Monday, November 15, 2010

ABC so simple but hard to get it right!

In our previous post we shared our view on the value the integration of planning and profitability management can bring. But why are only a few companies harvesting these benefits?

First of all there are still a lot of companies relying on traditional budgeting process, where politics and filling the P&L is leading the process. Companies not ready for driver based budgeting should not try to integrate their budgeting process with profitability management.

Second, a lot of companies are still having a hard time to get profitability management implemented; they still need their focus on getting the financial process into shape. It was the same with supply chain management more than a decade ago. Only the most progressive companies were able to benefit from the advantages of supply chain integration. Other companies were left behind struggling to get ERP on the road.

Successfully integrating these two concepts is only possible if a company understands both concepts and is ready for a next step.

Let’s focus on why companies are having a difficult time to get profitability or cost management implemented successfully. In our point of view it all boils down to five main causes.


1. If management keeps on questioning the implementation methodology, delaying the deadline, introducing new consultants and is very reluctant to start communication about the new project: The choice for implementing profitability management is probably taken on a different level within the organization and is not communicated well. The management is reluctant to make decisions based on the new information and suffers from the “not invented here” syndrome;

2. If the costing model is in fact an allocation model: There is nothing wrong to base part of your ABC model on allocations, but it should at least be automatic allocations, so the outcomes are updated automatically when there are changes in volume, FTE, assembly lines and for example number of servers. Without automatic allocations the huge number of drivers that has to be derived often makes it only an annual or in the worst case a bi-annual exercise. Drivers not related to volume will not take into account changes in the portfolio. The faith in the numbers will fade away;

3. If allocation drivers are based on observations not on facts: This will deliver situational biased outcomes. The planner recollects most recent circumstances best and will base the drivers on his workload during the last days or weeks and people tend to assume they have been effective for exactly 100%. Next to that Subjectively gathered drivers feed discussions about the drivers instead of discussions about how to improve the performance;

4. If the idea is to ABC the complete company at once: To get a good understanding of the capabilities and prerequisites of implementing profitability management, it is better to start with a department that incurs high cost and doesn´t give the transparency needed. Based on the experience gathered during this first exercise, other departments can be considered. The risk of starting of too ambitious is: Most costing implementations are proceeding quite well at first. Results are often available within a few months. When the deadline comes near the company decides that all cost of all functions need to be available. What often happens is that the clear and understandable assignment of part of the cost is clouded by the last chunk of cost that is added without a clear vision on how to distribute those costs.

5. If the implementation partner only promotes one technology: this can mean two things, or they are convinced that it is the best solution or they don´t have a choice. To support a data intensive exercise like TD ABC in a comprehensible manner requires the best technological solutions available. Selecting the right solution for your company overcomes ending up with a black box.

Curious how to overcome these pitfalls? Read our next posts based on three different cases!