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Activity Based Management &

Corporate Performance Management

Nick GrenfellManaging Director

Business Performance Solutions

Agenda

• Introduction• Activity Based Costing • Activity Based Management• The SAS ABM solution• Corporate Performance Management• ABM as a Foundation for CPM

Business Performance Solutions

• Established in South Africa in 1995• Exclusively focused on:

– Activity Based Costing & Management– Support of CPM initiatives

• Use the SAS ABM solution with clients– Financial Services– Manufacturing– Service– Government

ABC – The Theory

Adapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.)

Process View

ResourceDrivers

Cost Assignment View

ActivityDrivers

Cost Drivers PerformanceMeasures

CostObjects

ActivityCost

Assignment

Activities

ResourceCost

Assignment

Resources

Example - Airports

CostObjects

ActivityCost

Assignment

Activities

ResourceCost

Assignment

Resources Staff CostsRentElectricityDepreciation

Hold Baggage ScreeningProvide trolley servicesProvide refueling servicesAdminister payroll

LandingsPassengersCustomers

ABC’s Operational Relevance

Traditional Accounting

SALARIES

FRINGES

SUPPLIES

FIXED COSTS

Process sales order

Source parts

Expedite supplier orders

Expedite internal process

Resolve supplier quality

Reissue purchase orders

Expedite customer orders

Schedule intra-company sales

Request engineering change

Resolve problems

Schedule partsTOTAL R590,345TOTAL R590,345

TOTAL R590,345TOTAL R590,345

OLD WAYOLD WAY

NEWNEWWAYWAY

371,917

118,069

76,745

23,614

Activity ViewActivity View

144,846

136,320

72,143

49,945

47,599

45,235

27,747

17,768

16,704

16,648

15,390

ABM

• Identifying business opportunities• Providing management information to inform better

management decisions– Strategic decisions– Operational decisions

• Providing unit cost data is not the sole objective of an ABM exercise

Decision Support

• Strategic Pricing• Range / Product Management• Channel Management• Sales & Marketing

– Customer profitability– Customer Lifetime Value Analysis

• EVA / Cost of Capital Analysis• Scenario Planning• Resource Planning & Budgeting

Decision Support

• Business Process Re-engineering• Activity Analysis

– Value / Non-Value Adding– Level of Importance– Level of Competence

• Unused Capacity– Cost & Ownership– Planning

• Benchmarking

Decision Support

• Shared Service Environments– Allocation of costs to business units based on

consumption– Logical basis for transfer costing / pricing– Promotes ownership of transfer costs

• Out-sourcing– Evaluate costs in-house vs. out-source

• Regulator Reporting• Performance Management

– KPI’s & Scorecards

Some ABM Myths

• ABM is all smoke and mirrors• ABM efforts outweigh the benefits• ABM maintenance is very time consuming• ABM is a finance conspiracy• ABM is only for manufacturing companies• ABM can be done in Excel or my ERP system

How does SAS ABM Help?

• Resources• Activities• Cost Objects• Drivers & Assignments• Attributes• Reporting

Resources

Cost Centres and General Ledger Accounts

Activities

Organisation’shierarchy with processes and activities

Cost Objects

ChannelsCustomersProductsServicesProjectsCountriesRegions…

Drivers

The basis on which cost is assigned throughout the model

Assignments

Resource Costs Activities Cost Objects

Activity Contribution

Resource Contribution

Attributes

CategoriseCostsActivities & ProcessesProductsServicesChannels…

Cube Exploration

Corporate Performance Management

Gartner Research 2001

CPM is an umbrella term that describes all of the processes, methodologies, metrics and systems needed to measure and manage the performance of an organization."

Corporate Performance Management

Strategy

Scorecards

ROI

Shareholders

Customers

ERPCRM

Organisation

AssetsPeople

Gary Cokins, 2005

Relative Importance of Intangibles

Components of S&P 500® Market Value

16.832.4

68.479.7

83.267.6

31.620.3

0102030405060708090

100

1975 1985 1995 2005

%

Intangible Assets Tangible Assets

Board

Managers

Supervisors & Employees

Hierarchy of measurement

Departmental Measures

StakeholderNeeds PBIT

ROCERevenue

Cost Centre Budgetary

Performance

Financial Budget

Supervisors & Employees

Often not quantifiedRarely connected to departmental goals

Top Down

Traditional Mindset

Traditional Budgets…

• are time consuming and expensive• provide poor value to users • fail to focus on shareholder value• are too rigid and prevent fast response • protect rather than reduce costs• stifle product and strategy innovation• focus on sales targets rather than customer satisfaction• are divorced from strategy• reinforce a dependency culture• lead to unethical behaviour

From Beyond Budgeting Round Table,(BBRT) 2004

Board

Managers

Supervisors & Employees

View Encouraged by Traditional Budget

Hierarchy of measurement

Personal Measures

Process Measures

StakeholderNeeds

Value Based Operational Planning

Measures based on analysis of above drivers & cause & effect relationships

Process, Activity& Value Drivers by

Volume & Unit Cost

Value

Bottom Up

Evolving Mindset

Linking ABM and CPM

Personal Measures

Process Measures

StakeholderNeeds

Measures based on analysis of above drivers & cause & effect

relationships

Process, Activity& Value Drivers by

Volume & Unit Cost

Value

Resources Activities

ProductsServices

CustomersChannels

DriversOutput Quantities

Rates

Revenues

Contribution

ProcessValue Add

Through the focus on Activities and Processes, ABM provides the connecting logic through which causal effects can be understood and performance improved.

Profitability

Driver Quantities

Cost

Conclusion

• ABM combines financial and operational data in the organisation to provides meaningful financial intelligence for decision-making

• The ABM model becomes a business model describing the connecting logic and metrics which drive value

• CPM aims to align people with strategy• Traditional budgets do not encourage alignment• ABM’s focus on activities, processes and the

value drivers in the organisation provides foundational support for the CPM process