Bertrand Jaffrès, Bull Business Integration Solutions
A graduate of the national institute of applied science (INSA) in Lyon and the Administration des Entreprises business school in Aix-en-Provence, Bertrand Jaffrès began his career at Bull as an SAP functional consultant in specializing in the Financial and Management Accounting modules. He subsequently moved to the SAP Business Intelligence team, before taking responsibility for Bull’s teams specializing in Business Objects and Informatica offerings at the beginning of 2010.
Built around business processes, the ABC (Activity Based Costing) method offers an accurate picture of costs: an essential pre-requisite for detailed and proactive financial performance management. Bull’s recognized expertise in this field has proved invaluable to the French Employment Office in implementing both the method itself, and a flagship tool that has been critical to the successful launch of the new system: SAP/Business Objects PCM.
Effective financial management requires a perfect grasp of the profit margins for the organization’s different ‘business objects’: products, customers, regions… as well as the ability to optimize resource allocation according to the value created. In order to achieve this, it is essential to evaluate the total cost attributable to each product and service, including both structure expenses and overheads. This task generally falls to the management control team, and involves setting up distribution keys, the most obvious of which – and also the simplest and most traditional – is based on the relative turnover figures for the different products. However, because this method is inherently imprecise, it is becoming less and less appropriate in a context of increasingly diverse production scenarios; with products becoming more complex, and support functions and associated services playing a more decisive role in the success of the enterprise. So the results you get from this approach are essentially rough and ready, and sometimes even atypical, and the recommendations that naturally follow are sometimes as problematic for operators as the calculation has been mechanical and impersonal.
Faced with these limitations, there is a far more practical method based on a costing model much closer to the reality of the enterprise: namely, Activity Based Costing (ABC). The ABC method was developed in the 1980s in the United States and promoted by, among others, Robert Kaplan, the inventor of the Balanced Scorecard. Its starting point is the observation that a product is the sum of a number of actions, each of which consumes resources in terms of manpower, raw materials and so on. By modeling the processes, i.e. the different actions (called ‘activities’), assigning values to each of the resources used, and then allocating these to the different products depending on the distribution keys (the ‘cost drivers’), you can achieve a fairly reliable assessment of the total cost of the product for the enterprise.
ABC: a method with many advantages
There are many advantages to using this method, compared with a distribution based on turnover:
- The costs are closer to the reality of the enterprise. For example, higher marketing or R&D costs are naturally assigned to a new product than to a mature one.
- It makes unit costs for individual processes visible, including cross-functional processes. This means users can find out, for example, how much the action of “processing an order” costs, as this action consumes both administrative and operational resources. In particular, this enables possible areas for improvement to be identified.
- It provides a great deal of information enabling costs to be traced. In the previous example, for instance, it might be possible to break down the costs for processing an order between administrative and operational departments. One could also determine, not just by product but also by entity, the nature of the resources consumed (labor, IT expenses, floor space…). Similarly, you could find out what proportion of the total cost is associated with each action.
- Conclusions can be shared with everyone involved in the organization, because they are derived from the real processes, which everyone is familiar with, and not some obscure mathematical formula. Over and above providing figures, the ABC method is also a real catalyst for different parts of the business to talk to each other, as well as a management tool which helps to make the organization more effective.
A business project
The hardest thing is to demarcate processes to a sufficiently granular level: if there is not enough detail, the analysis will not be precise enough and will therefore not be so useful; if it is too detailed, it will become too hard to implement. In both cases, it is the identification, relevance and collection of cost drivers that poses the problem. The key notion to bear in mind is that each process, and each measurement, must make sense in operational terms, and this why a good understanding of the business is absolutely essential so the correct breakdown can be made. For example, procurement costs may be proportional to the number of items being transported; something that is easy to measure, but only the Purchasing function will be in a position to confirm this. So if the ABC method is destined primarily to support management control, above all its implementation will be a business project. It is a cross-functional initiative that has to actively involve all the players in the organization.
The ABC method may be somewhat complex and sensitive to implement, but it does deliver extremely valuable results. So ideally it should be reserved for organizations that have a degree of stability and to sectors with high administrative costs, for example the public and state-controlled sectors, as well as those with a high proportion of indirect costs (banking, insurance…) or who share significant functions such as support, marketing networks, IT, customer services…
PCM: a specialist tool
Once the crucial stage of identify activities, resources and cost drivers has been completed, implementing the ABC method requires a specialist analytical tool where these items can be filed and stored. Bull has developed a range of specific skills in SAP/Business Objects’ Profitability and Cost Management (PCM) tool, a specialist application built around a powerful processing engine, where the method’s standard off-load rules are pre-configured. Drawing on an ‘in-memory’ technology that increases performance, and featuring its own extraction and restitution tools, PCM is perfectly autonomous, relatively straightforward in both functional and technological terms, and can therefore be rapidly implemented for use by staff management control functions. Typically, a model can be built within a few days, and it would take just weeks to finalize the complete implementation on most standard technology platforms (Microsoft, Oracle, XML…).
One of PCM’s key strengths, moreover, is its multi-dimensional way of representing products and services. So it is eminently suitable to meet the needs of an enterprise that wants to calculate the cost of a product in a given context. The selling price of a product can be evaluated by entity, customer profile or geographical area. Being able to configure these management parameters means implementing the ABC method is effectively a Business Intelligence project, and PCM features all the rich functionality, the flexibility of restitution, and even the capacity for simulation, so vital to any proactive financial management and control strategy.
French employment office (or Pôle emploi): an example of a typical implementation
Bull was recently responsible for rolling out PCM and the ABC method in a vast project commissioned by the French employment office. The result of a merger between the unemployment agency ANPE (Agence Nationale Pour l’Emploi) and the French unemployment benefits office, the Assédic, Pôle emploi had to overhaul all its business processes and wanted, as a result, to completely review the calculation of its costs using the ABC method. In September 2008, Bull was given the task of implementing a local model in 23 regions, as well as a consolidated national model. In order to take the value of the organization into account, and to translate the different costs as accurately as possible, it was necessary to go outside the strict framework provided by the ABC method and set up composite or derived cost drivers, obtained by carrying out a series of preliminary calculations. Completed in June 2009, this project, known as CAB (Comptabilité Analytique et Budgétaire or Analytical and Budgetary Accounting), offers regions much greater control over their operating costs, greater visibility to identify discrepancies between cost forecasts and real costs. Also, it is now possible to compare costs between regions and identify good practice (such as on-line registration). Pôle emploi now knows the cost price of its various services, and can account for the way credits allocated to its various initiatives have been used, and inform State and social partners alike.
Using ABC and PCM in this kind of way is becoming increasingly common. Another new, innovative and potentially very valuable application is also emerging, with a number of major businesses already using these approaches to assess their carbon footprint. Instead of financial indicators, the drivers are expressed as the amount of CO2 consumed (or offset) by a particular process. By way of an analogy, you can offset these ‘carbon costs’ via the cost drivers throughout the entire product lifecycle to obtain a full status report, including not just the manufacture and transport, but also the energy consumption of IT systems, heating and lighting of premises, right through to recycling.
For more information >>> http://www.bull.com/bulldirect/N39/pole-emploi.html