provide your senior management a comprehensive overview of ABM. Afterwards, provide executives an ABM “coach“. Someone that can work one-on-one with them to interpret ABM reports and show them “how to use” ABM information for planning and other strategic uses.
  • Develop a staff ABM expert. Encourage them to stay up-to-date on ABM developments by attending ABM special topic seminars and conferences. Benchmark your ABM system to other organizations to identify best practices.
  • Educate all employees that will use and be measured with ABM information. Hold regularly scheduled departmental briefings on ABM results. Show employees “how to use” ABM information to achieve their continuous improvement goals.
  1. Practice Makes Perfect
Have you experienced “Chinese Dinner ABM Memory Dysfunction”? Symptoms include a favorable memory of ABM findings from the Pilot Project, but a yearning hunger for quantifiable ABM results on the Profit & Loss Statement. Monthly or quarterly repetition of activity accounting is absolutely necessary to insure that non-value costs are eliminated and business processes improved.

Regular updating and use of your ABM software will identify results to celebrate. Remember “You get what you measure.” If you regularly measure activity performance, employees will quickly learn the good and bad consequences of their activity or inactivity. Managing activities is not instinctive for most employees. An ABM Pilot Project is simply the first step of an ongoing process of change.

  1. Think Positive
ABM should not be a witchhunt in search of people with “NVA” emblazoned on their foreheads. While classification of activities as value or non-value added is very beneficial, too many organizations over emphasize this one feature of ABM. Ninety nine percent of all organizations have a much higher percentage of value than non-value.

The greatest opportunities to improve financial results are centered in enhancing value added activities and business processes. For example, identifying action plans to improve your Sales Order Process will simultaneously reduce costs and increase sales.

A continuous improvement program that reflects a balance of optimizing value and minimizing waste sends a positive message to employees. Re-deploying resources from non-value to value allows an organization to simultaneously grow sales and profitability.

  1. Talk to the Customer
Many well intentioned implementation teams “push” ABM upon the organization. To be successful and sustainable, internal customers must “pull” for the ABM information. Talk to the customer of the new ABM information. Ask “What do you need this year to achieve your goals?” Determine if ABM can be used to support those goals.

The president walked out of the presentation after 15 minutes. That is what recently happened to the project leader and consultant at the final review of a very large ABC implementation project. While ABC product costs were significantly different than the existing system, the president was not impressed. The implementers had not asked senior management before implementation, “What is your top priority this year, improved product costing (ABC) or improved product profitability (ABM)?” Don’t repeat this mistake.

Before and after implementation, talk to the customers of ABM. Listen to their wants and needs. Before implementation compile a formal needs assessment list. Talk to employees in every function of the organization. While ABM will not solve every need, employees are much more likely to embrace it if they understand from the onset that ABM is being created with their collective needs in mind. Follow-up after implementation to insure that employees understand “how to use” ABM to meet their needs.

  1. Synchronize your Resources

Would an Olympic rowing team have any chance of winning a race if everyone placed their oar in the water simply whenever they wanted? Certainly not. Each rower must synchronize their stroke with teammates to optimize speed and minimize effort. To win the race with competition in the marketplace, organizations must use their ABM systems to synchronize business processes and continuous improvement initiatives.

Organizational charts imply that companies function vertically. ABM, however, exposes that the organization actually functions horizontally via a web of cross-functional activities. To this end, an increasing number of organizations are creating a new position titled Business Process Manager. For example, a Procurement Process Manager would be responsible for synchronizing the workloads of activities performed in Purchasing, Receiving, Quality Assurance, Warehouse, and Accounts Payable. While an important role remains for the functional manager, process managers are needed to steer and synchronize cross-functional teams in the race towards the 21st century.

Effective ABM’ers should synchronize their annual workplans with other initiatives to optimize financial results and minimize confusion. For example, Waterloo Industries formed a team of employees from their Total Quality Management, Activity Based Management, and Time Based Competition initiatives. This team meets regularly to synchronize annual goals, eliminate duplication of effort, and minimize interruption to functional areas throughout the company.

  1. Define your Destination
How many times have you heard, “You’ll never get there if you don’t know where you’re going.”? What is your ABM destination? Answering this question correctly will be a major factor in determining your eventual ABM success.

For medium to large organizations, the long term goal should be a single, fully integrated ABM information system that will efficiently and effectively support internal and external reporting, ABC decision making, budgeting, and ABM continuous improvement requirements. While smaller companies can embrace the same objective, their needs and resources will more likely be better served with a PC-based ABM software tool that can be used ad hoc for ABC pricing, profitability analysis, budgeting, and ABM value analysis.

There are three essential components of good directions if you wish to successfully reach the intended destination – time, anticipation, and failure.

An ABM Pilot Project should take no more than 90 days. Based on a 1995 INSTITUTE OF MANAGEMENT ACCOUNTANTS survey, organizations on average are consuming 3.5 years to convert pilot projects into an ongoing single system practice of ABM. To pay for the cost of this conversion, organizations should anticipate significant profit improvement as a direct result of ABM’s improved decision-making and continuous improvement applications. The success rate of ABM implementations has improved 200% during the last 18 months. Failure to achieve and sustain significant benefits are certainly grounds for re-thinking both your ABM direction and destination.

Conclusion

To be highly effective, your organization’s employees must truly believe and embrace the principles and benefits of Activity Based Management. A firm trust in ABM will not automatically occur. It must be nourished and developed. Use the seven principles to successfully implement, sustain and optimize your organization’s ABM effectiveness.

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Tom Pryor
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