The ABC Of Ownership

"For ABM systems to be effective, everyone in the firm must view them--from top management to operating personnel--as cost-management tools rather than accounting tools," wrote Robin Cooper, associate professor of business administration at the Harvard Business School and one of the pioneers of abm, in his seminal Management Accounting journal article, The Changing Practice Of Management Accounting, in 1996. Indeed, not only will abm not deliver value unless wielded by everyone in your company irrespective of function, it can also be killed if kept limited to the purview of your accountants. The longer the book-keepers spend creating an ABC model, fine-turning it, and validating it, and creating variations for different departments, the more quickly will other managers lose interest. Agrees Amrut Pandurangi, 43, director, kpmg Peat Marwick: "If the accounting people champion abm, operating managers take only a halfhearted interest."

For your abm to work well, anticipate and sort out the conflict it's bound to have with the official lines of financial reporting. Aimed at generating information for management decisions, ABC will, initially, evoke responses ranging from disdain to rejection from your accounts people, who will be aghast at the idea of every employee playing the role of his or her own cost accountant, as they must under ABC. Listen to a branch manager of a leading foreign bank that introduced abm to determine the cost of, as well as manage, its plethora of activities. "Most often, the finance people feel operations is poaching on their area of expertise. So, they treat ABC as a side activity that management buffs indulge in," he comments.

In fact, your finance and accounting departments must virtually abdicate the ownership that they had enjoyed by virtue of ABC's being a costing exercise. The obvious solution: creating a cross-functional team at the design stage itself. "This not only limits the involvement of the finance group, but also pools in varied user perspectives early on," points out Rao of NIIE. W.S. Industries, for instance, started with a four-member task force--comprising two people from manufacturing, one from quality control, and one from finance--which became a prototype for every subsequent team that was created to devise variations of the ABC model for different purposes. Thus, both line and support employees took on the ownership.

The ABC Of Evaluation

To get the best out of any measurement system--whether it's economic value added or productivity per employee--smart CEOs inevitably link the findings to departmental, functional, team, and individual performance evaluation. The alternative can be disastrous in case of abm in particular. A prominent foreign bank, for instance, had introduced ABC in a few chosen branches. Using the results from the new applications, these informed branches immediately reshuffled their product portfolios and focused on the most profitable ones. The other branches, without ABC at their disposal, went on building marketshares in less profitable and even non-profitable products.

Besides the damage to the bottomline, the real problem was that it was the non-ABC branches that won the kudos--translating into rewards for their employees--for scoring on marketshare. For, the bank was still using the old scorecard, the ultimate outcome of which was that abm collapsed. Warns Datar: "People behave in an organisation the way their performance is measured." His company skirted the trap by creating a completely different appraisal system for employees of one production line, out of the 13, at Bharat Forge's Pune plant where ABC was introduced. "Each employee was appraised on the basis of actions he took in the context of ABC--like the time he spends on a particular activity, how much waste he's cut down, and so on," says Datar. Without being evaluated on its own terms, therefore, ABC won't work--and nor will the employees who are supposed to implement it.

Once you have introduced ABC, used its results to convert it to abm by adjusting your responses--as well as those of your people--should you let it become your flagship costing method, or even a parallel one? Or should it remain a supplementary tool, co-existing with conventional methods, invoked for specific purposes only? The naysayers caution against complete dependence. Warns the Mumbai-based Acharya: "It's too much of a risk to simply rely on cost information through ABC. At best, it acts as a check if your regular cost information is really off the mark." On the other hand, the converts speak with pulpit-box zeal. Pronounces Menon & Menon's Mande: "ABC will eventually stand alone, making traditional approaches unnecessary." Of course, ABC is not the only contender for replacing the older systems, having spawned several alternative costing models--from Coopers & Lybrand's Enterprise-Wide Cost Reduction to McKinsey & Co.'s Total Operational Performance, from Japan Inc.'s Kaizen Costing to corporate America's Total Cost Management.

Either way, the role of the management accountant is certain to change. For, despite its bias towards management action, ABC does need the active participation of the accountant. "He can, in fact, act as a crucial change agent here," says Jakhotiya of JBIMS. How? Well, under an abm framework, it would be the management accountant's responsibility to champion the reengineering of processes, using the findings of the ABC exercise to justify, direct, and accelerate it. Adds S. Ramadorai, 50, CEO, Tata Consultancy Services: "He would also be the one to translate strategic intent and capabilities into operational and managerial measures." Of course, that won't absolve the CEO of the responsibility for leading the changes that ABC demands. Warns A.F. Ferguson's Srinivasan: "The onus isn't merely on the management accountant. It is up to the CEOs to bring in the cultural shift that gets users to play a dominant role in designing their cost systems."
And there lies the bottomline. While the benefits of ABC are unquestionable, the jury is still out on whether the system can entirely replace conventional costing models. But even for those benefits to flow, you must ensure that the model is applied--and the findings acted on--by every employee. For, the objective of abm is not just to understand the activities, but also to ensure that the employee realises the costs of his or her activity, and tries to control them. Notes Jakhotiya: "Ultimately, the real benefits of ABC only accrue when the actual line employees proactively manage their activity costs." Only then will ABC be as easy as, well, A-B-C.