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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.
Activity Based Management (ABM to Jump Start Quality Program &Align Multiple Improvement Initiatives
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:
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.
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
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.
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 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
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.
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 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
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.
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.
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)
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.
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.
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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