“If the jury’s vote is unanimous, the accused cannot be put to death.” [1]

Yes, you read it right. This statement from the Jewish Talmud is different from American criminal law. While both Jewish and American law desire the same outcome…truth… the methods used to ensure a criminal defendant is accorded due process are quite different.

To achieve the best results with an Activity Based Cost (ABC) customer profitability analysis, a combination of American and Jewish criminal law practices works best. American law requires consensus … a unanimous vote of the jury … while the Talmud calls for conflict. “After the deliberations of the court, and before any judgment was reached” says Jewish law expert Aaron Schreiber, “the judges were required to spend the night together in pairs, searching for a possible defense for the criminal defendant.” [2]

When implementing an Activity-Based customer profitability analysis, combine both legal practices:

• First, you need a unanimous vote by your management teamthat
(a) gross margin is no longer a reliable predictor of profitability;
(b) profit or loss by customer would be valuable information; and,
(c) ABC is the best practice method to trace overhead costs to each customer.
• Second,you need someone on the management team to side with unprofitable customers.
ABC analysis commonly finds 20% of wholesaler, distributor, service, banking or manufacturing customers provide 80% of the organization’s pre-tax profit. One or more members of your management team should be asked to pose a possible defense for the 80% of customers who are found unprofitable.

In a recent Activity-Based customer profitability analysis, ICMS consultants found 884 of 3,319 customers of a distributor were unprofitable. We advised the client, “Don’t rush to judgment”. Before we convict and cut those 884 customers, let’s consider the Three P Defense for Convicted Customers:

• Policy… Setting a minimum order quantity for each sale’s transaction can transform a small, unprofitable customer from the red (loss) to the black (profit). Knowing transactional breakeven costs and enforcing a minimum order quantity can reduce order fulfillment costs for both you and your customer. For example, the owner of an industrial parts distributor was surprised to learn from Activity Based Costing that his breakeven was $283.00 per order. Leaping from “no minimum” to $283.00 was more than his customer base could absorb overnight. Instead, he trained customer service reps to gradually increase the minimum over a year’s time, asking the customer “Is there anything else you need that we can add to this order?” The result? Many small, unprofitable customers became profitable in a matter of a few weeks.
• Price…“Everyday low Prices” works great for Wal-Mart, but this pricing model may not be a good choice for your company. Instead, a “fair but not equal” pricing method might work better. For example, medical products distributor Owens & Minor successfully and profitably separated the price of their products from the price of their services (activities). This menu-based pricing model ensures each customer pays for the overhead activities they consume.
• Process…Requiring every customer order to flow through the same fulfillment process can result in overhead costs that exceed the product revenue. An alternative process for small, simple orders can ensure they are profitable. For example, instead of delivering every order with the company vehicle, a growing number of home healthcare providers are using United Parcel Service (UPS) to deliver simple, low-price products like walkers, canes and toilet seats. UPS delivery costs per transaction are often lower than deliveries performed by a healthcare professional.

The objective of Activity Based Cost (ABC) customer profitability analysis is to acquit the profitable and convict the unprofitable. If you are using ABC in your company, select someone to play the Henry Fonda role in Twelve Angry Men… a dissenting murder trial juror that slowly convinces others that the case is not as clear as it seemed in court.Don’t convict and cut customers until they’ve received their full day in Activity-Based Court.

[1] Why Not? Barry Nalebuff & Ian Ayres, Harvard Business School Press, 2003

[2] Jewish Law and Decision-Making: A Decision through Time, Aaron Schreiber, Temple University Press, 1979