ABC/M RAPID PROTOTYPING FOLLOWED by iterative remodeling of each of ABC/M's prior model's results has been proven as a superior approach to successfully implementing and sustaining ABC/M systems. It is a way to overcome the temptation (and habit by accountants or consultants) to construct an ABC/M system that is too large, too complex, and too detailed prior to the organization's ability to absorb what ABC/M is all about and how it can work for the organization. ABC/M rapid prototyping is accomplished in just a few days as a workshop facilitated by a skilled ABC/M practitioner. It is also an effective way to drive out the natural fear and resistance to ABC/M through training and participation.

ABC/M rapid prototyping is effective because the organization is modeling their own organization's expenses and calculated costs, and not a fictitious one. Employees, managers, and executives relate to it because they recognize the people, processes, work, and outputs (e.g., services). People learn better through doing.

ABC/M rapid prototyping accelerates the organization's use of ABC/M information by relying on only a few key employees first to rapidly construct a high-level ABC/M model. The initial model is deliberately called Model 0 so as not to give the impression that its information is to be used for decisions. The purpose of Model 0 is to accelerate learning by the organization, gain buy-in, and begin considering what types of uses and decisions they will draw on the information from the eventual permanent and repeatable ABC/M system. View this as “start small but think big.”

ABC/M rapid prototyping is an implementation approach where the initial ABC/M Model 0 is immediately followed with iterative remodeling of the same expenses and calculated costs included in the prior model, but deeper and with more resolution and visibility.

AFTER MODEL 0

Once the initial ABC/M Model 0 has been constructed and the participants have a good grasp of what ABC/M is and does, then with the help of co-workers they all can selectively adjust the model to lower levels of detail and higher accuracy.

With the subsequent model iterations, additional employees from the local areas highlighted in the initial ABC/M model can revise and modify the initial effort. These employees are in a much better position to improve the prior iterative version of the ABC/M model because they are more knowledgeable about the work in their respective areas and their outputs.

The intent of ABC/M rapid prototyping is to make your mistakes quickly, up-front, and early in the process when it is easier to change the ABC/M model, not later when it is far more difficult. Through prototyping, organizations can build a working and useful ABC/M model in days as opposed to trying to build a Rolls-Royce ABC/M model in months. With this sped-up approach, the benefits from improvements gleaned from the ABC/M information can be reaped almost immediately. The initial ABC/M models can then graduate into a repeatable, reliable ABC/M system. This implementation approach is more practical and sensible than ABC/M pilots or one-shot, big bang ABC/M implementations where the implementers cross their fingers and pray that it will all work at the end.

Think of ABC/M rapid prototyping as “crawl, walk, run, and fly.” Model 0 is the crawl. The subsequent iterations (Model 1, 2, etc.) are the walk. The eventual ABC/M “system” is the run. The “fly” is exploiting the possible uses of the ABC/M information as described earlier in prior chapters.

In the field of photography, you cannot presume that handing a camera to someone means that person knows how to take pictures. ABC/M rapid prototyping is similar to giving an organization a chance to snap some photos to see how they turn out.

ABC/M IS PERFECTLY OBVIOUS – AFTER THE FACT!

At first glance, the idea of implementing ABC/M can be overwhelming, and this perception might prevent an organization from even proceeding with implementing its system. Those unfamiliar with ABC/M share a general misconception that it involves a massive enterprise-wide involvement of people with a mudslide of data that must address activities in great detail from all parts of the organization.

Another misconception is that all employees will be tasked and required to complete daily or weekly timesheets reporting the time they worked on activities. Employees do not like timesheets. Some are fearful that managers and co-workers will know what they actually do and for how long. With ABC/M rapid prototyping, only a knowledgeable few managers are tasked with estimating the time for all of their co-workers.

Another misconception is that there will be no results until the ABC/M system is completely constructed and operating like a production information system. These people are unaware that ABC/M is an analytical tool that is best designed as a layer of reporting that sits on top of and apart from the transaction-intensive accounting and operations information systems.

An additional misconception about ABC/M is that it will take forever to implement and perhaps may not be worth the effort. With ABC/M rapid prototyping, an ABC/M system can be launched quickly and cheaply. By reducing the administrative effort but still raising awareness of the benefits, ABC/M rapid prototyping shifts the cost-versus-benefits evaluation from reluctance to higher levels of interest. These include a desire to move ahead with haste and a genuine motivation to finish the ABC/M model iterations so that a permanent and repeatable ABC/M reporting system can be installed and used.

ITERATIVE ABC/M MODELING

Any issues related to source input data can be quickly flushed out. Figure 14.1 gives a sense for a succession of models plus some key benefits. Iterative ABC/M prototyping with expanding granularity and more detail (but same scope) accelerates learning about model design and cost behavior. The figure illustrates how the ABC/M models can eventually become the ABC/M system within a few weeks, not months as is often perceived.

ABC/M rapid prototyping is a valuable accelerated learning technique for a small but important number of employees and managers. Not only can these key participants, referred to as “functional representatives,” get a solid vision of what their ABC/M system will look like, but they also start thinking about what they will do with the more robust ABC/M information when they get it.

Once an ABC/M model is designed, it becomes more obvious to the employees who constructed it, and there is agreement that the resulting costs are logical and defensible.

ABC/M rapid prototyping is effective because it starts where people already are – they know what their organization is doing. They also recognize that they do not understand their costs and that they mistrust their current cost information. ABC/M rapid prototyping gives them a chance to model their expense and cost structure. The enthusiasm for implementing ABC/M comes more easily after initial ABC/M models are completed, regardless of their size or scale. After the first ABC/M Model 0 is quickly completed, the participants can then see multiple views of their organization's costs – its resources, activities, processes, and outputs. They also realize how ABC/M information can collectively provide answers to questions they just could not fathom with the limited information provided by their existing cost accounting system.

RAPID PROTOTYPING: EIGHTEEN HOLES OF GOLF ON A POLO HORSE

ABC/M rapid prototyping is a much faster way to get phased-learning, buy-in, and results compared with the traditional approach to designing an ABC/M system. Traditionally, full-fledged ABC/M system implementations have been accomplished through intensive interviewing of many employees. With ABC/M rapid prototyping, those few “functionable representatives” who are knowledgeable about the majority of what the organization does are brought together. They construct the first ABC/M Model 0 in just a couple of days with a trained facilitator and an ABC/M software specialist. The focus is far less on achieving accuracy or results and much more on learning and getting a vision.

The workshop begins the same way as a traditional proof-of-concept ABC/M pilot, by forming a cross-functional team of “functional representatives.” After that, however, the similarities to a pilot end. All too often, ABC/M teams improperly build an ABC/M pilot too deep and too detailed, and they don't even realize it. They overengineer the ABC/M system design and resulting costing system, and then don't get the results they expected. It is death by details.

An ABC/M pilot takes a long time even though it is supposed to be brief. As a result, the organization can develop skepticism or lose interest since they conclude that no payback will be coming any time soon. The ABC/M effort may then go dormant. ABC/M projects never die. It is inevitable that ABC/M will be implemented. It may take a future catastrophe that jars an organization that stopped its earlier ABC/M project to admit that the current cost accounting system has either mislead them or left them clueless about their costs. When a major decision in hindsight is deemed a big mistake because the traditional costs were misleading, then the ABC/M system implementation gets restarted.

In contrast to pilots, which often are formally announced to employees with a loudly broadcast “banners-and-bugles” procession, ABC/M rapid prototype modeling is stealthier and less invasive. When senior management makes a major announcement that an ABC/M system will be installed, some employees only hear the “C” in ABC/M for the costing, and their defensive shields of fear and resistance go up. Employees may interpret the project as a cost-cutting exercise, perhaps terminating their jobs, rather than as a way to provide for better decision-making.

The purpose of the ABC/M rapid prototype is not to be secretive but rather for a select few employees – the “functional representatives” – within the organization to quickly gain some understanding. A key lesson learned is how to balance the tradeoff between higher accuracy and a greater effort to maintain the ABC/M system. Review Figure 10.7 that illustrated that there is a point of diminishing returns of higher cost accuracy for the extra administrative effort to collect, validate, calculate, and report the information.

The “functional representatives” learn a lot about the properties of ABC/M They also learn about some of the behavioral implications of how people might react when they see the ABC/M information. With ABC/M information, many employees will see things they have never seen before. It is important early on to learn how to treat the ABC/M information responsibly. ABC/M is not an accounting police tool to punish or embarrass people. It is more like a managerial information database and enabler for organizational improvement.

In contrast to ABC/M pilots that begin with collecting vast amounts of data through extensive interviews and questionnaires from many people, the initial ABC/M rapid prototyping is, as noted, conducted in a burst of a few of days.

Many adults learn better and more quickly through doing as opposed to listening to lectures about the concepts. So, the ABC/M model construction begins almost immediately. A key insight the team learns – and will share with their co-workers – is that incremental improvement is preferable to postponed perfection.

The “functional representatives” are always intellectually engaged in constructing the ABC/M prototype Model 0 since they are not modeling some fictitious case study organization; it is their own organization. The modeling also deals with and represents the people they know and work with, the things these co-workers do, and the outputs they provide to others. The participants are never bored during this fast-paced workshop. Simple rules are used to speed things up. For example, no one is allowed to bring in any data with them; the model is entirely constructed with what they already know. The only exception to this rule is for the financial data. Total expenses for the period being modeled, usually the current or past year, are a good starting point. Senior managers who will eventually see the ABC/M models will be able to relate to these total costs since they are already familiar with them. This also ensures that the initial ABC/M Model 0 will be complete and not mistakenly omit a function. No stones are left unturned.

BUILDING THE FIRST ABC/M MODEL 0: TAP DANCE NOW, WALTZ LATER

The first step in building the initial ABC/M model is quite simple. The organization chart of employees and contractors, if applicable, is divided into groups of people who do similar things. These groups are often (but not always) the functional departments. This may result in 10 to15 groups. The key is to count and sum the number of employees from each group to ensure that no portion of the cost structure to be analyzed is inadvertently left out. When the entire organization is initially modeled, validating this completeness is no problem since the total number of employees tends to be a well-known number and can be reconciled to. Each functional representative takes responsibility for the groups of people he or she is most familiar with. Next, the functional representatives define three significant activities for each group they have selected to represent. Figure 14.2 shows an example of a time-effort worksheet that has been successfully used to collect the ABC/M information.

Within 20 minutes, each form for each group is completed. Simple rules can be applied when defining the activities. As examples, the work activities should follow a “verb-adjective-noun” grammar convention. Assume that people are productive only five hours of an eight-hour day and ignore the other three hours for work breaks and social time. (The three hours will later get baked into the five productive hours. Treatment of those hours is more of a work culture issue.) Instruct the “functional representatives” that the three activities should account for more than 90 percent of what the group does throughout the year. This rule forces each activity definition to be worded in what may appear to some as being too summarized for each group. But about 40 to 60 activities will likely result from all the input forms, which is more than adequate to trace the activity costs to cost objects with higher accuracy than their organization's traditional method can.

Use estimates for the employees' time-effort in increments of 5 percent. Discourage allocation of 80 percent or more to any one of the three activities; if the participant struggles with that, allow only that activity to be subdivided into two components, thus yielding four activities for that group but still summing to 100 percent. Do not allow these two specific activities: “supervise and mentor employees” and “attend meetings” (even though these activities occur). Excluding them will ensure that all the work activities will lend themselves to being traceable to cost objects.

Ignore salary and wage differentials. Simply use an average salary for every employee. In effect, the mail clerk earns the same salary as the executives in this first Model 0. In most cases, this assumption won't make a significant difference to the costs of outputs, service lines, and customers for purposes of this first model. ABC/M's property of error dampening will help bring about that result. In future model iterations, salary differentials for different departments can be considered.

Additional rules to speed up the process involve not allowing consensus among the “functional representatives” when it comes to defining the activity dictionary, the activity drivers, or the activity driver assignments, nor for estimating the quantities that flow through the activity drivers. Each functional representative knows his or her own area sufficiently and does not need any help from the others. Functional representatives “own” their area of coverage. Any estimating error on their part cannot have any grave consequence. The consequence of error is simultaneous overcosting and undercosting, but these minor errors offset and wash out anyway when the costs reassign to the cost objects. Regardless, the intent of this first ABC/M prototype model is not precision costing. It is stimulating for the participants and the ABC/M project team. What they will have at the end is an economical and low-risk technique to get to their eventual repeatable and reliable ABC/M production system.

COST OBJECT PROFILING: A KEY TO GETTING DESIRED RESULTS

The use of preliminary estimates works well with ABC/M, as just described, because any estimating errors in the activity costs will offset when they are further traced (combined) into the outputs, service lines, customers, and service recipients. (The concept of offsetting error may be counterintuitive, particularly to accountants who are trained for high precision and perfection, but the properties of an ABC/M assignment network as a “closed” system make offsetting errors possible.) Error dampening works even better when no activity cost is too large relative to the other activity costs. This way any estimating error of any single activity cost cannot materially affect the cost of all the outputs. Error dampening also works better when the cost objects are deliberately predefined into look-alike groupings that already reflect the diversity and variation that ABC/M is so good at tracing into. The facilitator can ensure that well-segmented costs are easily accomplished by predefining the groupings to achieve this effect.

Like a caricature sketch artist at an amusement park, the facilitator leading the workshop is skilled at selecting just enough activities and cost objects to reasonably represent the organization without choosing so many that the ABC/M model goes too far past those diminishing returns in extra accuracy for the extra effort. The technique of predefining the groupings of final cost objects is accomplished through “profiling.” In most cases the organization has already been referring to families of its products and service lines. The functional representatives realize that there may be dozens or hundreds of specific products and service lines within each family. Those subdivisions are already known and likely codified by their organization.

Cost object profiling is much more needed for the citizens, customers, and service recipients because the standard groupings that organizations use do not usually work well for ABC/M. For example, some organizations may segment their service recipients by demographic traits or geographic locations. But large differences in how service recipients consume the workload may have little to do with where these service recipients are physically located. Segmenting customers by demographic groups or by the levels of special attention required may be a much better segmentation to reflect more dominant ways in which workloads are disproportionately consumed. Some ABC/M teams refer to these customer groups as “clusters” or “centroids.”

Figure 14.3 shows a worksheet that the facilitator uses to define multiple and various types of customer or service-recipient groupings. At a minimum, by selecting only three bases of difference, with only two extremes, the eight unique combinations (i.e., 2x2x2=8) are ensured to preset the diversity of any costs into these eight cost objects.

With profiled final cost objects and 30 or more work activities, no one activity being too large, the functional representatives are assured that they will trace to and calculate fairly reasonable costs in their first effort.

TEACH THEM TO FISH, AND THEY CAN FISH ON THEIR OWN

The construction of the ABC/M Model 0 is fairly straightforward. Each activity is traced to the cost objects that cause the activity levels to fluctuate up or down. This link ensures that a causal relationship exists, complying with costing's causality principle. Next, measurable activity drivers are identified for each activity, and finally activity driver quantities are estimated in total and for each cost object in relative proportions. Commercial ABC/M software does the rest by reassigning the costs through the linked cost assignment network into the final cost objects (refer back to Figure 11.2).

After the costs related to salary and fringe benefits have been totally assigned to the cost objects, distribution of the remaining resource expenditures goes quickly. The financial controller provides the top ten nonwage expense items in a way that they account for roughly 90 percent of the nonwage resource expenses. Nonwage expenses almost always follow the work, and each expense item usually traces into less than four of the many defined work activities. Sometimes the expense type is dedicated to only one activity. Since the ABC/M cost assignment network was already completed an hour before this workshop, all that needs to be done after these last resources are connected to activities is to recalculate the model. The nonwage-related costs trace all the way through into the final cost objects. The ABC/M model is then complete and ready for analysis.

The combination of using informed estimates by knowledgeable workers and the error-dampening property of the ABC/M assignment network has very significant implications. Together, these mean that using estimates in place of facts will have a minimal adverse impact on the accuracy of an ABC/M system's final cost objects. This also means that only a few key employees are initially needed to provide the data. Everyone is somewhat surprised that their organization can achieve ABC/M results without having to have all the data available from a subsystem to get started and see reasonable results. This revelation also ensures that ABC/M will get some traction as a way to improve the organization's performance rather than potentially stall out as a complicated information technology (IT) and systems project. The IT aspects of ABC/M come much later, well after a few users are already relying on the ABC/M information for making better decisions.

The ABC/M rapid prototyping experience is like a practice round in a sport without keeping score. By having those few “functional representatives” construct the initial ABC/m Model 0 from scratch, they much better understand what they have created. There is ownership. The results are sufficiently credible to them, despite the resulting calculated costs usually being quite different from their beliefs and from the standard costs provided by their existing accounting system. These traditional accounting costs will likely have been calculated based on flawed allocations and misguided thinking. ABC/M is very logical. Allocating costs using factors without any causal relationships is not.

CONSTRUCTING AND POPULATING ABC/M MODEL 0: THE STARTING POINT

As previously mentioned, the initial ABC/M rapid prototype is named Model 0 to reinforce an understanding that Models 1, 2, and so on will be used as further refinements. An ABC/M cost assignment network is scalable. Revisit Figure 11.6, which illustrates how the ABC/M cross has scalable depth and can always be further disaggregated into lower levels of detail.

Groupings of resource expenses, work activities, types of outputs, and types of customers or service recipients should be subdivided (i.e., disaggregated) only if more segmentation achieves needed visibility or additional accuracy. The participants learn the ABC/M rule to always ask, “Is the higher climb worth the better view?” After ABC/M Model 0, the ABC/M project team can gather additional specific data when it becomes apparent that the accuracy of outputs is more sensitive to those specific data. They can then substitute the higher-grade data for the estimates. The project teams can also substitute a few different activity drivers as better drivers than the ones they initially and spontaneously selected and used.

Instead of presuming that detail is needed everywhere, ABC/M rapid prototyping deliberately starts at high levels and adds more detail selectively and only where it is justified. Sensitivity to error can always be tested by adding more detail to the existing ABC/M model. The team learns the properties of estimating error in an ABC/M cost assignment network. To some, particularly to accountants, the result is counterintuitive. The impact of estimating error for the activity costs means some are slightly overcosted while the others must be undercosted; there must be zero-sum error. But as the activity costs combine further down the network into the final cost objects, any error begins to offset. In ABC/M, error does not compound; it dampens out. As a result, higher levels of accuracy can be quickly achieved with minimal effort. Then much less additional accuracy comes from more effort.

In a few weeks the ABC/M iterative models graduate into the repeatable and reliable ABC/M production system that can be refreshed. With iterative remodeling, the ABC/M team learns to identify and include activity drivers as they are needed rather than to assume they are required.

Refreshing the ABC/M rapid prototype models or the ABC/M production system is done with a blend of updated measured data and estimates for the remaining and less vital areas of the ABC/M model. Of course, the financial ledger expenditure data, with its 100 percent resource data, should be a source. (Some organizations, however, have simply begun with the total expenses from their most recent run of their payroll.) The purpose of the initial rapidly prototyped models is not to pin down all the details right away, but rather to stimulate the participants. It gets them thinking, exchanging ideas, realizing how their current data are limiting or misleading, and most importantly envisioning how their organization may use the output data to address problems and make decisions.

ABC/M is basically a self-discovery experience. Even when a much larger ABC/M system is up and running, the ABC/M information does not necessarily provide final answers. It tells people where to look and what additional questions to ask. These early participants begin experiencing what ABC/M is and what it is not. They will likely become a much more effective means of informing their organization about ABC/M's benefits than the designated ABC/M project team or hired consultants (whom other employees may suspect have self-serving motives).

ABC/M rapid prototyping helps prevent “death by details.” ABC/M project teams often have a problem determining the right level of detail, work activities, products, channels, and customers to focus on. There are pitfalls if an ABC/M system is designed using traditional IT development methodologies to solve this problem – the “ABC/M leveling problem.” With IT methods, one of the work steps in the traditional schedule for the first few weeks is usually to perform the “data requirements definition.” But this step is not appropriate for designing the ABC architecture. This is because there are too many interdependencies among ABC/M's resources, activities, and cost objects. There is interplay among the levels of detail, each affecting the ultimate accuracy of outputs to be costed.

The intent of the ABC/M rapid prototype is to get reasonably right results in a workable and timely fashion. Drilling too deep too soon is a trap that should be avoided. The extra benefits of a little more accuracy aren't worth the extra effort. Ironically, after Model 2 or so, the data requirements are a derivative of the ABC/M rapid prototyping workshop. Ideally Model 0 should be completed in two days so that the third and last day of the experience can be dedicated to playing with the model, analyzing the ABC/M information, and learning the principles and properties of ABC/M.

Perhaps the most important thing the ABC/M team can do on the last day of their workshop is to add a few attributes to the model. Two effective attributes are the level of importance and the level of performance. This lets the participants appreciate that their ABC/M system delivers much more visibility than just calculated cost amounts. They realize that attributes begin to suggest what general directions they should investigate. Where should they scale back on spending? Where should they invest more energy? What processes might they consider outsourcing? What activities, products, or customers should be promoted more?

ANALYZING MODEL 0 TO GET BUY-IN

Finally, the ABC/M team can begin analyzing their model with the intent of evaluating the impact of specific changes. By adding volume and quantity data, the model quickly computes the unit costs for each product, service line, and any intermediate output such as the cost per equipment hour if that is relevant. As part of the unit cost calculation, ABC/M also reveals the per-unit cost of each contributing element, such as for each activity cost. Since unit-of-work output costs can substantially vary even for outputs with comparable total unit costs, the team can begin their own form of internal benchmarking to explore best practices.

Through this mock analysis, the team inevitably begins to test the feasibility of using the ABC/M information for some of the pressing issues their organization may be struggling with, such as estimating the costs of taking on certain types of orders from specific types of customers or service recipients. They can learn what options are available by examining the assumptions they initially made related to fixed and variable costs that they now have displayed. They can play with alternative ways to assign depreciation costs to equipment other than the traditional way the existing accounting system is assigning depreciation. And they can see costs without any depreciation, since depreciation is a sunk cost (not just a fixed cost), if they want to consider using a marginal cost rather than a fully absorbed cost in their analysis.

The “functional representatives” and the ABC/M team can get a glimpse of how much of their cost structure is organizationally sustaining relative to costs that make and deliver products or serve their customers and service recipients. That ratio may be shocking. The total sustaining costs may be greater than 30 percent of their cost structure, excluding purchased material costs. Is that good or bad? It probably depends on other factors. But at least they can see the amount and consider whether they want to maintain those same levels of spending on nonproduct, nonservice, and non-customer-related costs. The “functional representatives” can also discuss the concept of unused capacity management now that the cost information is structured in a format that makes more sense to them.

The point here is not to overanalyze anything. It is to get the participants to connect the data to uses of the information – and to connect some of those uses to some of the burning high-priority issues of the organization. This creates the needed buy-in to proceed with building the next ABC/M Model 1 and ABC/M in general.

SECURING AND PROPAGATING THE LEARNING: A COMMUNICATION PLAN

A useful way to expand learning and simultaneously gain further buy-in is to immediately have the Model 0 participants make a brief unrehearsed presentation to specially selected peers, and perhaps an executive or two, covering the following points about their few days building Model 0:

• What did we do?
• What did we learn?
  • About our organization's expense and cost structure?
  • About the ABC/M methodology and ABC/M model properties?
• What are our options for next steps?

It is important that these invited guests also have their expectations well managed, just as the functional representatives' expectations were. The peer group needs to know that the ABC/M Model 0 structure they are observing is a miniature-scale model, and that the calculated costs were derived entirely from estimates (except for the starting annual financial expense totals). Fortunately, even in first ABC/M rapid prototype Model 0, the ABC/M properties begin to “pile up” the output costs in directionally accurate and roughly with the same relative amounts as will the subsequent larger-scale ABC/M Models 1, 2, and so on.

An important reason to conclude the first ABC/M rapid prototyping workshop by presenting to peers and some senior executives is for the ABC/M project team to much better appreciate that they really need two ABC/M plans: (1) an implementation plan, and (2) a communication plan. The second plan may well be more important than the first. These two types of plans will be further discussed in Chapter 16, “Organizational Change Management.” ABC/M is about organizational and behavioral change management. Who is initially exposed to ABC/M and subsequently the sequence of who else is exposed are very relevant to successfully implement ABC/M. If naysayers or threatened managers who have clout are introduced too soon into the process, they can stop the project before ABC/M has a chance to take hold.

By generating some visible benefits with an initial group of positive-attitude employees, enthusiasm builds. Invariably, everyone will learn that costs are abstract and intangible. Costs measure the effects of the things that are placing demands on work. So, measuring and calculating costs is actually modeling to get a representation of how resource expenses are consumed and used. Resources are where the capacity to do work resides. By working with and iteratively refining ABC/M models, managers and employee teams find their knowledge growing. They begin to appreciate the ABC/M adage (which we previously referenced in Chapter 10) that “it is better to be approximately correct than precisely inaccurate!”

TIME-PHASING ABC INTO ABM

With ABC/M rapid prototyping, after an organization understands how the diversity and variation of its outputs create its cost structure, it can much better understand how the same activity costs can be oriented to the time-based horizontal process view. This facilitates “process analysis.”

Figure 14.4 indicates that organizations should first perform cost assignments vertically to discover how diversity and variation in outputs, products, service lines, citizens, and customers relate to complexity and thus to higher indirect support expenses. ABC/M rapid prototyping reinforces this lesson. (This was displayed in Figure 11.4.)

With ABC/M's vertical cost assignment view, the functional representatives can first examine the work activity costs on a per-unit cost of output basis. Comparisons can be made between and among identical work activities and their costs, on a per-unit-of-work basis, as well as for different kinds of outputs.

Some costing approaches, practiced when the business process reengineering (BPR) movement was at its high point of interest in the 1990s, simply calculated a one-step cost allocation of the general ledger into activity costs – and stopped there. (This was displayed in Figure 11.5.) The activity costs were immediately applied as costs sequenced in time across the end-to-end processes. They lacked the emotional charge from also seeing the per-unit costs of the variety and mix of the outputs from those same business processes.

Some organizations have business process flowcharts on their conference room walls but have not committed to significantly changing their processes. When ABC/M information reveals the true per-unit cost of each output, including intermediate outputs, “organizational shock” often sets in. Then genuine “root-cause analysis” problem-solving begins. Fortunately, ABC/M provides reliable and fact-based information at an early point to assist the ABC/M project team and functional representatives. In short, the lesson is do ABC vertical assignment first, and perform process analysis afterwards.

Some organizations initially design highly disaggregated activity models with intent to reduce cost. By first reporting on the costs of outputs, senior management will be engaged and know where to focus.

HOW ABOUT THE FUTURE OF ABC/M?

It is an understatement to say that business, government, and commerce are swiftly changing. Why are incumbents losing ground to reinventors (i.e., those who can transform themselves)? Today one cannot move at the pace of evolution; this is disruptive revolution. One cannot just continue to follow the existing way of doing things but a little better. It must be much, much better.

Unfortunately, an overarching issue with ABC/M involves its perception as just another way to spin financial data rather than its use as mission-critical managerial information. The information age we find ourselves in can be mind-boggling. As technology advances, so will the demand to access massive amounts of relevant information. The organizations that survive will be those that can answer these questions:

• How do we access all these data?
• What do we do with the information?
• How do we shape the data and put them in a form with which we can work?
• What will happen when we apply technologies developed during the information age for the information age?

Clearly, as information technology evolves, governments will increase their levels of service and their effectiveness. Furthermore, as the needs of citizens and service recipients change, governments will run into global competitors, perhaps even other governments, that increasingly look to information and information technology for competitive advantage. ABC/M is involved in this broad arena of “outsmartmanship.”

ABC/M puts the “management” back in management reporting. For those people who are involved with ABC/M projects, the key is to create and orchestrate change rather than merely react to it and attempt to make the best of a poor situation. It will be fun watching government move from the learning stages into mastery of building and using ABC/M systems.

This chapter concludes Part Five. We now move on to the final three chapters where the discussion is on information technology as an enabler to VBM, organizational and behavioral change management, and the authors' aspirations for the future of VBM.