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Performance management activitiesActivity-based costing (ABC), activity-based management (ABM) and the balancedscorecard (...
reporting--are automated to reduce the cost and enhance the timeliness of data capture.Data feeds from legacy systems or e...
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Performance management activities


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Performance management activities

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Performance management activities

  1. 1. Performance management activitiesActivity-based costing (ABC), activity-based management (ABM) and the balancedscorecard (BSC) are established management methods. They are building blocks ofperformance management systems. ABC and ABM provide cost and other businessintelligence about key business elements including resources, activities, products,services and customers. They enable managers to make decisions that improve cost andprofit performance. The BSC translates strategic goals into a set of performance measuresbalanced according to the important dimensions of performance. It helps communicateand execute the strategic plan by defining success in quantitative terms at each level ofthe organization.ABC and the BSC are often viewed as independent methods each with its own purpose.However, they are complementary and offer greater value when linked together. Thebenefits of linkage include additional performance measures-measures for which ABC isthe only reliable source-and more comprehensive decision support.The BSC benefits from the inclusion of ABC performance measures. These include thecost of activities and activity outputs which are used in the internal business processdimension of the BSC of public and private organizations. This activity informationcovers support services as well as primary business processes. For private organizations,ABC profit measures by customer, market segment, market area and distribution channelare used in the customer dimension of the BSC.ABC can provide as much as 20-30% of the performance measures in the BSC. Forexample, the South Dakota Department of Transportations activity-based costing modelprovided 22% of the measures in the BSC.The users of the BSC benefit from the analytic capabilities available in ABC. Forexample, a manager of a transportation department may find that the actual cost ofmaintaining a mile of highway exceeds the target in the scorecard. ABC allows themanager to access detailed information about the activities and resources associated withmaintaining highways. A detailed "drill down" and analysis of this information in ABCmay reveal the root cause of the problem and allow corrective action to be taken.Decision support is particularly effective if ABC data can be accessed from within theBSC.Successfully linking ABC and the BSC requires a different type of ABC model. The BSCrelies on up-to-date ABC data on a monthly or quarterly basis, so the ABC model mustbe up-dated monthly or quarterly and data fed to the scorecards in the BSC.This ABC enterprise reporting system is quite different from the one-off desk-top modelstypical of early applications. Data sources unique to ABC-such as employee time
  2. 2. reporting--are automated to reduce the cost and enhance the timeliness of data capture.Data feeds from legacy systems or enterprise resource planning systems are automatedusing extract, transform and load (ETL) tools.ABCs role as an analytic decision support tool changes the design of the ABC model andreporting system. The ABC model must be forward-looking to support planning efforts aswell as a source of accurate historical performance data. A good reporting system-such asa modern web-based tool-allows managers to access, analyze and display ABCinformation on their desktop. This reporting capability should allow a manager to followthe trail of investigation from the targeted performance measure in the scorecard to theunderlying details in the ABC model.In summary, linking ABC and the BSC enhances the value of two proven managementmethods. The BSC scorecard benefits from access to performance measures for thebusiness process and customer dimensions. The BSC also benefits from the analyticcapability of ABC to support performance analyses. ABC transitions from costing tool toanalytic method supplying up-to-date business intelligence to support performanceimprovement initiatives.Why link ABC and the balanced scorecard? ABC and the BSC are provenmanagement methods. They work well on their own, but they work better together. Thisis why: The balanced scorecard benefits from ABC performance measures for thebusiness process and customer dimensions; Managers use ABC as a diagnostic tool touncover the root causes of scorecard performance problems; and ABC becomes anenterprise analytic system for performance management : Over 200 ebooks, templates, forms forperformance appraisal.