Value Creation Group, Inc.  Home ] Table of Contents ] Sitemap ] Search ] Consultants ] Contact Us ] Clients ] 

 

Activity Based Costing/Management/Budgeting
Case Studies

Financial Services Productivity Improvement

The Challenge

Our client, a 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.

The Approach

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  client-server activity-costing software package so  organization could report activity cost and improvement  on a regular basis.

The Result

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.

 

 

Improve Accuracy of Product Costing for Financial Services Firm

The Challenge

This financial services firm had a wide variety of products. These products could have been originated by them or purchased from other financial institutions. These products had different statuses (e.g., current, delinquent, default, resale). As the industry was becoming more competitive, some national players were focusing on these products, and the government was negatively impacting rates, this financial institution needed to better understand their costs by product, status, and source to assist them with:

  • determining strategy
  • making purchasing decisions
  • managing performance

The Approach

We met with senior management to determine specifically the type of improved costing information that was needed. Employees from cost centers in two locations attended one or two workshops. In these workshops, the employees were given a brief explanation of why the company needed more accurate costing information and what was expected from them. The employees were asked to define their activities. They were asked to either do time studies or estimate what percentage of their time was spent for each activity. Then they were asked to determine how to assign these activities to the various cost objects (i.e. products, source, and status).

This information was loaded into ABC Technologies OROS activity costing package where we were able to extend the capabilities of the software to meet the clients needs by working closely with ABC Technologies.

The Result

As a result of this information, it became apparent that some processes were more expensive than everyone thought. It also gave insights into which products were profitable and which were not. This helped marketing to make pricing decisions when buying loans from other financial institutions. It also helped management better understand that as the ration of loans in different statuses changed, the cost of servicing loans will increase or decrease. It served as a benchmark for comparing results across locations. When the organization decided to consolidate the number of locations that were performing an activity, this information helped them assign activities to those locations with the lowest cost for a particular activity.

 

Jump Start Quality Program & Align Multiple Improvement Initiatives

The Challenge

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.

The Approach

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.

 

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.

 

 

Reengineering the 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.

 

 

Helping Service Company Better Understand Their Costs

The Challenge

This $500 million plus service organization wanted to better understand the cost of the various services that they were providing to their customers. They were spending millions of dollars on reengineering and did not know what their "as is" and "should be" costs were.

The Approach

This very successful international service organization was providing service without understanding very well the cost of the various services that they were providing. They were spending millions of dollars on reengineering without knowing what those services cost prior to reengineering. We started with the call center and accounting areas. In the accounting areas, we asked everyone to define their activities and estimate the time they spent on those activities. In the call center, we listened to calls recorded by quality to determine the effectiveness of the customer service representative. Calls ranged from 2 minutes to 30 minutes depending on the caller, the customer service representative, and the purpose of the call. We interviewed training, telemarketing supervisors and senior management.

The Result

As a result of our approach, we were able to collect some very useful "as is" information that could be used to compare to the "future state" that would result from the very expensive reengineering effort. In addition, the managers of the area could now better understand not only the times, but also the costs of various activities that they sponsored. This information could be used in deciding whether to approve a major computer system that had little cost savings, but was supposed to improve customer service.

This information was used when the owner of this privately held company decided to sell to a publicly traded organization for estate planning purposes.

 

 

How Much Does It Cost to Service Different Customers?

How to I Better Price My Products and Services?

The Challenge

This company provided back room leasing services to large money-centered banks. Their customers were household names. When a customer called the bank about their lease, they were actually talking to this organization. The organization did everything from processing monthly lease payments, collecting and paying property tax and insurance, making collection calls, and taking necessary legal action to repossess assets that were in default. The problem was the organization did not understand how much each of these services costed. Also, their customers wanted their invoices billed to them as a monthly charge in the form of so many dollars per lease. This meant that customer one may only want monthly processing of lease payments and delinquency calls. Monthly lease payments occurred every month, but delinquency calls were only to delinquent lessors. Customer two might want processing of insurance and legal action to regain property from defaulted lessors. Insurance and property are an annual or semi-annual charge while regaining property from defaulted lessors occurs only if they default. Yet both customers wanted their invoice in the form of a monthly charge per lease rather than in the form of a charge per insurance payment.

The Approach

We started with a two-day workshop with a cross section of people from marketing, finance, and each of the areas of marketing. The president attended the morning portion of the training, and he read our book on Activity-Based Management for Service Industries, Government, and Nonprofit Entities. He supported the ABM effort through-out. We facilitated workshops for each area including marketing, sales, accounting, insurance, property tax, collections, and regaining the property. We calculated the cost of performing these various activities. The results were used to develop a pricing model.

The Result

After talking with marketing and sales, the president and marketing decided that the invoice would still be in the form of so many dollars per month per lessor. However, the monthly invoice would be derived by calculating the unit cost of each separate service (e.g., pay insurance, make collection calls) multiplied by the expected number of times that service was going to be performed. This answer would be summed for all services to obtain a total annual cost. The monthly charge per lessor would be derived calculating the total charges for each customer and then dividing by the total monthly customers for the year. This approach gave the customer an invoice in the form they wanted. This approach helped the organization better understand their costs by service provides as well as by customer which enabled them to focus their marketing to those types of customers and those services that were most profitable.

 

 

Social Services Agencies

The Challenge

A group of social services agencies was facing reduced reimbursement rates while costs were increasing. They were being asked to provide additional services without additional compensation. Private industry was beginning to provide services that these agencies provided. Many of these agencies were small with revenue of only $1-$20 million.

The Approach

We were chosen over a Big-Six firm because of our experience, our approach, and our price. We worked with a trade association that put together a pilot consisting of 8 different social service agencies. The agencies had to contribute something, but not the full cost of the study. This project was considered so important that the trade association took the balance of our fees from their reserves. The agencies listened to our presentation and competed to participate in the pilot. The eight agencies represented a cross section of size (i.e., small, medium, and large) plus a cross section of social services provided to consumers. These services consisted of transportation, vocational, clinical, day rehabilitation, case management, support services, recreation, and education. The pilot consisted of costing 80% of the total cost of an agency and included intake, billing, and human resources.

A one-day workshop for the pilot with representatives form each of the 8 agencies defined activities for the main services the various agencies and for intake, human resources, and billing. Then the representatives went back to their agencies and ask a sample of employees what percentage of time was spent on each of their activities for the last year. We worked with each of the pilot agencies. They spread non-salary expenses such as phone, computers, and rent to these various activities. They divided their activity costs by the total output volume for each activity to derive activity unit costs. Finally they assigned these activity unit costs to the various services their agencies provided.

The Result

This enables the agencies to better understand the costs of each of their activities. It also helped them understand the total cost of providing different services. They were able to separate the cost of services from reimbursement methods. This was an extremely complicated model because the agencies could perform the same activity for two people yet be reimbursed different amounts because the two people came in under different programs. They could have a program where they were reimbursed from two sources for the same activity. For example, if they provided supervised janitorial services for people who had development disabilities, they could be reimbursed as part of the janitorial contract as well as being reimbursed as part of a social services program. This costing information helped them to remain competitive and make better decisions.

 

 

Internal Customers Complaining They Don't Understand IT Charges and

Felt IT Charges Were Too High

The Challenge

A $10 billion service firm had internal customers who were complaining that they did not understand their charges from IT. They felt the charges were too high, and the services provided by IT couldn't possibly cost that much. They had recently outsourced their help desk, but help desk charges were continuing to escalate. They had purchased a faster mainframe that processed faster, but their cost per CPU minute was increasing. Customers were complaining. They has a work ticket system for handling help desk calls, but this was not being utilized to the fullest.

The Approach

Our approach was to help them better understand their costs. First we worked with the area that managed the system for the recording, analyzing, and reporting on their work tickets. We determined all the various activities that were involved in managing such a system. Their activities consisted of: setting up new employees and changing employees connection; answering questions concerning the work ticket software as well as questions concerning the network and printers, customizing the work ticket system reports; updating the Oracle database on which the work ticket system rests. A cross section of the group identified cost drivers (those things that interfere with them doing their job. They created action plans and defined/refined their performance measures.

The Result

The group determined that by having a list of all the activities that were involved in maintaining the work ticket system, their internal customers would better appreciate the cost of providing this service. They estimated the cost of everyone completing work tickets. They could now add the cost of the department providing the work ticket system with the cost of the users of the work ticket system so that everyone would better understand the total cost of such a system. With this cost information, they can discuss with the users: that not filling out work tickets completely, the organization does not gain insights into root causes and frequency of problems so that proper corrective action can be taken. Heavy users of customization should be charged so that they better understand the cost they are causing the organization or at least informed how much each request costs so they can determine if they can justify that costs. The computer security folks should handle passwords to this system along with all the other computer passwords. IT training should perform work ticket system training. They should create a feedback loop between the work ticket system reports and training so that the work system trainers emphasize those common errors of users. They need to explore how to better resolve issues crossing areas (e.g., printer, password, network, mainframe, application).

 

 

Improve Obsolete Management Reporting System

The Challenge

This large financial services firm has $50 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.

 

 

Taking a Firm from Activity Based Costing

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.

 

 

Lean Management Accounting to Support Lean Manufacturing

The Challenge

One of our strategic alliance partners, BMA Inc, asked us to joint venture with them in helping a major defense contractor implement a lean management accounting system to support the company's lean manufacturing system. The defense industry has become extremely competitive with the end of the cold war. As a result, the government is asking defense contractors to continually reduce their costs. The days of "cost plus" contracts are coming to any end. So defense contractors have to find ways to change their culture and way of doing business. One of those ways is to implement "lean manufacturing". However, the problem arises when a company implements "lean manufacturing", but maintains their management reporting on a traditional realization basis.

The Approach

Lean manufacturing was being implemented in one of the manufacturing cells. We defined the value stream that was connected with that assembly cell. This value stream consisted of engineering, tooling, master scheduling, MRP, production control, transportation, kiting, and quality. We helped them define their activities in each of these areas connected with this particular assembly cell. We asked them to determine the amount of time these support areas spent with this assembly cell. BMA helped them define performance measures, standards, and features/characteristics for that cell.

The Result

As a result of our efforts with BMA, the client now has the ability to create a lean management accounting system to support their lean manufacturing system. They have useful information that all levels of management can use for continuous improvement. Some of that information is visual and to be used by the operators and supervisors. Some of the information is for middle and senior managers. The focus was on changing the culture of the organization away from realization that is currently required by their government customers. The new lean accounting system focuses on:

  • value added--what changes the form, function, fit of the product
  • non-value added--that which is part of the process, but does not add value
  • waste--that which is neither
  • value added nor non-value added and results from redoing or resolving problems

They also have a set of performance measures that are more meaningful for the cell than the traditional realization measures. They have a way to change management focus from why is realization low to what programs and projects are being worked on in order to minimize non-value added and waste. This change is focus is away from who to do we blame to what action is being done to resolve problems and continuously improve.

Call John Antos at 972-980-7497 to find out how we can help you achieve your goals.

Contact Us to find out how we can create value for your organization.
Copyright 1999-2013 Value Creation Group, Inc.
Last modified: January 08, 2013