For instance, an ABC model will enable you to analyse your products according to the different customer segments they're targeted at, and compare the cost of each category with the premium that the buyer segment allows you to charge. That will immediately reveal just which of the customer segments you're targeting are really generating profits--once the real cost of marketing to them, using ABC, is calculated. This, in turn, can be used to channel your investment as well as to make resource-allocation decisions. Likewise, the profitability of geographical markets, specific product lines, and even particular processes can be computed using ABC.

But that's not all. Once you move onto abm, direct links with other management tools will emerge. Smart ceos manage their ABC findings by, inter alia, pruning non-value-added activities (Business Process Reengineering), eliminating the need for checking activities (Total Quality Management), paring down inventories (Just-In-Time management), and changing manufacturing processes (shopfloor reengineering). And the benefits basket balloons, as the pay-offs from these management initiatives kick in.

The powerful results it delivers is making ABC the epicentre of several different approaches to management accounting. For instance, Kaplan and David P. Norton--president of Nolan, Norton & Co. of the US--have integrated it into their concept of the balanced scorecard, which measures strategic objectives and operational performance across four perspectives--financial, customer, process, and learning--balancing short-term financial performance with the drivers of growth opportunities for the future. Just how does ABC fit in? In two ways. First, it can generate the metrics for gauging the efficiency of different activities under the balanced scorecard system. And second, the cost information it provides can guide the strategic and operational decisions that are taken in response to the balanced scorecard. Thus, a pure costing exercise cascades into an enterprise change management system.

That's just what the Rs 700-crore Greaves has set into motion at its captive foundry for manufacturing diesel engines in Pune. The impetus? "Cost distortion by our traditional system was general," answers S.B. Manel, 46, group general manager, Greaves. With the foundry being highly labour-intensive and activity-oriented, the chances of hidden activities proliferating were high, particularly since the conventional heads of direct labour and direct materials were being employed to calculate costs.

At the outset, all data on resources like wage bills, purchases, power et al were collated. A team comprising a technical expert, two engineers, and a cost manager led 24 line engineers working on the project. The foundry operations were broken into separate activities such as moulding, melting, and quality assurance. In all the departments, activities were mapped, common cost-drivers were traced, and the cost per unit was determined. Having started in March, 1997, Greaves now intends to use the results to control its costs through activity management.

Different? Of course. Logical? Entirely. A shot in the arm for management accounting? Yes--and no. Given its power, it is no wonder that a private study conducted by Price Waterhouse among its US clients in 1995 revealed that over half the manufacturing companies, and about a third of service companies, use ABC. According to another global study by management consultants Bain & Co., 62 per cent of companies around the world have used the system in the past five years. But it is the transition of costing from the book-keeper's domain to the manager's which has cost ABC its reputation among some companies. Concurs CTA's Raman: "ABC puts the onus of cost management on line managers. That's obviously provoking extreme reactions from a wary accounting fraternity."

Even so, corporate India is converting, with a handful of plucky pioneers--among them big corporates like the Rs 1,486-crore Philips, the Rs 600-crore Bharat Forge, and Greaves, and smaller companies like the Rs 120-crore W.S. Industries, the Rs 90-crore Emco Transformers, and the Rs 45-crore Menon & Menon--showing the way. While emulating them is easy enough in terms of adopting ABC, carrying it--and your people--through the process is a more demanding job. Just what, then, are the real issues of implementing ABC?

The ABC Of Objectives

The carousel of credits that ABC commands can often confuse corporates about which of them to gun for. Why not all? Well, adopting the technique without shortlisting the expected benefits can not only cause disillusionment, but can also lead to the wrong form of implementation. Warns Sachin Menon, 35, ceo, Menon Pistons: "It's crucial to remember that ABC is just a tool and a facilitator. You must have a very clear idea of what it can do for you before embarking on it." Or, as Devinder Chawla, 34, managing consultant, Coopers & Lybrand, explains it: "abm derives its power from the way its output can be used for cost management. ABC information, by itself, does not invoke actions and decisions that lead to improved profits and operating performance." What does, however, is the filter through which the data it releases is viewed. For, ABC allows you to discover which of your products, or branches, or customers are profit-makers; it paves the way for appropriate action in each of these areas. Likewise, the downstream linkages between ABC and management initiatives--will you use abm to lead into reengineering or into a quality drive?--will also have to be factored in before choosing your mode of implementation. For instance, the Rs 50-crore Kolhapur-based auto parts-maker Menon & Menon rolled out abm in 1996, two years after it had started off a continuous improvement movement at its foundries and machine-shops for making automotive cylinder blocks and heads. The objective was two-fold: validate the success of the quality drive with ABC; and attack costs in response to the price resistance demonstrated by foreign customers. Says Vijay Menon, 40, ceo, Menon & Menon: "We were able to pin down the hidden costs, besides finding the focal points for continuous improvement."

In fact, it wasn't till the company applied ABC to its billing process that it discovered that its original assumptions were mistaken. Instead of climbing in proportion to the size and complexity of an order, the activity cost of the process turned out to be determined by the number of orders being handled. A string of small orders consumed much more resources than a single bulk order. Realising this, the company adjusted its prices.

The strategic use you make of the results of ABC must also be an input in fixing its format. That's why, when the Chennai-based electric transmission equipment-maker W.S. Industries adopted ABC in 1996, it was with a clear priority of objectives. The extent of value-addition in manufacturing at its insulator plant was very high, with over 1,000 types of products being made. While its operations were both capital- and labour-intensive, about half were based on common processes, the other half involving activities meeting discrete product needs. With products multiplying over the years, it was obvious that several non-value-added activities had become part of the system. But before weeding them out through reengineering, CEO V. Srinivasan had to know where to attack the redundancy.

That's when he roped in CTA's Raman to draw up an ABC agenda for his company. The first step was to list the specific objectives: to ensure accurate product costing through the creation of a strong and stable database, to identify which activities were adding value and which weren't, and to chalk out ways to eliminate non-value-added activities. With these goals in mind, W.S. Industries developed an ABC system that would build a cost model featuring these specific factors. That has led, inter alia, to the creation of a database that's the mother of all overhead expense-trackers. Says S. Narayan, 26, director (operations), W.S. Industries: "ABC has not only given us crucial insights for strategic decision-making, budgeting, and accurate production planning, but has also created an informed system that's cost-aware. And it has prepared my organisation for reengineering."

For starters, therefore, choose whether you want to use ABC to help specific strategic decisions where conventional accounting practices fail to offer the answers, or whether you plan to institutionalise it across the organisation. For, while ABC can do both, trying the second when you really need the first will not help. Besides, a big bang implementation throughout the company is neither quick nor painless. To be sure, some experts advocate the all-or-nothing approach. Asserts cta's Raman: "Only when abm is initiated as a movement across the organisation does the entire basket of benefits actualise." On the other hand, the fear of failure--and the resultant confusion when accountants and managers despair of finding the right answers to their original question--often prevents such a roll-out. Agrees V.A. Datar, 53, finance director of the Rs 600-crore Bharat Forge: "If you're haunted by doubts about the successful implementation of ABM, it's sensible to do pilot studies." Not only do the benefits manifest themselves more quickly on a smaller scale, the learning generated from the study can also be applied for better results.

Above all, decide beforehand whether the results will be worth the time and effort you invest in parallel-accounting your processes using ABC. If your strategic focus is on expansion or alliances, for instance, diverting resources to auditing your costs with ABC may not throw up the results that you need to act on. Moreover, once you start using it, ABC's results should really be the basis of your management decisions on costs. Adds Ramu P. Iyer, 58, consultant, Price Waterhouse: "Time and again, we've found that ABC reports gather dust, or the software lies stacked away in the MIS departments while companies stick to conventional accounting methods for decision-making." Allowing the ABC systems to rust will certainly not deliver results.

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