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The new relevance of abc

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  • 1. The new relevance of ABCBrian Wood is a research director in Gartner Research, specializing in corporateperformance management (CPM).Prior to joining Gartner, Brian was a director in the consulting and advisory business withseveral worldwide consulting leaders, including KPMG, Cap Gemini and IBM GlobalServices. He has been responsible for designing and managing the go-to-market strategyand offerings across a broad spectrum of practice areas, and has been directly involved inthe planning and control cycles. He has more than 20 years of experience in the consultingand IT services industries.In this interview, Mr Wood, research director in Gartner Research, talks about ActivityBased Management and gives advice to organizations planning to adopt this concept. Hisresearch focuses on the methodologies, processes, metrics and technologies that enterprisesuse to manage business performance, as well as program and project management issues.Q: Historically, activity-based management has been perceived as being too complicated.And it’s true that in the past many ABM projects have stalled. As organizations reviveABM, what should they do to ensure success?A: In Gartner’s view, activity-based management is one of the key methodologies thatshould play a part in corporate performance management.There are several areas that organizations can focus on to increase the likelihood of successwith ABM. First, it’s worth remembering that the technological challenge is usually farsmaller than the political one. Strong executive ownership of the project can minimize theimpact of political issues. Comprehensive plans for change management andcommunications are also critical. Assuring stakeholders that their input is valued and willbe integrated into any solution will go a long way to overcome many typical stickingpoints.Processes must also be implemented to ensure proper maintenance and enhancements of themodel. Stakeholders are less likely to dig their heels in if they know that they do not haveto live with the initial model forever, and it is inevitable that initial models will need fine-tuning as the business and markets evolve. In the past, these refinements were often seen asvery labor-intensive, but a number of activity-based management tools make that less of anissue these days.Q: Different types of vendors offer ABM applications. There are some remaining nichespecialists, for example. There are vendors that offer ABM as part of a performancemanagement suite, and vendors of enterprise resource planning solutions offering an ABM
  • 2. module. Quite often this functionality is the result of a vendor acquisition. Whatconsiderations should a client keep in mind when choosing a supplier?A: As a starting point, each organization must consider its existing strategies for enterpriseresource planning, corporate performance management and business intelligence. Where asingle vendor has been chosen to provide most business applications, it makes sense to lookat the ABM solutions they can offer. If the functional fit is reasonably good, there should beeconomies of scale and skills. Similarly, if the organization has a strong centralizedBusiness Intelligence strategy, and its key suppliers provide ABM solutions, these shouldbe considered. If there is no dominant business applications vendor in place, but thecompany has a strong business intelligence strategy and supporting infrastructure, it may besensible to implement best-of-breed solutions on top of that infrastructure.Understanding and articulating the requirements and business case for ABM are anotherprerequisite to selecting the right technology. The potential benefits of staying within aparticular vendor’s suite can quickly be offset by additional costs arising from functional oroperational shortcomings. Equally, choosing a niche player that appears to offer better fit orfunctionality can be a bad decision if you don’t weigh the fully loaded costs and risks ofsupporting additional technologies and vendors.Other areas to consider include integration with existing user interfaces, metadata and datamodels. Enterprises with a corporate performance management strategy should consider theABM capabilities of their CPM suite vendor, if these can provide a sufficient level ofintegration. But bear in mind that best-of-breed vendors in this space may not remain viableas the market consolidates.Q: Traditionally ABM was based on historical data, and models were run infrequently. Tomaximize its usefulness, shouldn’t ABM also focus on future costs and profitability?Shouldn’t models be refreshed much more frequently, as with normal managementreporting?A: The optimal frequency for reviewing and refreshing a model will vary with eachorganization, but the ability to do this efficiently is critical. In organizations with moreadvanced corporate performance management capabilities, the output from these modelswill help drive the continuous planning processes. Strategy formulation, scenario planning,simulation, forecasting, planning and budgeting all benefit from the inclusion of ABMinformation.Even if the business environment is relatively static, it is important to reduce latency. Butmost companies operate in highly dynamic environments, and can benefit enormously frombetter event detection and early warning. Since the acceptable latency of the data willdepend on the decisions being supported, it is important that models can be reviewed,modified and refreshed on demand.Q: How is Web-based technology changing ABM, and making possible this increasedfrequency of reporting?
  • 3. A: Certainly Web-based technology helps in the deployment of many projects, but itsprimary value is the ability to make real-time (right-time) information available through theWeb when and where it is most useful. The Web is not changing activity-basedmanagement so much as changing the way enterprises use the data and insight ABMprovides. By making key metrics, many of which are based in part on ABM data, availablethrough the Web, and in many cases embedded in operational applications, BPMimplementations, and portal pages, enterprises can make better decisions faster.Q: As ABM is becoming essential to core performance management, should it be moreclosely integrated with other performance management methodologies such as planning andbudgeting, so that when an organization re-forecasts its performance, the ABM results areavailable simultaneously?A: Activity-based management is a methodology that produces metrics at a level ofgranularity that facilitates actionable feedback loops. This data needs to be made availablepromptly, to support enterprise planning and control cycles. The precise frequency forrefreshing the model will depend on the planning and control cycles of the individualcompany, but certainly these activities should be in synch.Q: The ABM methodologies offered by various vendors differ substantially. Some stressthat collecting non-system driver data from contributors is the only way to be accurate.Web-based technology and process management tools are making this faster and easier.Other vendors recommend using time-driven analysis, and building up cost from individualtransactions. Some ABM applications allow companies to allocate activity costssimultaneously to several cost object dimensions, such as product, customer and channel.Others highlight the importance of being able to allocate costs reiteratively betweendepartments that provide services to each other, in costing shared services.What are the strengths and weaknesses of the various methodologies?A: Each of these techniques has evolved in response to specific implementation issues. Thebest choice in individual cases will depend on the goals of the initiative, and the constraintsand culture of the enterprise itself.Each approach has its virtues. You can apportion parts of the overall cost to differentcomponents of activities, for example, based on the resources that those activities consume.Often this level of granularity, where you do get down to each of the individualcomponents, is very helpful in determining how to remedy any problems identified by anactivity-based management application.In some cases, though, it is difficult to determine the granularity of consumption, and firmsuse a time-based method, seeing how much time each activity (or task within an activity)consumes, and then allocating resources based on that breakdown. Time-driven techniquescan circumvent some of the political issues I mentioned earlier, but there is a politicaldimension here too, if staff feel uncomfortable with a system that quantifies how long ittakes them to perform certain tasks. And while the time-based approach works whenallocating total costs, it may not provide the level of granularity desired. Moreover, it
  • 4. doesn’t always identify causes, or give the holistic view one can achieve with more driver-based approaches. So while the time-based method is easier to implement, it doesn’t alwaysyield the detail needed for drill-down and analysis, which, in turn, deliver much of thebenefit of ABM.It is certainly advantageous to be able to allocate costs to multiple analytical dimensionssimultaneously, and there are advantages to the reiterative approach in a shared servicesenvironment. Again, though, the importance of these features will vary greatly based on theorganizational dynamics, vision and culture of the company, and the specific objectives ofthe ABM initiative itself.Q: At the heart of most financial regulations, such as Sarbanes-Oxley, is the need forboards and executives to develop a deeper understanding of their businesses. What role willactivity-based management play in this?A: Many organizations do not have a detailed understanding of their own processes.Section 404 of Sarbanes-Oxley requires documentation of these processes and theassociated risks and controls. Looking closely at business processes will help identifycritical activities and tasks that should be tracked from an ABM perspective. Once in place,ABM can be used to help meet the requirements of section 409 as well, since it providesinsight into key drivers of business performance. It also helps identify events that anenterprise should monitor, because they may have a material impact on businessperformance.Q: How should clients measure the success of their ABM initiatives, and what type ofreturns should they expect?A: Better ABM leads to better insight into business performance drivers, which should leadto better planning. To some degree, success can be measured in terms of variance betweenplanned and actual results. Unfortunately, ABM initiatives tend to be viewed as“infrastructure” projects, for which it is difficult to calculate a direct ROI.There are typically direct cost savings arising from the initial implementation, but using thismeasure alone is very short-sighted. The real benefits of ABM come from the insight intothe nature and allocation of costs. This understanding of key business drivers helpsorganizations to make decisions about resource allocation, customer treatment, supplierrelationships and so on, based at least in part on quantitative data.