Profitability management is the new Activity Based Costing
The biggest problem of ABC/ABM (activity based management) is that it is called like that. It is one of those examples where unfortunately the name of the application (I don't mean this in the technical sense but as in "how a concept is applied) is the same as the concept. And it's not. Profitability Management is actually the same as ABC, and so are many other exercises. For many, activity based costing is a loaded term. Many projects in the past failed. The difference today is that there is a much stronger business imperative.
Why so many projects failed in the past
Like with many projects, because of internal politics. In many cases, allocated costs were not seen as an instrument to optimize a value chain, but as a??funny moneya?? to shift around managing budgets. Thata??s disconnected from reality. These politics still exist ofcourse, but with the increased pressure organizations cana??t afford to fail because of internal politics.
Another reason for failure is a??going overboarda?? and looking for precision. Allocating costs and revenues is never a precise exercise. It is based on assumptions and discussion. The goal of profitability and cost management is not precision, but accuracy. The cost and revenue structure needs to reflect the cost and revenue drivers within the organization. Transparency of that process is far more important than creating a a??precise black boxa?? that no one understands.
Frank Buytendijk
Why so many projects failed in the past
Like with many projects, because of internal politics. In many cases, allocated costs were not seen as an instrument to optimize a value chain, but as a??funny moneya?? to shift around managing budgets. Thata??s disconnected from reality. These politics still exist ofcourse, but with the increased pressure organizations cana??t afford to fail because of internal politics.
Another reason for failure is a??going overboarda?? and looking for precision. Allocating costs and revenues is never a precise exercise. It is based on assumptions and discussion. The goal of profitability and cost management is not precision, but accuracy. The cost and revenue structure needs to reflect the cost and revenue drivers within the organization. Transparency of that process is far more important than creating a a??precise black boxa?? that no one understands.
Frank Buytendijk