Our client, a very large credit card company was facing increased competition
and needed to better understand their costs by card brand. They had already
instituted a quality program.
Since this organization had been involved with a number of different
initiatives, the start of the project was delayed for three months until
commitment was obtained from senior management that if the pilot worked, this
initiative would be continuing and just not the project of the year. Locations
were asked to compete for the pilot and convince senior management why the pilot
should be at their location in order to obtain buy-in. Our approach involved
presentations to local management on why productivity improvement involving the
troops was critical to continuous improvement. Employees were asked to define
and cost their activities as well as determine cost drives and create action
plans.
This activity costing information was entered into a client-server
activity-costing software package so the organization could report these
activities on a regular basis.
We developed a comprehensive work plan to assist the client in eliminating
non-value, improving cross functional communications, integrating quality and
activity based management as the basis for continuous improvement.
The successful pilot encouraged the company to expand the approach to six
other locations. Since we had transferred knowledge to the implementation, our
services were needed much less in these next six pilots. Therefore, we did some
of the front-end work with various cost centers and the implementation team
completed the workshops. By the time the implementation came to corporate, the
team was pretty self-sufficient.
This approach allowed the team to benchmark their activities with the other
locations so that the locations could learn from each other. A local person for
each location was identified to continue the work started during the
implementation. Senior management supported the process by establishing cost
improvement goals for each general manager. These goals were made part of the
manager's performance reviews.
This results in reduced costs and better service to both internal and
external customers.
This division of a Fortune 50 company was simultaneously conducting multiple
improvement initiatives. These initiatives included quality, high-level process
mapping, MIS process mapping, and Activity Based Costing. The Big 5 accounting
firm brought in to implement Activity Based Costing had done a poor job. People
were unhappy with the process they used. They focused on just more accurate
costing and did not give the employees tools that would be helpful to improve
operations. The quality program was in a state of flux, and some executives
wanted to discontinue quality, and use these funds more effectively. These
various initiatives were not integrated.
A new senior executive was selected by the CFO and president to head up the
project. A more experienced manager headed up the implementation. She had over
10 years of experience with the company, was well respected, and had good
internal contacts that could be relied on to obtain buy-in. We asked some of the
key players what was wrong with the first implementation. They told us:
- The consultants were early in their career and didn't understand their
company.
- The focus had been on better costing rather than on how to improve
operations.
- New employees who were not very familiar with operations in all parts of
their department were selected to represent the department.
- The steering committee wanted to steer and not just be a rubber stamp.
A steering committee consisting of the president, CFO, controller, treasurer,
and directors of all major operating and support areas was selected in order to
obtain buy-in. The project was presented as phase II. The steering committee
liked the idea of integrating different initiatives and jump starting quality. A
cross section of each department was selected to participate in the workshops to
use activity-based management as an improvement tool as well as better costing.
The Result
We obtained employee and management buy-in to using activity based management
as a better costing and improvement tool. We were able to finalize a list of
cross-functional business processes and relate activities to that list of
processes. We were able to identify a list of action plans for reducing cost
drivers and non-value. We suggested that activity-based management be
incorporated into the quality training that each new employee received. We built
an activity based costing model in Armstrong Laing's HyperABC. We were able to
establish a better way for costing products to better determine product
profitability and assist with strategic direction.
Activity Based Management (ABM) to Improve Product Costing and Reduce
Non-Value
The Challenge
A $2 billion in sales financial service's company was facing stiff
competition from domestic competitors as well as from customers in-sourcing.
Industry sales were flat causing tremendous pressure on profit margins. They had
some old unprofitable business that was hurting profits. They had been using a
Big 5 accounting firm for several months, and they felt that they were not
making progress.
The Approach
We started by facilitating an activity-based management seminar for 40 of
their directors and managers. As a result of this seminar, they invited us to
help them implement activity-based management. We started with a pilot that
consisted of treasury, education, and office services. We conducted 5 workshops
for each pilot functional area. We defined activities, traced expenses to
activities, defined non-value, created/updated process maps, created action
plans to eliminate non-value, and defined/refined performance measures. After a
success pilot, they expand the activity-based management initiative to other
parts of the organization including MIS. In one function, offices were spread
throughout the country. As part of the implementation, we brought a cross
section of people to a central location in each of five regions. Because of
travel costs, we conducted all five workshops in 2 days. In preparation for the
workshops, we created a starter list of activities. This starter list was
modified slightly by the first two regions. The remaining regions focused more
heavily on defining cost drivers, creating action plans, and defining/refining
performance measures. This approach of having a cross section of employees from
offices throughout the U.S. involved in the workshops generated buy-in to
process improvement.
The Result
The president of this $2 billion in sales organization set a corporate
objective to eliminate non-value and transfer those resources that had been
spent on non-value activities to activities that would grow the business. The
president realized that you can not just cut expenses and be successful. You
have to eliminate non-value and then use those resources to grow the business.
Now the organization had a better way to focus on continuous improvement. A
senior vice president was assigned to manage a new function. He reviewed the
activities, activity costs, cost drivers, action plans, and performance measures
generated by the process. He said that he felt this approach was much better for
him to understand his new area of responsibility than to just have a financial
statement with expense categories. He said he now understood what the activities
in this area, the problems, and what was being done to address those problems.
The reengineering team used our activity information for redesign.
Activity Based Management for Reengineering Customer Acquisition and
Customer Service
The Challenge
This $3 billion sales financial service was enduring a great deal of pain in
their customer acquisition process. It was taking a great deal of time to
accurately load customer information in order to be able to process claims. As a
result, initial claims would be paid based on initial assumptions of insurance
coverage, which were different than the final terms of coverage. Besides costing
more money, customer complaints were rising. Second, customer service was
enduring extremely high turnover. Because of the technical nature of these
health insurance claims, it could take up to six months to train a customer
service representative. Customer service morale was very low.
The Approach
We conducted a one-day training seminar. The morning sessions was attended by
most of the senior executives. The directors and managers for the areas involved
attended the entire day of training. During the training, we explained we would
be: mapping their activities, costing their activities, asking them what was
causing the pain, and ask them for ideas for eliminating the pain. We
interviewed representatives of each area to obtain the above information. After
costing their activities and creating a very large process map, we reconvened
the entire group of about 20 people to discuss what we found. Each area made a
short presentation of their findings as well as suggestions for improvement.
Then we divided the group into three subgroups who took the material presented
and brainstormed concerning an ultimate solution.
The Result
The three groups came up with ideas that identified $1.8 million in savings
opportunities. The group assigned a task force that consisted of the current
group plus additional members, including MIS, to implement the recommended
solutions. When the results were presented to the senior executives, they were
very enthusiastic despite the cost of implementation of a new system. They
recommended acceptance of the proposal to the president. The president felt that
since his senior executives were unanimous in supporting these recommendations
--an occurrence that did not happen very often-- he had no other choice but to
accept their recommendations.
The second project identified $750,000 of savings opportunities that were
accepted and implemented immediately during the final presentation without
waiting for senior executive approval. The third project identified $1.7 million
of savings opportunities in the customer service area. These improvement ideas
included changing the training program to save money as well as to improve
effectiveness as well as ways to reduce turnover.
Activity Based Management (ABM) to Improve Obsolete Management
Reporting System
The Challenge
This large financial services firm has $80 billion in assets, locations in
half the states, and 32,000 employees. Their management reporting was based on
statutory reporting rather than on something useful for decision making. The CFO
felt that over 5,000 cost centers was entirely too many. The senior executives
and middle mangers were not getting the type of information that they wanted and
needed to make better decisions.
The Approach
They presented an overview to the divisional president who thought this was a
great idea, but that his employees were too busy with other initiatives. A
middle manager told him that because of so many disjointed initiatives they
needed to start working on this immediately. After our presentation to the
president's cabinet, we gained his support and that of his cabinet. The pilot
selected was a processing center with over 600 employees. An implementation team
was selected. We conducted 5 workshops for each pilot cost center. In workshop
I, we explained what the goal and asked the group to define their activities. In
the workshop II, we reviewed the activities, and discussed how much time was
spent on each activity. Some groups decided to do time studies for a week to
obtain better time percentages. Other groups just determined their time there in
the workshop. In workshop III, we identified non-value and cost drivers. We
created/updated process maps. In workshop IV, we created action plans to reduce
non-value. In workshop V, we defined/refined performance measures for cost,
time, and quality. Each group made a presentation to their director emphasizing
performance measures and action plans.
The second pilot, MIS, consisted of $100 million in expenditures and included
mainframe, LAN, WAN, middleware, distributed processing, Internet, help desk,
security, disaster recovery, research, etc. Because MIS language--talking in
product terms-- interferes with defining activities, we took a more active role.
The product may change, but the activities will remain. This resulted in a
better charge out system.
After conducting these two pilots, the team was ready to conduct their own
activity analysis. After they analyzed activities in various groups, we were
asked to review their results and offer suggestions.
The Result
In the first pilot over $1,000,000 of savings were identified. MIS had a
better charge out system. The company selected Hyper ABC for their software.
They are implementing an ABC system that will be used to replace their current
cost accounting system. They are creating interfaces to their current
applications software to automate downloading of information that serves the
basis for activity costs.
From Activity Based Costing (ABC) To Activity Based Management (ABM)
The Challenge
This three billion-dollar financial services company had implemented Activity
Based Costing. They were reporting information monthly to managers and senior
executives as well as the Board. They had created a home grown system. The
challenge was that the "Big Five" firm that had helped them had focused on
product costing rather than as a management improvement tool. Their activities
had output measures that were related to products, but were not necessarily
useful for improving their processes. The second challenge was that only some
senior executives had bought into the process even thought the CFO and president
were supportive of ABC.
The Approach
Our approach was to conduct a customized two-day training seminar similar to
the two-day seminar we have given over 100 times for American Management
Association. This seminar was videotaped so that as there was turnover on the
team, new people to the team would have access to the video. Several one-day
summaries of this seminar were given to middle managers. We explained the
differences between ABC and ABM. We explained that ABC was the first step in the
process, but that what management really wanted was to improve their processes.
We selected several pilot groups in which we asked them to review their
activities and output measures in light of continuous improvement rather than
product costing. For example, an accounting area might define an activity as
"prepare financial statements." One way to assign the cost of this activity is
by the number of cost centers receiving financial statements. Although this may
make sense for assigning costs (ABC), this output measure is not helpful for
improving this activity. A much better output measure would be the number of
times they prepare financial statements or the number of schedules. The person
doing the activity now has a cost per financial statement. They can then
determine continuous improvement targets for: reducing cost per financial
statement, reducing the time it takes to prepare a financial statement, and
improving the quality and usefulness of financial statements. After working with
the team in a number of cost centers, the team was ready to continue reviewing
the activities in the cost centers with a focus on continuous improvement.
The Result
As a result of our efforts, we were able to take what the Big Five firm had
done and convert the activity information into more useful information.
Activities that were too summarized for process improvement (e.g., close books)
were divided into smaller units to make them more meaningful. For example, the
summary activity close books now became "run trial balance", "do inter-company
transfer", "prepare financial statements", and prepare board reports". We used
the house of activities for process improvement.
Call Jim Brimson or John Antos at 972-980-7407 to find out how
Activity Based Management can help you reach your goals and give your peace of
mind
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Phone: 972.980.7407 email: Contact us
Value Creation Group, Inc.
7820 Scotia Dr. #2000
Dallas, TX 75248
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