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Resource Management + OFTA case study (27 Aug 2005)

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An introduction to resource allocation, performance management and with an OFTA (Office of Telecom Authority of Hong Kong) case study thrown in.

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Resource Management + OFTA case study (27 Aug 2005)

  1. 1. Effective Resource Management How Activity-based Costing could facilitate effective resource management Presented by Workshop Jointly Organised by AIA & HKUSaturday, 29 March 2003 SPACE Saturday 27 August 2005 Dr Joseph Yau, HKU SPACE Mr Alan Lung, ABCM Consulting ABCM Consulting
  2. 2. Contents: Perspectives in Resource Management2.30-2.45 Building an analytical framework -- from2.45-3.00 historical data to fact-based management Highlights of ABC theories: The CAM-I3.00-4.00 Cross, Resource, Activity, Cost Object and Drivers Case Study – OFTA and Manufacturing4.15-4.30 Cases Some Practical Implementation Issues4.30-4.45 Group Discussion and Group4.45-6.00 Presentation ABCM Consulting
  3. 3. What is resource management?• An accounting term?• A public administration jargon?• Resource = Money? Property?• Resource = Knowledge, Skill, People? ABCM Consulting
  4. 4. Managing Resources in aGovernment (Bureaucratic)Organizations• Resource Allocation• Resource Deployment and Re- deployment• Resource Review ABCM Consulting
  5. 5. Please suggest ways for HKSAR Government to allocate the following resources ABCM Consulting
  6. 6. HRG/DRG is not likely to be implemented soon … ABCM Consulting
  7. 7. Typical Resource Allocation• Policy Objectives• Key Result Areas by Programme (or CSF?) Global Allocation Proposed Distribution Refined Distribution Key Performance Indicators Execution  Programme Objectives  Initiatives ABCM Consulting
  8. 8. What are the features of effective Resource Management? • Availability of physical, human, financial and intangible resources • Deployment and re-deployment • High value-added in core and supporting processes ABCM Consulting
  9. 9. What are the handicaps in the government sector? • Salaries constitute a very high % of total cost • Little room for reduction in direct costs • Difficult to identify non-value- added activities ABCM Consulting
  10. 10. Output/Outcome Management: How much “Inputs” (Resource) are used to produce specificoutputs? Were those “Outputs” (Services) useful to the “Outcomes” (Policy Objectives)? OUTCOMES OUTPUTS IN PUTS Activities ABCM Consulting
  11. 11. Are all your customers Profitable? Profitability Analysis by Total Profit($) and Margin(%) Best customerProfit($) low priority inTotal productionQuantity Profit (before HQ Costs) Manufacturing FOB Cost increase Revenue Material quantity Cost increase FOBMargin(%) cost reduction ABCM Consulting
  12. 12. CPA: Customer Profitability Analysis cumulative profit Hidden profit Actual profitDifferences in Cost-to-serve  Different customers use different 0 Products ranked: most profitable first.. activities Customer A Customer B cumulative profit Hidden profit Customers are Actual profit easier to influence than products 0 Products ranked: most profitable first.. Product A Product B Possibilities to influence  ABCM Consulting
  13. 13. Management Business planning, finance and control Training and management development Housing MIS Staff, logistics and quality assurance Produc Ser- ary Manu- Marketi t Procur Assem Strategic Cost Management Deliver facturi ng and Product costing Prim develo ement bly y vice ng Sales Price setting p-ment ..and do you recognize the Portfolio management Customer profitability ABC hidden profit ??cumulative profit Hidden Traditiona profit l Actual profit 0 Products ranked: most profitable first.. Product A Product B Hidden profit...drive to improve ABCM Consulting
  14. 14. Other reasons for using ABC at a Label Manufacturer• Customer request short TAT  increase service level• Tighter Cost Control• Eliminate Non-value added activities• Identify the profitable customer/product• Evaluate if we intend to keep the account which are in lost. If so, what we can do to minimize it• Achieve corporative objective ABCM Consulting
  15. 15. Project Objective for a PCB Manufacturer Determine the costs of all activities and resources associated with the PCBs production Evaluate and test the appropriateness of Activity Based Costing for a PCB manufacturer Reveal the “true cost” for the PCBs production at the company’s core activities ABCM Consulting
  16. 16. Contents: Perspectives in Resource Management2.30-2.45 Building an analytical framework -- from2.45-3.00 historical data to fact-based management Highlights of ABC theories: The CAM-I3.00-4.00 Cross, Resource, Activity, Cost Object and Drivers Case Study – OFTA and Manufacturing4.15-4.30 Cases Some Practical Implementation Issues4.30-4.45 Group Discussion and Group4.45-6.00 Presentation ABCM Consulting
  17. 17. BSC is closely related to ABC... ABCM Consulting
  18. 18. Short History of the Balanced Scorecard ABCM Consulting
  19. 19. Short History of Balanced Scorecard 2004: Intangible Assets are the key value drivers in organisations – they account for 75% of value! Strategy Maps – describing how an organisation intend to create and sustain value for shareholders Link processes to measurements (BSC) – put emphasis on the Value Creation Processes Aligning intangible assets (Human Capital, Information Capital and Organisation Capital) to strategy – alignment of Knowledge Management concepts and BSC Consulting ABCM
  20. 20. Strategy is also a NewDestination (Getting from A to B) Successfully Executed Strategy Landmark 2 Landmark 1 Formation of a Strategy
  21. 21. … the cockpit analogy ABCM Consulting
  22. 22. Mission Where do we want to be ? Strategy How do we get there ? LearningFinancial Customer Process & Development ABCM Consulting
  23. 23. … the Value Creation Tree ABCM Consulting
  24. 24. Blue Sky Airlines Strategy Map Draft Map Achieve Profitability Financial Increase Maintain Revenues Low Costs IncreaseCustome Meet Flight Increase Customer Schedules Market Share r LoyaltyProcesses Internal Understand Maintain Improve Customer Fast Ground Operating Segments Turnaround Efficiency Maintain EmployeeLearning & ProductivityEmployee Growth Hire, train, and retain Provide Preserve our the right constant culture people communication ABCM Consulting
  25. 25. Strategic Feedback & Learning Strategy M easurement of progress toward objective indicates success in strategic execution. Critical Success Factors Employee actions contribute toward achieving desired results. Employee Action ABCM Consulting
  26. 26. St r at egy/ Goals Balanced Scorecard’s relationship to ABC: Grow t h & Custom er People Process Et hics & Financial I nnovat ion Sat i sf act ion Com mit m ent Quali ty Compl iance Crit ical Success Fact or s ( CSFs) Or ganizat ion Perfor m ance Measur es Functional View Divisional or Pr ocess Level Per for m ance Measur es ResourcesProcess View St r ategy/ Goals Balanced Scorecard and Gr ow t h & Cust om er Pe opl e Pr oce ss Et h i cs & F in ancia l Cost I n n ovat io n Sa t isf act ion Co mm it men t Qu ali t y Com p li an ce Cri t ical Success Factors ( CSFs) ABC/M share: Drivers Activities Or gani zat ion Per for m ance M easur es - Activities, Divi sion al or Pro cess Level Per for man ce M easur es - Resources, - Cost Cost Objects http://www.cam-i.org ABCM Consulting
  27. 27. Contents: Perspectives in Resource Management2.30-2.45 Building an analytical framework -- from2.45-3.00 historical data to fact-based management Highlights of ABC theories: The CAM-I3.00-4.00 Cross, Resource, Activity, Cost Object and Drivers Case Study – OFTA and Manufacturing4.15-4.30 Cases Some Practical Implementation Issues4.30-4.45 Group Discussion and Group4.45-6.00 Presentation ABCM Consulting
  28. 28. “Most companies in Hong Kong use financial statements to run their business – a situation thatis neither adequate nor satisfactory …” ABCM Consulting
  29. 29. “How do we use fact-based and quantity-based managementinformation systems to measure ourselves objectively ?” ABCM Consulting
  30. 30. Limitation of TraditionalFinancial Accounting Approach• Broad-brush allocations e.g. based on product volume, revenue size, no. of staff ……..• Historical … not forward-looking• Non-value-added activities and cost due to inefficiency can NEVER be detected! ABCM Consulting
  31. 31. What is ABC?• Resources are consumed by Activities• Activities are consumed by Products/Services ProductsResources Activities & Services ABCM Consulting
  32. 32. Cost Assignment View Resources Resource Cost Resource Resource Assignment Drivers DriversProcess View Cost Drivers Activities Performance Measures Activity Cost Activity Activity Assignment Drivers Drivers Cost Objects ABCM Consulting
  33. 33. The Need for ABC A key to understanding ABC is to understand how cost behavior truly varies in relation to other factors Changes in Cost Structure 100% Overhead The demand for overhead activities Cost Direct are not much linked MaterialComponents to sales or production volume. They result from: • The diversity and complexity of Direct (recurring) Labor products, services and customers • Quality levels • Rates of needed 1950s 1990s change 0% Old-fashioned Hierarchical Integrated Stages in Business Evolution ABCM Consulting
  34. 34. Management do you recognize the peanut Business planning, finance and control Training and management development Housing MIS Staff, logistics and quality assurance Produc Ser- ary Manu- Marketi t Procur Assem Strategic Cost Management Deliver facturi ng and Product costing Prim develo ement bly y vice ng Sales Price setting p-ment butter (i.e. spreading) Portfolio management Customer profitability “Simple" clients that.. effect ?? “Pain in the .." clients that..• Plan their ordering • Demand quick, ad hoc delivery• Order big volumes at one time • Order small quantities• Order on time • Order too late• Order standard product • Order only special productsNot getting rewarded because Not paying for the extra coststraditional calculation.. they cause.. Lots of wrong decisions are caused by poor calculation practices.. ABCM Consulting
  35. 35. Resource“An economic element that isapplied to or used in theperformance of activities.” Defines what is needed Defines what is needed Adapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.) ABCM Consulting
  36. 36. Resource ExamplesSalariesTechnologyTravelSuppliesFacilities ABCM Consulting
  37. 37. Activity“Work performed within an organization.” What we do What we do Adapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.) ABCM Consulting
  38. 38. Activity ExamplesUnloading trucksProcessing purchase ordersTraining employeesMaintaining vehiclesForecasting sales ABCM Consulting
  39. 39. Cost Object“Any customer, product, service, contract,project, or other work unit for which a separatecost measurement is desired.” What we work on What we work on Adapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.) ABCM Consulting
  40. 40. Cost Object ExamplesCustomersProductsServicesContractsProjects ABCM Consulting
  41. 41. Management Business planning, finance and control Training and management development Housing MIS Staff, logistics and quality assurance Produc Ser- ary Manu- Marketi t Procur Assem Strategic Cost Management Deliver facturi ng and Product costing Prim develo ement bly y vice ng Sales Price setting p-ment ..and do you recognize the Portfolio management Customer profitability ABC hidden profit ??cumulative profit Hidden Traditiona profit l Actual profit 0 Products ranked: most profitable first.. Product A Product B Hidden profit...drive to improve ABCM Consulting
  42. 42. Management Business planning, finance and control Training and management development Housing MIS Staff, logistics and quality assurance Produc Ser- ary Manu- Marketi t Procur Assem Strategic Cost Management Deliver facturi ng and Product costing Prim develo ement bly y vice ng Sales Price setting Realize hidden profit p-ment Portfolio management Customer profitability Loss making products Profitable products (or customers) (or customers)POTENTIAL: POTENTIAL and REDUCE RISK:•Increase price (competition can’t do it •Sell more of this product or to this kindcheaper either!) of customer•Stop (let your competitor serve these •Know how much you can decreaseloss-making customers) price in case the market dictates so•Reduce cost •Get more volume by discounting (at a level where you are still profitable) •Lower specs •Pamper thes customers, don’t let •Process improvement competition take these! ABCM Consulting
  43. 43. Management Business planning, finance and control Training and management development Housing MIS Staff, logistics and quality assurance Produc Process Optimization Ser- Manu- Marketi t Procur Process Costingand Deliver Assem facturi ng develo ement Activity-Based-Costing bly y vice ng Sales p-ment Evalution of Process Improvements ABM creates new insight Investment decisions Make or BuyReporting on Cost Activity-based-reportCategories Shipping Dept Budget Shipping Dept Budget ($ 1000) ($ 1000) Plan trucks 29 Salaries 600 Transport 838 Material 372 Load trucks 130 Energy etc. 32 Waiting time trucks 185 Depreciation 275 Check delivery 32 Office supplies 28 Manage staff & resources 27 Other 8 Train staff 36 1315 Maintain buildings 38 1315 ABCM Consulting
  44. 44. Management Control the Support Staff Business planning, financeActivity Analysis Overhead and control Training and management development Housing Transfer Pricing MIS Transparency in Overhead and Staff Departments Staff, logistics and quality assurance Service Level Agreements Produc Ser- Manu- Marketi t Procur Assem Deliver facturi ng and develo ement bly y vice ng Sales Control the Support Staff p-ment• Overhead Activity Analysis• Transfer Pricing• Transparency in Overhead and Staff Departments• Service Level Agreements 30-50% of costs is overhead Many people E.g. the IT in headoffice, department management and staff Cost Management makes overhead manageable ABCM Consulting
  45. 45. ABC Doesn’t Replace the Accounting SystemAn ABC/ABM system does not replace the accounting system. It restates thesame data and adds operating relationships to more effectively supportdecision making. Data Data+ Information A Ms. Strategy General B A blizzard of Ledger C transactions (expense / Mr. Operations account A balances) B M An Optical Decision makers Lens Accumulator (Reassigns Costs) ABCM Consulting
  46. 46. Three Views of Cost Operational View TodayFinancial StrategicView Yesterday Tomorrow View ? ABCM Consulting
  47. 47. HOW ABC IS USED Product Costing Cost Reduction Profitability Analysis Process Improvement Cost Estimation Performance Measurement Pricing ModelsBusiness Process Re-engineering Benchmarking Target Costing Inventory Valuation Capacity Utilization Budgeting Other Capital Justification Downsizing Project Management Compensation/Gain-sharing Number of 0 20 40 60 80 100 120 Sites 16 ABCM Consulting
  48. 48. Contents: Perspectives in Resource Management2.30-2.45 Building an analytical framework -- from2.45-3.00 historical data to fact-based management Highlights of ABC theories: The CAM-I3.00-4.00 Cross, Resource, Activity, Cost Object and Drivers Case Study – OFTA and Manufacturing4.15-4.30 Cases Some Practical Implementation Issues4.30-4.45 Group Discussion and Group4.45-6.00 Presentation ABCM Consulting
  49. 49. Switching fromInput Accounting to Output/Outcome Management at OFTA ABCM Consulting
  50. 50. About OFTA• Executive arm of the Telecommunications Authority (Established by statue in 1993)• Technical and economic regulator• Dual role of ensuring – fair competition, – that Hong Kong gets the best telecom services• Trading Fund Organization – ensuring “Cost Recovery”• Place high priority on training and development ABCM Consulting
  51. 51. A Systematic Way to Understand Costs• Full Cost Recovery from fees charged• Relative cost and benefits of services delivered• High cost is weigh against social benefits• ABC versus traditional costing: – “Cost Triggers” vs. “Revenue Based” and “Headcount Based” accounting• Pricing of “Products” based on true costs ABCM Consulting
  52. 52. OFTA ABC Conceptual Cost FlowGeneral Ledger Resources Activities Cost Objects G/L Cost Pool Resource Cost Activity Cost Drivers Drivers Drivers Licences Classification of G/L Items into Cost Resource Cost Pools - Activities - by Section Baseline by Staff Grade G/L Items Cost Baseline Computer Services Computer Services Business SustainingAudit Fee Cost For example:Telephone - mobile Direct Operation SupportPrinting Administration Trouble-shooting and MaintenanceDepreciation For example: System and Network AdministrationElectricity Communication SITM Security ManagementStaff Salaries ITM DevelopmentAdvertising Computer & Elect. ITO Licensing System Redevelopment Equip IT Preventive Maintenance . Web Updating Activity Driver . Utilities Standards Supervision (Evenly Assigned) Surveys . Support Cost (Ave. % of time spent) . Office expenses Percentage PRS-2G . Resource Standards No of requests PRS-3G External Affairs 1 . Driver: No. of Systems Mobile Radio System . Office Facilities Allocation Time # of headcount External Affairs 1 Fixed Network Keys External Affairs 2 # of licences Maintenance Survey # of reports Ship Station (office & Equip) External Affairs 2 # of cases Fixed Carrier (Restricted) # of participants Broadcast Relay Station Administrative Services # of applications Radio Paging System Depreciation Administrative Services (Note) . . . . Corporate Affairs Corporate Affairs . . Publicity & . . Promotion . Finance Finance . . People Cost RMU + Investigation & RMU + Investigation & Prosecution Prosecution Senior Management Cost Inspection & Licensing Inspection & Licensing Transportation Regulatory & Training . Regulatory & Training . Business Sustaining . . Other Sections Support . Cost .Note: In the model, depreciation categorised as: Activity- Land & Building Support Cost- Computer, Furniture & Fixtures Intra-- Telecom Equipment- Vehicle AssignmentABC provides more relevant information as it turns more indirect costs into direct costs ABCM Consulting
  53. 53. ABC Conceptual Flow at OFTA• For 2002/03, OFTA has – No of Resource items: 165 – No of Activities: 599 – No of Cost objects (products): 50• Results – Project commenced in May 2003 and first management report issued in Sept 2003 – More understanding on the costs of telecommunications licences – Enterprise-wide model developed with less indirect costs and more direct costs identified ABCM Consulting
  54. 54. “The ABCM exercise in OFTA gives us an opportunity to evaluate services costs and re- deploy resources in a more effective manner. But senior management should be prepared to communicate openly and explain the reasons behind an ABC exercise to avoid having the potential misconception problems” WONG Kwok-shu, Assistant Director Office of the Telecommunications Authority ABCM Consulting
  55. 55. Four Stages of Implementation• Stage One: Consultants to provide conceptual training and conduct a pilot study• Stage Two: Map out plan to roll-out using own staff• Stage Three: Further conceptualization and explanation to staff at each level• Stage Four: Organization-wide implementation (to be completed in 2004/2005 Financial Year) ABCM Consulting
  56. 56. Experience Learnt• Avoid setting too aggressive targets – Agree the cost objects with top and middle management – Restrict the number of activities and cost objects – Allow enough time for checking and review• Importance of management support and teamwork – Seek support from top management – Require team efforts (project team members and other staff)• Importance of face to face communication – Conduct in-house interviews to complete the Activity Dictionary (24 interviews arranged with duration of 2 hours each) – Convene meetings to explain the logic and reasons for ABC implementation (4 meetings held) ABCM Consulting
  57. 57. Future direction of ABC at OFTA:Automation & Refinement • Automate data integration between ABC database and data gathering process – e.g. develop time log system to capture time spent • Refining the ABC Model framework – capture of regular cost and driver data ABCM Consulting
  58. 58. Future direction of ABC at OFTA: Predictive Planning • Launch Activity Based Management Initiatives – continuous improvement on ABC information to facilitate predictive resources management and pricing decisions ABC ABBPast Now Future ABCM Consulting
  59. 59. Future direction of ABC at OFTA:Output/Outcome Management OUTCOMES OUTPUTSIN PUTS Activities ABCM Consulting
  60. 60. Conclusion – About OFTA• Executive arm of the Telecommunications Authority (Established by statue in 1993)• Technical and economic regulator• Dual role of ensuring – fair competition, – that Hong Kong gets the best telecom services• Trading Fund Organization – ensuring “Cost Recovery” OUTPUTS• Place high priority on training and development ABCM Consulting Future direction of ABC at OFTA: Output/Outcome Management OUTCOMES OUTPUTS IN PUTS Activities www.qprcostcontrol.com ABCM Consulting
  61. 61. Contents: Perspectives in Resource Management2.30-2.45 Building an analytical framework -- from2.45-3.00 historical data to fact-based management Highlights of ABC theories: The CAM-I3.00-4.00 Cross, Resource, Activity, Cost Object and Drivers Case Study – OFTA and Manufacturing4.15-4.30 Cases Some Practical Implementation Issues4.30-4.45 Group Discussion and Group4.45-6.00 Presentation ABCM Consulting
  62. 62. Implementing Fact-based Resource Management • Mis-conception About ABC Implementation – too complicated • Rapid Prototyping ABCM Consulting
  63. 63. Mis-conception about ABC Implementation• It involves a massive enterprise-wide involvement of people and mudslide of data• No result until the ABC system is completely constructed• It will take forever to implement and perhaps may not worth the effort ABCM Consulting
  64. 64. ABC Application Adopting Iterative Prototyping• Education and awareness• High-level modeling (Model “0”)• Analyzing Model “0” to get buy-in• Securing and propagating the Learning: A Communication Plan• Lower-level modeling (Models “1”, “2” etc) ABCM Consulting
  65. 65. Level “0” Modeling• Usually starts with the ledger expenditure data• Obtain crude data through interviews to identify work activities, work products, and the time involved• Aim at “aggregated” (i.e. grouped) cost drivers• It will only take a few days to complete• ABC Team will spend more time on learning the approximation error in the ABC “cost assignment” ABCM Consulting
  66. 66. Rapid Prototyping, BEFORE Piloting• Not to work on detailed costing, just to stimulate participants• Will not necessarily provide final answer• It starts with crude approximations• Accuracy to be refined in the lower- level models ABCM Consulting
  67. 67. The Typical ABC Team• A Project Leader• Professionals• Application services• In-house modeler (not necessary be accountant or cost engineer)• External consultant (NOT a must) ABCM Consulting
  68. 68. Contents: Perspectives in Resource Management2.30-2.45 Building an analytical framework -- from2.45-3.00 historical data to fact-based management Highlights of ABC theories: The CAM-I3.00-4.00 Cross, Resource, Activity, Cost Object and Drivers Case Study – OFTA and Manufacturing4.15-4.30 Cases Some Practical Implementation Issues4.30-4.45 Group Discussion and Group4.45-6.00 Presentation ABCM Consulting
  69. 69. Thank you! Q&A For more information, contact:Alan Lung, Consultant & General Manager ABCM Consulting(China)LtdTel: +852 2503-1383 Fax: +852 2503-3645 E-mail: alanlung@abcmconsulting.com ABCM Consulting

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