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![NOTES
[1] Sacrifices of the same kind were continued. Livy, xxii. 57: “Interim ex
fatalibus libris sacrificia aliquot extraordinaria facta: inter quæ Gallus et
Galla, Græcus et Græca, in Foro Boario sub terra vivi demissi sunt in
locum saxo conseptum, jam ante hostiis humanis, minime Romano sacro,
imbutum.”
[2] Jovienus Pontanus, in the fifth Book of his History of his own Times.
He died 1503.
[3] These cauldrons walled into the sides of the churches are probably the
old sacrificial cauldrons of the Teutons and Norse. When heathenism was
abandoned, the instrument of the old Pagan rites was planted in the
church wall in token of the abolition of heathenism.
[4] There is a rare copper-plate, representing the story, published in
Cologne in 1604, from a painting that used to be in the church, but which
was destroyed in 1783. After her resurrection, Richmod, who was a real
person, is said to have borne her husband three sons.
[5] Magdeburg, Danzig, Glückstadt, Dünkirchen, Hamburg, Nürnberg,
Dresden, etc. (see Petersen: “Die Pferdekópfe auf den Bauerhäusern,”
Kiel, 1860).
[6] Herodotus, iv. 103: “Enemies whom the Scythians have subdued they
treat as follows: each having cut off a head, carries it home with him,
then hoisting it on a long pole, he raises it above the roof of his house—
and they say that these act as guardians to the household.”
[7] The floreated points of metal or stone at the apex of a gable are a
reminiscence of the bunch of grain offered to Odin’s horse.
[8] Aigla, c. 60. An Icelandic law forbade a vessel coming within sight of
the island without first removing its figure-head, lest it should frighten
away the guardian spirits of the land. Thattr Thorsteins Uxafots, i.
[9] Finnboga saga, c. 34.](https://image.slidesharecdn.com/25671837-250524014510-094a3f22/85/Activity-Based-Management-Improving-Processes-And-Profitability-Brian-Plowman-56-320.jpg)
![[10] Hood is Wood or Woden. The Wood-dove in Devon is Hood-dove, and
Wood Hill in Yorkshire is Hood Hill.
[11] See numerous examples in “The Western Antiquary,” November,
1881.
[12] On a discovery of horse-heads in Elsdon Church, by E. C. Robertson,
Alnwick, 1882.
[13] “Sir Tristram,” by Thomas of Erceldoune, ed. Sir Walter Scott, 1806,
p. 153.
[14] See an interesting paper and map, by Dr. Prowse, in the Transactions
of the Devon Association, 1891.
[15] Two types, the earliest, convex on both faces. The later, flat on one
side, convex on the other. The earlier type (Chelles) is the same as our
Drift implements. Till the two types have been found, the one superposed
on the other, we cannot be assured of their sequence.
[16] In the artistic faculty. The sketches on bone of the reindeer race were
not approached in beauty by any other early race.
[17] “The Past and the Present,” by A. Mitchell, M.D., 1880.
[18] The author found and planned some hut circles very similar to those
found in Cornwall and Down, on a height above Laruns. There was a
dolmen at Buzy at the opening of the valley.
[19] Hor. Sat. ii. 8.
[20] Fornaldar Sögur. iii. p. 387.
[21] Heimskringla, i., c. 12.
[22] I have given an account of the Carro already in my book, “In
Troubadour Land.”
[23] Roman and Greek ladies employed parasols to shade their faces from
the sun, and to keep off showers. See s. v. Umbraculum in Smith’s
Dictionary of Greek and Roman Antiquities.
[24] A good deal of information relative to umbrellas may be got out of
Sangster (W.). “Umbrellas and their History.” London: Cassell & Co., Ltd.
[25] The first Englishman who carried an umbrella was Jonas Hanway,
who died in 1786, but it was known in England earlier. Beaumont and
Fletcher allude to it in “Rule a Wife and Have a Wife”:
“Now are you glad, now is your mind at ease;
Now you have got a shadow, an umbrella,
To keep the scorching world’s opinion](https://image.slidesharecdn.com/25671837-250524014510-094a3f22/85/Activity-Based-Management-Improving-Processes-And-Profitability-Brian-Plowman-57-320.jpg)
![From your fair credit.”
And Ben Jonson, in “The Devil is an Ass”:
“And there she lay, flat spread as an umbrella.”
Kersey in his Dictionary, 1708, describes an umbrella as a “screen
commonly used by women to keep off rain.”
[26] Castrén, Nordische Reisen, St. Petersburg, 1853, p. 290.
[27] “The Beggynhof,” London, 1869, p. 68.
[28] Ed. Viger, IV., p. 161.
[29] So Grimm and others following him; but I am more inclined to see in
Herodias, Herr-raud the Red Lord, i.e., Thor.
[30] “A Dyalogue describing the orygynall ground of these Lutheran
facyons,” 1531. A later work on the excesses of sectaries is Featley’s (D.)
Dippers Dipt, 1660.
[31] Quoted in Westminster Review, Jan., 1860, p. 194.
[32] “Autobiography of Peter Cartwright.” London, 1862 (7th ed.)
[33] “The Epidemics of the Middle Ages.” London, 1859.
[34] The word is, of course, derived from Instrumentum.
[35] See “Fretella,” in Ducange, “Fistulæ species.”
[36] M. Gilbert prints, “As the dew flies,” etc.; this is a mistake—“doo” is
dove.
[37] Possibly we may have this in the still popular Cornish lament, “Have
you seen my Billy coming?”
[38] On December 14, 1624, as many as 128 ballads were licensed, the
names of which are given. “The Blind Beggar (of Bethnal Green);”
“Maudline of Bristowe (The Merchant’s Daughter of Bristol);” “Sweet
Nansie I doe love thee;” “The Lady’s Fall;” “My minde to me a kingdom is”
(Sir Edward Dyer’s famous song); “Margaret, my sweetest;” “In London
dwelt a merchantman;” “I am sorry, I am sorry;” “In May when flowers
springe;” “I am a poore woman and blinde;” “The Devil and the Paritor
(Apparitor);” “It was a Lady’s daughter;” “Roger’s Will;” “Bateman (Lord);”
“Bride’s Good Morrow;” “The King and the Shepherd;” “As I went forth
one summer’s day;” “Amintas on a summer’s day;” “Ah me, not to thee
alone;” “Sir John Barley Corne;” “It was a youthful knight;” “Jane Shore;”
“Before my face;” “George Barnwell;” “From Sluggish Sleepe;” “Down by a
forrest;” “The Miller and the King;” “Chevie Chase;” “How shall we good](https://image.slidesharecdn.com/25671837-250524014510-094a3f22/85/Activity-Based-Management-Improving-Processes-And-Profitability-Brian-Plowman-58-320.jpg)
![husbands live;” “Jerusalem, my happie home;” “The King and the Tanner;”
“Single life the only way;” “The Lord of Lorne;” “In the daies of old;” “I
spide a Nymph trip over the plaine;” “Shakeing hay;” “Troy Toun;”
“Walking of late abroad;” “Kisse and bide me welcome home;” “The
chirping larke;” “John Carelesse;” “Tell me, Susan, certenly;” “Spanish
Lady;” “When Arthur first in Court;” “Diana and her darlings;” “Dear love,
regard my life;” “Bride’s buryal;” “Shakeing of the sheets;” “A rich
merchantman;” “Gilian of Bramfield;” “Fortune my Foe;” “Cripple of
Cornwall;” “Whipping the catt at Abingdon;” “On yonder hill there
springs;” “Upon a summertime;” “The Miser of Norfolk.”
[39] Friedrich (J.B.) Geschichte des Räthsels, Dresden, 1860.
[40] “Le Dieu Gaulois du Soleil,” Paris, 1886.
[41] “Scriptores rer. German. Frankof.,” 1718, p. 508.
[42] “Eckhard, Monument. Jutreboc,” p. 59.
[43] “Anton, Versaml. uber Sitten d. alten Slawen,” II. p. 97.
[44] The date on this stone is only 1807, so that the practice must be very
modern.
[45] Other dolmens with holes at Trye-le-Château, Presles, les Mauduits,
in Seine et Oise; at Vic-sur-Aisne; at Bellehaye, and at Villicor—Saint
Sépulcre (Oise); and others are in the Morbihan, Charente, etc.
[46] What we in England term cromlechs, the French more correctly call
dolmens.
[47] The building up of part of the circle round a cairn was probably to
block the way of the spirit in the direction of the village occupied by the
living.
[48] Bull. de la Soc. d’anthropologie de Paris, t. ix., p. 198.
[49] Reinsberg Düringsfeld. “Trad. et Legendes de la Belgique,” 1870, T.
II., p. 239.
[50] Journal of the British Archæological Association, vol. xxxviii., 1882.
[51] They are found, for instance, on tombstones near Inverness.
[52] The majority of these vessels, which abound in the West of England,
were unquestionably measures of corn. But all were not so; those that
have rounded hollows like cups, and not square cut, were for holy water.
[53] “Heimskringla,” Saga III., c. 8.](https://image.slidesharecdn.com/25671837-250524014510-094a3f22/85/Activity-Based-Management-Improving-Processes-And-Profitability-Brian-Plowman-59-320.jpg)
Activity Based Management Improving Processes And Profitability Brian Plowman
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- 5. ACTIVITY BASED MANAGEMENT: IMPROVINGPROCESSES AND PROFITABILITY Prelims 9/24/01 2:58 PM Page i
- 6. Prelims 9/24/01 2:58PM Page ii
- 7. ACTIVITY BASED MANAGEMENT: IMPROVING PROCESSES AND PROFITABILITY BrianPlowman Gower Prelims 9/24/01 2:58 PM Page iii
- 8. © Brian Plowman2001 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the permission of the publisher. SVA (Shareholder Value Added), EVA (Economic Value Added) and Windows NT are all registered trademarks. Published by Gower Publishing Limited Gower House Croft Road Aldershot Hampshire GU11 3HR England Gower Publishing Company 131 Main Street Burlington VT 05401-5600 USA Brian Plowman has asserted his right under the Copyright, Designs and Patent Act 1998 to be identified as the author of this work. British Library Cataloguing in Publication Data Plowman, Brian Activity based management : improving processes and profitability 1. Activity-based costing 2. Managerial accounting I. Title 658.1'511 ISBN 0 566 08145 8 Library of Congress Cataloging-in-Publication Data Plowman, Brian. Activity based management : improving processes and profitability/Brian Plowman. p. cm. Includes index. ISBN 0-566-08145-8 (hardback) 1. Activity-based costing. 2. Management. I. Title HF5686.C8 P5934 2001 658.15'54–dc21 2001033410 Typeset in Century Old Style by IML Typographers, Birkenhead and printed in Great Britain by TJ International Ltd, Padstow, Cornwall. Prelims 9/24/01 2:58 PM Page iv
- 9. Contents List of figuresand tables xi Foreword xv 1 Introduction 1 Customers 1 The twenty-first century is electronic 2 The missing dimension 2 Can all customers be kings? 3 Activity Based Management 4 Key points 5 Part I The Context 2 Historical perspective 9 The first serious questions 9 New costing approaches gather pace 10 Key points 11 3 What is ABM? 13 Costing and profitability 13 Process improvement 16 Key points 17 4 Frameworks for measurement and improvement 19 The Balanced Scorecard 19 The Business Excellence Model 21 Shareholder Value Added 22 Positioning and capability 22 Key points 25 v Contents 9/24/01 2:59 PM Page v
- 10. 5 The ABMframework 27 Traditional resource accounting 27 ABM versus traditional treatments of costs 31 Key points 50 Part II ABM in Practice 6 The ABM flow of costs 55 Resources 56 Functions 56 Activities and drivers 57 Products, channels and customers 59 Infrastructure and sustaining costs 62 Product and customer profitability 64 Attribute analysis 65 Processes and process improvement 65 Embedding the model 67 Key points 68 7 The basic principles of building models 71 The flow of costs in the model 71 The general ledger 75 Categories of costs and activities 75 Assigning costs from the general ledger 76 Understanding cost drivers 79 Cost driver variability 82 Activity data 84 Assigning costs from the ledger to activities 85 Reassigning internal service department costs to other departments 86 Reassigning IT department costs to other departments 87 Product and customer profitability 88 Using unit costs for analysis 90 Key points 92 8 Undertaking an ABM project 95 Objectives of the project 95 Key steps 96 Areas of potential difficulty 98 Software 99 Team resources 100 CONTENTS vi Contents 9/24/01 2:59 PM Page vi
- 11. Use of consultants100 Embedding and refreshing 101 Using ABM outputs for performance improvement 102 Using ABM for commercial decision support 103 Key points 105 9 Integrating improvement approaches 107 ABM and Business Process Re-engineering 107 ABM and Value Based Management 111 ABM and Customer Relationship Management 114 Key points 115 Part III Case Studies 10 How ABM made a difference: lessons from case studies 119 A manufacturing company: distortions caused by costing using Overhead Recovery Rates 120 A manufacturing company: understanding overheads makes a real difference to product costs 122 A printing company: tunnelling deeper uncovers the real drivers of cost 125 A finance company: breaking out one-off costs from recurring costs 127 A trading company: the costs of different customer relationships vary 129 A fast-moving consumer goods company: activity data can highlight process failures 131 A retail chain company: a flawed internal charging mechanism can have severe consequences 134 A merchant bank: proper costing and charging for central support or shared services removes the angst in the relationship with business divisions 136 A Head Office function: activity and value-for- money analysis create enhanced effectiveness 138 An IT services division: achieving a proper basis for costing and charging IT services 141 A utility company: selling off the IT services function meant understanding the dynamics of the new business 145 CONTENTS vii Contents 9/24/01 2:59 PM Page vii
- 12. A courier company:the devil is in the detail, which is only known by the people doing the work 150 A manufacturing and technical services company: a simple pricing mechanism masks complex and costly customer relationships 153 A wholesale and distribution company: treating major costs as fixed masked the real differences in customer profitability 157 A manufacturing company: an increasing number and changing mix of distributors eroded profitability 159 A bakery company: when margins are small, detailed analysis is required to unravel the complexities of many different products going to many different customers 163 A university: the real costs of ‘products’ and ‘customers’ remained invisible in the conventional management information system 167 An airline company: seeing costs from different business perspectives helps optimize corporate performance 170 A power generation equipment manufacturing company: a focus on profitability rather than volume highlighted process failures and better market opportunities 172 A merchanting company: customer profitability analysis exposed poor performance measures that were eroding profits 177 A global manufacturer and supplier of orthopaedic implants and surgical instrumentation: when the profitable segments are found, enhancing service levels helps to retain customers 182 A specialist distribution company: uncovering the complexity of having many suppliers of many products going to many customers 186 An advertising directory company: better information to support product costing, customer profitability, benchmarking and process improvement 191 CONTENTS viii Contents 9/24/01 2:59 PM Page viii
- 13. A high streetretailing company: subtle changes can make dramatic improvements 196 An electricity supply company: uncovering the true impact on profitability of the behaviour of millions of customers 200 Part IV Conclusions 11 Pulling it all together 207 ABM comes of age 207 ABM brings a different perspective 208 Making ABM happen 209 ABM does make a difference 210 Appendix: Glossary of terms 211 Index 227 CONTENTS ix Contents 9/24/01 2:59 PM Page ix
- 14. Contents 9/24/01 2:59PM Page x
- 15. List of figuresand tables FIGURES 3.1 ABM Product and Customer Contributions 15 4.1 The four perspectives of the Balanced Scorecard 20 4.2 The nine elements of the Business Excellence Model 21 4.3 The journey of change 23 5.1 Conventional product costing 33 5.2 Comparing product costing methods 34 5.3 The cumulative product contribution curve 35 5.4 The cumulative customer contribution curve 37 5.5 Customer contribution and volume 38 5.6 Product contribution and volume 39 5.7 The purchasing process 43 5.8 Use of time in a sales process 46 6.1 Overall flow of costs 55 6.2 Resources on the ledger 56 6.3 Functions and activity categories 57 6.4 Assigning resources to activities 58 6.5 Reassigning an internal service (for example, training) 59 6.6 Assigning activities to cost objects (for example, products) 60 6.7 Assigning activities to cost objects (for example, customers) 61 6.8 Assigning activities to cost objects (for example, sustaining and infrastructure) 63 6.9 Activity attributes 66 6.10 The complete ABM model 67 7.1 The cascade of assignments in an ABM model 72 7.2 Cost pools 77 7.3 Categorizing costs 79 7.4 Levels of detail to collect activity data 84 xi List of figs 9/24/01 3:00 PM Page xi
- 16. 7.5 Activity andtime data 85 7.6 The multi-stage process to assign IT costs 88 7.7 Cumulative costs: best and worst case 91 7.8 An event chart 91 9.1 The two steps of the BPR journey 108 10.1 The impact of set-up times 122 10.2 Assigning costs using cost driver volumes 123 10.3 Old and new basis to assign costs 135 10.4 Use of time by activity attribute 139 10.5 Cost of servicing the user applications 142 10.6 Cost of solving problems 143 10.7 Drivers of IT costs 146 10.8 A rate card for IT services 147 10.9 Cumulative profitability by region 154 10.10 Country and customer profitability 154 10.11 Cumulative customer contribution 158 10.12 The revenue cascade 159 10.13 The order satisfaction process 161 10.14 The cost of a product 164 10.15 The cost of a customer 164 10.16 The cost of a typical Law student 168 10.17 An airline’s costs 170 10.18 The old plan to double the business 175 10.19 The new strategy to double profitability 175 10.20 Cumulative trading and gross profit 178 10.21 Cumulative product group profitability 182 10.22 Cumulative customer contribution 183 10.23 The new salesforce strategy 184 10.24 Breakdown of logistics costs 186 10.25 The potential for further cost savings 188 10.26 Cost to produce directories 193 10.27 Benchmarking and searching for best practice 194 10.28 Unit costs focus on process failures and customer behaviours 195 10.29 Retail store profit per square metre 197 10.30 Planning a new strategy for the retail store 199 10.31 Cumulative profitability of domestic customers 200 10.32 Activities quickly erode profitability to zero 201 LIST OF FIGURES AND TABLES xii List of figs 9/24/01 3:00 PM Page xii
- 17. TABLES 7.1 Example ofa simple ledger 77 8.1 ABM process checklist 96 LIST OF FIGURES AND TABLES xiii List of figs 9/24/01 3:00 PM Page xiii
- 18. List of figs9/24/01 3:00 PM Page xiv
- 19. Foreword The battle tosustain and increase corporate profitability grows ever more arduous in most sectors of the economy. Margins are caught in a pincer movement by, on the one hand, the steady improvement in competition and, on the other, the increasing awareness of customers. Things are ever changing. Now we see more businesses moving into the e-world. This has provided major opportunities to increase business, but comes at a price. From aware customers comes the demand for lower prices; a share of the lower costs assumed to come from doing e-business. There is no room for complacency. We need to grasp every opportunity not only to be ever more effective at what we do, but also to be truly competitive, winning more market share of the customers both nationally and globally. For success, a full understanding of costs and cost structures is necessary. Conventional account- ing and management reporting throw little light on the real cost dynamics in a business. As a result we are not in control of profitability at a level of detail that supports substantive decision-making. Activity Based Management (ABM) is an approach that has now come of age. ABM is not a technique; it is about management. ABM needs to be understood and implemented by all functions so its power can be unleashed and the benefits obtained. Over time, ABM has evolved considerably and is now being applied in manu- facturing, service companies, utilities, logistics, telecommunications, government bodies and many other sectors. With ABM, businesses can make dramatic improvements in measuring product and process costs, and more importantly customer profitability. Brian Plowman has created a reader-friendly, comprehensive narrative covering the key aspects of the theory and practice of ABM. Executives and managers in all functions in all types of organizations, as well as students, will appreciate this book’s practical and down-to-earth approach with many practical illustrations drawn from experience. xv Foreword 9/24/01 3:02 PM Page xv
- 20. As well asstep-by-step guidance on basic principles, comparisons with tradi- tional methods, definitions of processes, activities, cost-drivers, data collection techniques and implementation steps, this book uses numerous detailed examples drawn from practice to build a logical picture of how to obtain the benefits of ABM. On its own, ABM help will change management decision-making. By under- standing how ABM also supports other profit improvement initiatives such as Business Process Reengineering, Shareholder Value Added and Customer Relationship Management, managers will learn how they can have the best possible toolkit to help put the business firmly on the road to leaps in profitability. This book should be required reading for anyone within an organization who has the responsibility to grow their business profitably. Professor Michael Bromwich CIMA Professor of Accounting Department of Accounting and Finance London School of Economics FOREWORD xvi Foreword 9/24/01 3:02 PM Page xvi
- 21. 1 Introduction CUSTOMERS We knowthat customers are important to us. But even when we achieve the right orientation towards customers, we know, instinctively, that some customers are more profitable than others. We also know that some are probably loss-making. For some businesses, this doesn’t matter much. If margins are good enough, for whatever reason (a captive market, or a patent, or regulatory protection, and so on), overall profitability is sufficient. But few businesses have that luxury. We may also have some idea of which customers are the least profitable, and which are the most profitable. A walk around the business listening to anecdotes in different departments will tell us which customers are demanding of time and effort and cost: these are the customers who order unpredictably, amend their orders, change specifications at the last minute, delay payment, require special deliveries, and so on. Every department will have its own, separate experiences of customer behaviour. Nobody will have the whole picture. So anecdotal evidence will pick up the extremes – the ‘worst’ and the ‘best’ customers. What about the others? Customer profitability is a black hole in most managers’ understanding of their business. Identifying customer revenue is easy: it’s shown in the sales ledger. Identifying what individual customers cost – so we can understand whether or not they are profitable – is difficult. In a world in which competition, and often regula- tion, put increasing pressure on margins, it is vital to understand both product and customer profitability. As if competition were not enough to put pressure on margins, electronic commerce (e-commerce) promises lower unit costs and creates customer expec- tations of lower prices. 1 Chapter 01 9/24/01 3:03 PM Page 1
- 22. THE TWENTY-FIRST CENTURYIS ELECTRONIC Technology advances, rapidly. Now companies can record and process all avail- able facts about their customers, logging their every purchase and preference, storing details of each transaction and interaction – be it through call-centre, e-mail or post. If customers visit a Web site, a company can know their every key- stroke and click. And it is possible to analyse the information to death. If the marketeers have got it right, they can predict customers’ every need and antici- pate their every whim. Web routings, pages and menus can be programmed to reflect the history of the customer and the actions taken on-line. Just like good salespeople, but at a fraction of the cost, they can package and price offers not to target a niche, but an individual. Welcome to the world of one-to-one marketing. Buying decisions become quicker and easier because customers are proposi- tioned only with what they find attractive, in a process they judge convenient, safe and painless. Soon customers will have forgotten how on earth they managed in the scrum of mass marketing when they had to do the donkey work. And on top of all this, sales costs plummet as the need for expensive salespeople and high street outlets, and for slow-turning showroom stock, disappears. It is enough to make a chief executive salivate. So where’s the catch? In fact there are two. The first is that all the competitors will be doing the same thing. Unless a company can take an early lead and then defend its additional market share, or unless the concoction of technology and marketing in this brave new world increases the size of the total market, the only hope is to do it better than the competitors – which is what organizations try to do every day. The second catch is that all the hyperbole about e-commerce usually has a special message to the customer. It says ‘lower prices’. After all, why do we put up with the DIY purgatory of supermarket shopping if it isn’t for cheaper groceries? Instead of being able to pass on to the customer the cost of all the expensive technical wizardry, companies will find that margins are squeezed even more! So is electronic commerce merely a development in which companies are forced to participate as a defensive measure, to the benefit only of customers and systems suppliers? Not necessarily. THE MISSING DIMENSION Customer Relationship Management (CRM) is aimed at capturing information that will allow companies to create the circumstances in which customers will buy. It maximizes the attractiveness of the offer and the convenience of the sale by matching the selling process to the customer. But in making the match, it risks driving hidden costs into the business, be it by shortening delivery lead times, by ACTIVITY BASED MANAGEMENT 2 Chapter 01 9/24/01 3:03 PM Page 2
- 23. encouraging complex productvariants, by offering high levels of personal service, or by attracting customers who trigger excessive costs. It’s as if CRM provides a more extravagant, indulgent courtship display, but pays no attention to the slog of making the marriage work in the long term. It is not enough for companies to use CRM to anticipate every interaction the customer might have with the business, before, during and after the sale. They must understand the costs driven by those interactions. When the dust has settled on the expensive new e-commerce implementation and its bewildering array of ‘bundled’ products and services, customer profitability becomes the missing dimension, hidden deep in the business. Understanding all the costs that are driven by customer behaviours, some of them maddeningly cryptic, is vital to designing the processes and setting the prices that companies offer. Otherwise, they risk making customer promises they cannot profitably fulfil. CAN ALL CUSTOMERS BE KINGS? Not all customers are created equal in the sight of the supplier. They behave differ- ently from one another and have a variety of characteristics, so they generate different costs and margins. Some are highly profitable, others are spectacularly unprofitable, and many lie in between. Often, a small, anonymous group of customers contributes the major share of profits, while an equally invisible seg- ment erodes it. A clear understanding of customer profitability allows a business to differentiate the level of service it provides to various customer segments according to their needs and their value to the company. For example, it may offer individual atten- tion to prized customers in the form of dedicated telephone lines, free delivery, incentive pricing or customized products. At the same time, it might choose to reduce service to unprofitable customers – or to increase prices – even at the risk of losing them. A comprehensive view of the costs that customers drive allows a business to refine its processes and policies and focus its resources where they will have the greatest effect on profits: cementing customer relationships; avoid- ing excessive costs; matching prices to the service given. In many sectors, the customer continues to provide revenue and to drive costs well after the initial sale, through after-sales service, repeat purchasing or general administration. All these costs, as well as the revenues, need to be identified and analysed to ensure that the initial terms are profitable and that the customer segments a company targets have a high probability of being profitable over the lifetime of the relationship. An added benefit of customer profitability analysis is that it highlights the costs of poorly designed internal processes. As the true costs of processes emerge, INTRODUCTION 3 Chapter 01 9/24/01 3:03 PM Page 3
- 24. managers can sensewhich costs are suspiciously high. This triggers a cycle of further investigation, problem identification and process improvement, thereby correcting profit-harming defects that would otherwise continue undetected. ACTIVITY BASED MANAGEMENT Activity Based Management (ABM) enables managers to understand product and customer profitability, the cost of business processes, and how to improve them. Since conventional management accounts and standard costing systems do not provide this information, it is perhaps surprising that ABM is not more widely used. Unlike many management techniques, research shows that 80 per cent of companies that have employed activity-based techniques found them to be successful. Why? Activities consume resources – people, materials and equipment – and this consumption can be measured. Activities are triggered by events, which can be counted, or decisions, which can be reviewed. Activities produce outputs – products and services, which can be counted and measured. Activities can be undertaken by different methods, which will vary the unit cost. Activities are linked together to form business processes. Understanding what activities are, what they cost, what drives them, what they produce, how they are done and how they are linked together is useful. We have understood manufacturing activities in this way for years. We measure the consumption of direct labour and materials in making products. On average, however, direct labour, materials and components account for around two-thirds of total costs in manufacturing businesses. The other, unmeasured, third is over- head activities and costs. In service industries, the ratio is the other way round – the unmeasured ‘overhead’ accounts for two-thirds or more of costs. Overhead costs are the black hole in conventional management information systems. ABM shines light into the hole. Knowledge of a business at the level of activities is the basic building block upon which new understanding can be built of where profits are being made and where they are being eroded. By making visible what was previously invisible, ABM throws a spotlight on those aspects of a business where action can directly improve business perfor- mance. Because it deals with ‘financial numbers’, ABM is often seen as the pre- serve of the Finance function. In fact, its real strength lies in providing genuinely useful information for all functions in an organization. Managers throughout the business need the right information to understand and address two key issues: ● how the company can position itself better in the market – for which accurate product and customer profitability information is vital ACTIVITY BASED MANAGEMENT 4 Chapter 01 9/24/01 3:03 PM Page 4
- 25. ● how itcan improve its internal capability and lower unit costs – for this, it needs to understand and change the procedures, systems and processes that create products and deliver services to customers. Most organizations are complex. Building an ABM model of a business requires a structured approach and the dedication of a team to achieve a result in a reason- able timescale. But building a model is only the start. Embedding ABM into the business means giving managers not only a new understanding of what drives costs, but the means to measure and act on the drivers to reverse adverse trends. ABM is about management. This book is intended for ‘general management’ in any type of organization. The following chapters discuss the basic principles of the approach, describe how to approach the development of ABM models and the implementation of ABM thinking in a business, and use numerous case studies to illustrate how ABM can make a difference to business performance. KEY POINTS ● We know customers are important but without knowing the costs that customers impose on us, we’ll never know which ones are profitable. ● When we know the costs that are driven by customer behaviours, we can differ- entiate the level of service we provide to various customer segments. ● In manufacturing businesses, direct labour, materials and components account for around two-thirds of total costs. The other, unmeasured, third is overhead activities and costs. In service industries, the unmeasured ‘overhead’ accounts for two-thirds or more of costs. ● ABM helps companies position themselves more advantageously in the market by providing accurate product and customer profitability information. ● ABM helps companies to improve their internal capability and lower unit costs. ● ABM is often seen as the preserve of the Finance function. In fact, its real strength lies in providing genuinely useful information for all functions in an organization. ● E-commerce channels currently give certain companies cost advantages. But not for long. Competitors will soon be doing the same thing. ● In e-commerce, customers want a share of lower costs, reflected in lower prices. In the future, it will be even more important to know customer profitability. INTRODUCTION 5 Chapter 01 9/24/01 3:03 PM Page 5
- 26. Chapter 01 9/24/013:03 PM Page 6
- 27. Part I The Context Chapter02 9/24/01 3:04 PM Page 7
- 28. Chapter 02 9/24/013:04 PM Page 8
- 29. 2 Historical perspective THEFIRST SERIOUS QUESTIONS In the late 1980s and throughout the 1990s, the relevance of traditional accounting practices was seriously questioned. Conventional costing, budgeting and manage- ment accounts became ever less able to support the business decisions that were now relevant. The relevance debate was founded on three key criticisms. The first criticism was levelled at the lack of technical developments in manage- ment accounting practice despite major changes in manufacturing technology. These major changes had resulted in greatly increased productivity, flexibility and quality, together with reduced lead times and inventory. Further, the significant changes in the proportions of ‘direct’ costs to ‘overheads’ had created major distor- tions in calculating product costs based on simplistic overhead recovery rates. The second criticism held that management accounting was nothing more than financial reporting, leading to information that was too distorted, too aggregated and too late to be of much value to management. The final criticism was concerned with the history of management accounting. A mature management accounting tradition was well established in the 1920s. In those days, traditional accounting had served business needs well in terms of cost management, management controls and performance measurement. However, the worldwide dominance of accountancy practice, standard training and examina- tions means that significant inertia towards change still exists. The relevance discussions were published during a period of concerns over America’s need to regenerate its industry in the context of the emergent global economy and the lessons from the success of Japan at that time. The moves in management accountancy were towards cost management and away from cost accounting. Developments since have included a concern with understanding such aspects as value-adding processes, life cycle costing, market-driven target costing, product and customer profitability, customer relationship management, Shareholder Value Added and the emergence of e-commerce. 9 Chapter 02 9/24/01 3:04 PM Page 9
- 30. NEW COSTING APPROACHESGATHER PACE Costs have been addressed in many ways in businesses, although traditional prac- tice had formed around the major manufacturing sectors. The key problems with trying to determine accurate product costs started to gain the attention of a body called CAM-I (Consortium for Advanced Manufacturing – International). This body researches all aspects of the manufacturing sector in its struggle to come to terms with the changes that modern methods have introduced. The CAM-I Cost Management Systems (CMS) Program is internationally recognized as a leading forum for the advancement of cost and resource manage- ment practices. Organized in 1986 as a coalition of leading thinkers from industry, government and academia, the CMS Program has accomplished extensive research and development of new management methods. The CMS Program is acknowledged worldwide for raising the awareness of Activity Based Costing (ABC) and Activity Based Management. Although the manufacturing sector was the first to find that traditional account- ing had lost its relevance, the service sector began to catch up. In financial services, what is a direct cost, and what is an overhead? Tracking the real cost of its products, services and customers became an issue as the recession and severe competition started to erode the traditional safe profits in banks and insurance companies. In the utilities sector, the problem had grown rapidly with the changes in legis- lation that created greater competition. The ‘regulator’, who wanted to ensure visibility in a company’s costs and put constant downward pressure on prices, further complicated the situation. Where there are virtual monopoly suppliers of services, the UK Monopolies and Mergers Commission is keen to gain access to the real costs of providing products and services, and handling customers. Another perspective is through the value chain. The term Efficient Consumer Response (ECR) has been coined to encapsulate improving the chain that stretches from the basic raw material sources of a business through to the ultimate consumer. Generally, firms are only involved in part of the overall chain of value- creating activities, and therefore must endeavour to develop information that permits internal cost management and allows information to cross the company’s boundaries. Activity-based approaches form the foundation on which information and costs are analysed throughout the value chain. The new millennium has brought the prospect of a new dawn to many busi- nesses. But all types of companies are finding that they are still in the dark. Their traditional accounting and costing methods remain unable to provide the answers to very relevant business questions, such as: PART I: THE CONTEXT 10 Chapter 02 9/24/01 3:04 PM Page 10
- 31. ● How dowe measure commercial success? ● Which parts of our process add value, or not? ● Do we make profitable products, and provide profitable services? ● Which is our most profitable customer? ● What can we afford to negotiate away? ● Which type of distributor is important to us? ● Do some products subsidize others, and if so, by how much? ● Are some of our customers targets for our competitors? ● Are we going for volume at the expense of profits? ● What is the real contribution from our product range? ● How should we invest this contribution from our current products? ● Should we go for new products or new markets? ● Will our new e-commerce channel provide the profits we yearn for? Most of these questions have always been asked. It is management’s job to answer them. But while struggling to feed ever more irrelevant budgeting systems and answer monthly management accounts variance queries, management has had to fall back on ‘gut feel’. This is a poor substitute for appropriate information. ABM fills the chasm so long filled with inappropriate information. KEY POINTS ● The relevance of traditional accounting practices has been seriously ques- tioned. Criticisms concern the distortions in calculating product costs based on simplistic overhead recovery rates, financial reporting that is too distorted to be of much value to management, and the worldwide dominance of accoun- tancy practice, standard training and examinations, creating a significant inertia towards change. ● The foundations of ABM were built on the manufacturing sector, but the service sector has rapidly caught up, driven by regulatory and competitive pressures. ● Activity-based approaches form the foundation on which information and costs are analysed throughout the value chain. ● Traditional accounting and costing methods remain unable to provide the answers to very relevant business questions. ABM has filled the gap. HISTORICAL PERSPECTIVE 11 Chapter 02 9/24/01 3:04 PM Page 11
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- 33. 3 What isABM? Initially, Activity Based Costing (ABC) was presented as a means of establishing product costs more accurately. The emergence of Activity Based Management (ABM) provided a means of enhancing profitability. ABM is underpinned by a theory of resource consumption, with activities viewed as giving rise to costs, as in ABC, but taking the analysis further in a way that provides management with insights into managing the business overall. Essentially, these insights are focused on a process view of the business and a deeper understanding of product, channel and customer profitability. COSTING AND PROFITABILITY The ledger, budgeting and monthly management accounts are based on reporting resources: those planned to be used, the consumption month on month and the variances from plan. Resources are those things that provide the means to allow work to be done in the organization: salary costs for the people doing the work, accommodation costs so that people can work in buildings, utilities so that people can see what they are doing and keep warm, vehicles so that goods can be delivered and customers visited. In some cases, the list of types of resource on the ledger may seem endless. But no matter how long the list of resources, nothing in the ledger or the man- agement accounts tells us how the resources are being consumed in doing things, to what purpose, or in what way. Resources are consumed by activities and it is at this level of analysis that we see what is actually being done. At this level we can also take a view on whether the activities that are being performed are necessary. We can also find out whether the activities are being done well and use the best methods, and so take the business forward, or whether they are really only sorting out problems that are dragging the business back. 13 Chapter 03 9/24/01 3:05 PM Page 13
- 34. Activities are undertakenfor many purposes. Some directly manufacture prod- ucts, while others indirectly support manufacture, such as the Quality department or materials handling. Some activities support the business as a whole, such as recruitment and training or the parts of the IT department that keep the network running. Other activities are directly associated with customers, such as the salesforce, or more indirectly within the Credit Control department. Other parts of the busi- ness are working on activities to create a better future, such as New Product Development, and others are working on influencing potential customers, such as Marketing and Advertising. Some parts of the business have little to do with products, services or customers but are necessary to keep the business legal, such as statutory reporting or orga- nizing the shareholders’ annual general meeting or preparing for the annual audit. Activities are the very engine at the heart of the organization. Understanding what is done, how it is done, what causes it to be done and why we are doing it gives us a better chance of deciding whether we are getting the best value from the resources we deploy. As a simple analogy, budgeting and reporting on the differ- ent amount of food we eat may be mildly interesting but what people then do with their time having consumed the resources is what influences the world around them, for better or worse. In conventional accounting, and particularly in manufacturing companies, costs are categorized into two main types: direct costs and overheads. Direct costs include the employees manufacturing the products, and the raw material they use. Overheads are the rest. The problem then arises when the costs of the products need to be calculated. Although we will look at this in greater detail in later chapters, we can say at this point that an ABM analysis accurately assigns the costs of those overheads that are actually influenced by the products being made or the services being provided. Having derived accurate product costs, ABM goes further and analyses the costs of servicing each customer or specific segments of the customer base. Customers create a wide range of differing costs for a host of reasons. The key insight that ABM exposes arises when revenue is brought into the equation. When the actual costs of the products or services going to a particular customer are calculated and the actual costs of servicing that customer derived, we can compare these figures to the revenue from the customer, as shown in Figure 3.1. Revenue minus the product costs gives the ABM Product Contribution. Revenue minus the product costs minus the costs of servicing the customer gives the ABM Customer Contribution. The sum of all the customer contributions has to pay for all those remaining costs that are not associated with the current products or customers, such as new product development and statutory accounting. Anything left after that is the profit. PART I: THE CONTEXT 14 Chapter 03 9/24/01 3:05 PM Page 14
- 35. It is atthe level of ABM Product or Customer Contribution that we use the term ‘Product and Customer Profitability’, as it is at this level that meaningful compar- isons can be made between products and between customers. It is this type of analysis that exposes small or negative values prompting a serious review of which products or customers to keep, or at least a decision to take action to try to turn the relationship into one that provides positive contributions. We will look at this later in greater detail, as this insight into a company’s costs is the central advantage of using ABM analysis. By understanding how costs relate to those factors that drive the costs, we can use the powerful approach of Activity Based Budgeting (ABB). Rather than a futile circular argument revolving around resources, such as just asking for more people, the debate focuses on the drivers of cost that influence how much activity is actually required. ABB analyses the products or services to be produced, and so determines the level of the activities required. The level of activities then deter- mines the resources to be budgeted. When automated, ABB can rapidly and accurately produce financial plans and models based on varying levels of volume assumptions. The more obvious volume assumptions would take into account levels of WHAT IS ABM? 15 Figure 3.1 ABM Product and Customer Contributions Sales revenue Manufacture indirect Direct materials Direct labour Other manufacture overheads ABM Product Contribution Direct materials Direct labour Gross margin Manufacture indirect Direct materials Direct labour Other manufacture overheads ABM Customer Contribution Customer- related overheads Chapter 03 9/24/01 3:05 PM Page 15
- 36. product or servicebeing provided. More subtle assumptions would take into account, say, the projected numbers of staff to be recruited, and hence the impacts back into the personnel and human resources activities, and thus resources. From the customer perspective, providing more volume of the same products to the same customers would have one set of impacts on activities. In another scenario, additional new customers placing orders for half the previous average quantity per order line but for an average of double the number of order lines per order would have a quite different impact on activities, and thus overall resources, in various functions. This is the stuff of the real world, where real things are happening. Sitting in a functional silo with no knowledge of what actually drives the costs in a function makes guessing the resources required for the next twelve months one of the most futile exercises that has ever been invented. This probably accounts for the long, sad faces when the budget round is announced. Using activity-based target costs throughout the product design and develop- ment process brings the real world of the competitive marketplace right into the start of the process that creates costs. Gone are the days when companies could design a product, work out its costs, add a bit for overheads, then announce the price. To grab market share and ensure sustainable growth, a company has to know beforehand the price that will ensure the product’s success. At the design and development stage, more than just the direct costs are designed in. At this stage, the company has to think through all aspects of the processes in the busi- ness affected by the product or service so that it does not breach the target cost. PROCESS IMPROVEMENT An organization is a series of activities that combine in processes to create valu- able products or services for customers. It is the effectiveness of an organization in performing these processes – to create high value at low cost – which marks out a successful company. Most of a company’s significant processes travel across func- tional boundaries, and it is at these boundaries that delays and quality problems occur. ABM focuses on the company’s processes. If the processes are understood then failure activities can be eliminated from those processes. Value-adding activities can be examined to see whether better methods can be used. Time delays and quality issues can be addressed at the point in the process where they occur. ABM is the management of improvement through the analysis of business processes, and their associated activities. This analysis is carried out systematically and cross-functionally so that improvement projects can be readily implemented and the changes monitored. ABM is an approach that involves many people within the organization, and is: PART I: THE CONTEXT 16 Chapter 03 9/24/01 3:05 PM Page 16
- 37. ● a vehiclefor creating process improvement – both incremental, continuous improvement and radical restructuring of the organization ● a model to show how costs (and revenues) are created through processes and activities – if you understand the activities, then you can understand the costs; if you understand the processes, then you understand the business ● a means of measuring the company’s progress in the key areas of the business that need change and improvement. We will look at this use of ABM in greater detail later, as the insights gained from process analysis are central to reducing unit costs, eliminating waste and improv- ing levels of service to customers. Although ABM can be used to address a specific project or process that needs improvement, it is at its most effective when the company uses ABM as a standard approach to business improvement. This way, the entire organization can be involved in process improvement, and over time every process within the com- pany can be studied, and changes initiated. KEY POINTS ● Nothing in the ledger or the management accounts tells us how resources are being consumed in doing things, to what purpose, or in what way. ● Activity analysis allows us to find out whether the activities are being done well and use the best methods to take the business forward, or whether they are really only sorting out problems that are dragging the business back. ● Revenue minus the total product costs gives the ABM Product Contribution. Revenue minus the product costs minus the total costs of servicing the customer gives the ABM Customer Contribution. ● The sum of all the customer contributions has to pay for all those remaining costs that are not associated with the current products or customers, such as new product development and statutory accounting. Anything left after that is the profit. ● It is at the level of ABM Product or Customer Contribution that we use the term ‘Product and Customer Profitability’, as it is at this level that meaningful comparisons can be made between products and between customers. ● Activity Based Budgeting (ABB) focuses on the drivers of cost that influence how much activity is actually required. ABB analyses the products or services to be produced, and so determines the level of the activities required. The level of activities then determines the resources to be budgeted. WHAT IS ABM? 17 Chapter 03 9/24/01 3:05 PM Page 17
- 38. ● An organizationis a series of activities that combine in processes to create valu- able products or services for customers. It is the effectiveness of an organiza- tion in performing these processes which marks out a successful company. ● ABM includes the management of improvement through the analysis of busi- ness processes, and their associated activities. PART I: THE CONTEXT 18 Chapter 03 9/24/01 3:05 PM Page 18
- 39. Frameworks for measurement 4and improvement Although ABM can be used as a stand-alone approach to understand processes, product and customer costs and profitability, it provides a more powerful means of decision support if it exists as part of a larger framework of measures. Over the years, a number of frameworks have been developed, each endeavour- ing to arrive at a more rounded perspective on the business and a reduced empha- sis on the previous domination of financial measures. Although traditionally profit has assumed the dominant role as a measure, the many means of its attainment are recognized as being much more varied and com- plex to measure and control. Consequently, as well as being concerned with sales and margins, it is necessary to have information on such things as production times, component commonality, quality initiatives, customer satisfaction, cus- tomer service activity, employee skill development, employee turnover, legislation changes, environmental impacts and many other variables in the business. In fact, any element of performance can be important if it is related to success in the marketplace. Their integration has been more formally recognized by the use of a number of frameworks that attempt to bring a more rational balance to the variety of measures used in the business. ABM is a key component of these measurement frameworks. THE BALANCED SCORECARD Professors Kaplan and Norton first described the Balanced Scorecard in an article in the Harvard Business Review in 1992. The term ‘balanced’ reflects the objective of reporting to stakeholders other than the owners of the business, as well as in ways quite different to financial reporting. The Balanced Scorecard includes four perspectives, as shown in Figure 4.1. As well as the more traditional measures found in the financial perspective, the scorecard includes customer, internal business, and learning perspectives. 19 Chapter 04 9/24/01 3:06 PM Page 19
- 40. The customer perspectivecan include measures of quality, lead times, reliability and customer service as these impact on customer satisfaction, repeat business and referrals. The internal business perspective is concerned with processes and productivity. Crucially, there is a recognition that the workforce is a vital stake- holder whose skills and commitment to the organization cannot be taken for granted. The fourth perspective, that of learning and innovation, is concerned with performance improvements and the ability to introduce successful new products and services. All four perspectives reflect the need to sustain a strategic position in the marketplace to create value for shareholders, provide challenging employ- ment opportunities for the workforce and enjoy a sustained partnership with customers, both corporate and consumers. It is therefore imperative that an appropriate range of measures exists to integrate in the scorecard. A by-product of using a Balanced Scorecard is that, throughout the organization, it raises the awareness of measures, in a language that people can understand in their own areas of responsibility and influence. However, where useful informa- tion is lacking, ABM becomes a powerful tool to understand and answer funda- mental questions that arise around processes, products and customers. Profitable customers served by ineffective processes will not lead to success. Impeccable processes serving unprofitable customer segments will also drag the company down. If employees focus their learning and innovation on products and services PART I: THE CONTEXT 20 Financial Internal Innovation & learning Customer On course Change course! On course On course On course Change course! Change course! Change course! Figure 4.1 The four perspectives of the Balanced Scorecard Chapter 04 9/24/01 3:06 PM Page 20
- 41. that attract disproportionatelyhigh but largely invisible costs, it can bring a busi- ness to its knees. The Balanced Scorecard by itself is not a guarantee of corporate success. The underlying behaviour of costs and an understanding of what drives costs provide the knowledge and insights to drive improvements. In this respect, ABM is a fundamental building block. THE BUSINESS EXCELLENCE MODEL The European Foundation for Quality Management (EFQM) Business Excellence Model arose during the time that ‘quality’ and ‘total quality’ had ascended to the highest point of management’s consciousness. The quality movement had tended to follow the course of ISO 9000, an international standard that focuses on quality systems within the business. In response to this trend, a number of companies leading the quality movement searched for a means of describing a business across a range of features that went beyond just looking at the internal quality systems. This endeavour led to the formation of the EFQM and the publication of the Business Excellence Model. The model defines nine elements as shown in Figure 4.2. Five elements are known as enablers, and the remaining four are the results. Each element has a weighting, and when taken as a score, a company with a total of 80 per cent or more is recognized as achieving excellence. In Europe, such high scores put a company in the running for the annual European Quality Awards. Interestingly, a company that states that it has implemented ABM as an approach to inform and change its scoring on a number of elements only achieves an enhanced score if it actually produces the ABM information and acts on it. FRAMEWORKS FOR MEASUREMENT AND IMPROVEMENT 21 Figure 4.2 The nine elements of the Business Excellence Model Leadership People management Policy & strategy Partnerships & resources Processes People results Customer results Society results Business results Enablers 50% Results 50% 10% 9% 8% 9% 14% 9% 20% 6% 15% Innovation & learning Chapter 04 9/24/01 3:06 PM Page 21
- 42. Setting up anABM programme but failing to apply its findings will count against a company. SHAREHOLDER VALUE ADDED The measure of Shareholder Value Added (SVA) is unashamedly financial. SVA, the generic term (also known as Economic Value Added), was introduced as a measure by the American consulting firm Stern Stewart & Co. Their term and the three-letter acronym, EVA are both trademarks of their company. The definition is simply: Shareholder Value Added equals the net operating profit after tax minus the capital charge. The net operating profit after tax brings into focus prices, volumes, the cost of sales and all the operating expenses in the business, as well as taxes. It is therefore imperative that the business knows which products and customers are profitable, and why, and that its processes operate at the lowest unit cost. Whatever tech- niques or approaches are used to achieve these ends, it is important that informa- tion in the business is structured to support the right decision-making. ABM is a building block to create this knowledge. The capital charge is all capital (net working capital plus net fixed capital) multi- plied by the cost of capital. Capital comprises working capital (debtors, creditors and inventory) plus fixed capital (property, plant and equipment). Actions to reduce debtor days and work in progress would be simple examples of increasing the value in the business. Investing in capital equipment focused on profitable products to profitable customers requires greater finesse in ensuring that the right decisions are made. All financial measures, including SVA, tell us the outcome of many different things, but they usually hide the causes of good or bad profitability. The good or bad performance of individual processes is seldom visible in financial performance measures, and the real profitability of products and customers is completely obscured. Depending on the type of business, actions to increase value will differ. Inside an SVA measurement framework, ABM is the means to actually influence the value drivers in the business. It is this knowledge that makes a difference so that people can make decisions and take actions to increase value. POSITIONING AND CAPABILITY The collection of measures encapsulated within the term ‘positioning and capability’ was developed by the UK consulting firm Develin & Partners, and is PART I: THE CONTEXT 22 Chapter 04 9/24/01 3:06 PM Page 22
- 43. founded on theprinciple that organizations need to make a series of steps from where they are now to some future goal. To guide the company on its journey to a future goal, a ‘map’ is required, where the axes of the map are positioning and capability. The basic map is shown in Figure 4.3. Positioning is to do with external factors, such as: ● understanding customer needs ● understanding product and customer profitability ● understanding competitor initiatives ● determining the business’s financial needs ● complying with changing legislation ● meeting environmental constraints. Getting positioning right leads to higher levels of revenue through providing prof- itable products and services, increasing market share, increasing the size of the market, and by retaining profitable customers. Capability is to do with internal factors, such as: ● key business processes ● procedures and systems ● competencies, skills, education and training ● attitudes, style and behaviours. FRAMEWORKS FOR MEASUREMENT AND IMPROVEMENT 23 Where we are now Where we want to be Capability (internal) Positioning (external) Figure 4.3 The journey of change Chapter 04 9/24/01 3:06 PM Page 23
- 44. The capability ischanged to deliver the desired positioning. Capability creates the costs in the business. The journey joins revenue and cost. Getting the balance right between positioning and capability enhances profits and the value of the busi- ness. ABM is the vehicle by which companies journey along their chosen route. ABM informs key aspects of positioning, particularly when used to provide accurate product costing and to derive product and customer profitability. ABM informs key aspects of capability, particularly when used to understand process costs, fail- ures within processes, and to establish the link between costs and the drivers of cost. ABM provides the basis for management to make better informed decisions, both on positioning and capability. In other words, the company can determine which products, markets and customer segments it wishes to retain, it can make relative pricing decisions based on competitor initiatives, and it will be able to focus on those aspects of capability which leverage profitability through process improvement and a reduction in unit costs. Using ABM during the positioning work provides an opportunity to undertake customer engineering as an action to guide changes in capability. Avoiding a cer- tain activity may then be an initial action, rather than spending effort on improving what could be an unnecessary process. ABM analysis of the current business, prior to making changes to any processes, can answer a number of positioning questions: ● Can the salesforce be directed towards more profitable segments in relation to the costs of servicing the business that is generated? ● Will a switch away from volume selling to focused selling improve short-term profitability? ● Can some customers or product lines be dropped and achieve an increase in company profitability? ● Can we apply discounts more effectively to achieve volume and know that we will remain profitable? ● Can we switch some customers to wholesalers or other third parties, rather than service every customer ourselves? ABM is the way to link a company’s trading relationships (positioning) to its internal cost structure (capability). The basic premise is that activities consume resources and convert them into products and services to customers. Costs are therefore the consequence of resource decisions, and income is the consequence of linked activities, the business processes. The requirement is therefore to improve resourcing decisions as the means of managing costs, and to improve processes as the means of improving business effectiveness and thus customer service and revenue. 24 PART I: THE CONTEXT Chapter 04 9/24/01 3:06 PM Page 24
- 45. In the positioningand capability framework, ABM plays a key role in informing the journey. On the positioning axis, ABM is used for profitability management, such as costing and profitability analysis, customer and product mix decisions, and support for marketing decisions. On the capability axis, ABM is used for resource and performance management, such as resource and service level changes, activity-based budgeting and cost driver analysis, and for process improvement to eliminate process failures and reduce unit costs. KEY POINTS ● The integration of many elements of performance has been more formally recognized by the use of a number of frameworks that attempt to bring a more rational balance to the variety of measures used in the business. ABM is a key component of these measurement frameworks. ● The Balanced Scorecard includes four perspectives: financial, customer, internal business, and learning. The underlying behaviour of costs and an understanding of what drives costs provide the knowledge and insights to drive improvements. In this respect, ABM is a fundamental building block. ● The EFQM’s Business Excellence Model defines nine elements. Five ele- ments are known as enablers and the remaining four are the results. ABM is an approach to inform and improve the scoring on a number of elements. ● Shareholder Value Added equals the net operating profit after tax minus the capital charge. ABM is the means to influence the value drivers in the business that will help increase SVA. ● Positioning is to do with external factors, and getting this right leads to higher levels of revenue through providing profitable products and services, increas- ing market share, increasing the size of the market, and by retaining profitable customers. ● Capability is to do with internal factors, a change to which delivers the desired positioning. Capability creates the costs in the business. Positioning and capa- bility thus join revenue and cost. Getting the balance right enhances profits and the value of the business. ● The journey of change can be mapped using the two axes of positioning and capability. ABM provides the information for both axes, to plan the journey and measure how far you have travelled. FRAMEWORKS FOR MEASUREMENT AND IMPROVEMENT 25 Chapter 04 9/24/01 3:06 PM Page 25
- 46. Chapter 04 9/24/013:06 PM Page 26
- 47. 5 The ABMframework In Chapter 4, we saw how ABM fits into a number of overarching frameworks of measurement and improvement. In Chapter 6, we will see how ABM is used in a real-life example, to illustrate how ABM handles costs, assigning them to activities then onwards to products, channels and customers. However, before going into an example it is wise to take a few moments to describe how ABM views the treatment of costs, which differentiates it from tradi- tional accounting approaches. This chapter explains the way ABM handles costs and the characteristics of activities compared to conventional approaches, as well as introducing the language of ABM. TRADITIONAL RESOURCE ACCOUNTING Most established accounting systems usually capture and distribute resource costs based on one or more of the following methods: 1. organization structure or cost centre accounting 2. budgetary accounting 3. cost allocation accounting. From their longevity of practice, we must assume that in the past they have met the needs of organizations to some degree. Yet every one of them fails to meet the full requirement for management information that will adequately support decision-making in today’s competitive environment. COST CENTRE ACCOUNTING This is a popular method for applying resource costs to an organization. The accounting system identifies each of the organizational parts of the traditional functional structure and applies the identifiable costs to that part of the structure. 27 Chapter 05 9/24/01 3:07 PM Page 27
- 48. In many traditionalorganizations, the only costs that are identified to the organiza- tion’s functional departments are the salary costs. Although overhead costs are sometimes distributed to cost centres, it is more common to find that these costs are ignored at the unit level. Many overhead costs are held centrally by the providers of services, and not sub-divided to the users of the services. For exam- ple, the cost of ‘vehicles’ would be held in the function or department that looks after the vehicles. The cost of ‘postage’ would be held in the postroom where the mailing physically takes place. This system was created to provide management with some information on the costs of the organization’s departments. Some argued at the time that this would make ‘controllable’ costs visible to those managers that have to control the costs. However, under cost pressure the owners of resources supplied to others would turn the tap down or off. The Stationery department refusing to issue paper for other departments’ photocopiers is a result of this approach to cost control. Where attempts to obtain a true picture of departmental costs are applied, man- agers of resources that are supplied to others apply cross-charges to users, based on a rate for the service. The rate is based on a collection of costs the service department actually incurs, such as its own staff salaries, to which it adds a mysterious amount to cover its own overheads and the costs that it has received as cross-charges from others. The cross-charging game can reach heights of absur- dity when internal sub-divisions of the organization are made into profit centres. The charge-out rate then includes a bit extra, which it calls ‘profit’. In some instances, this accumulating figure is then used to purchase something from out- side on the basis that it is using spare income, and not a departmental cost. From the organization’s perspective, this is real money going out the door. However, trying to get accurate costs to the place in the organization where the budget for the funds is held can also create absurd situations, as the following example aptly illustrates. CASE STUDY A company introduced a simple method to improve the cost-effectiveness of the use of taxis. By arranging to use a single supplier, any travellers only had to print and sign their name against the meter cost recorded on the taxi’s log sheet. To prevent fraud, the passenger retained a tear-off copy slip showing the cost. On a monthly basis, the taxi company presented its itemized bill, which a clerk in Accounts dutifully used to look up where each passenger worked. The cost centre manager’s name and cost centre number were also looked up and noted. The annotated invoice then started its journey around the site for each manager to authorize and add the cost centre allocation number for taxi PART I: THE CONTEXT 28 Chapter 05 9/24/01 3:07 PM Page 28
- 49. journeys to theinvoice. Later, these costs would be accumulated and reported to each cost centre manager. Three months later, the irate taxi company would begin to demand payment. The problem for the Accounts department was knowing where the invoice was in its journey around the site. In a year, 40 per cent of the invoices never found their way back to the Finance function. The taxi company would regularly threaten court action to secure payment. Accounts Payable would just ask for a faxed copy of the invoice and pay the same day on receipt of the fax. Finally, someone did question whether the whole process added any value, or whether it just added unnecessary cost. In all this striving for accuracy, accountability and control, hardly any real attempt is ever made to trace costs to the activities or process flows in organizations or to the ultimate output, the products and services for customers. BUDGETARY ACCOUNTING The tracking of costs to a budgetary account is often combined with cost centre accounting. In this case, the major concern of the spenders of resources is to ensure that their total expenditures do not exceed the allocated budgetary amounts. Consequently, accounting systems become a safeguard mechanism to capture commitments, undelivered orders, and expenditures, normally divided into the cost centres that reflect the organization structures, to enable tracking of actuals, budgets and variances. The measure of success, and thus the major objec- tive of each accountable manager, is to use the resources assigned fully, rather than enhancing productivity or reducing expenses. In some types of organization, any attempt to conserve resources or work more effectively to come under budget runs the risk of prompting a reduction in the future budget resource level. The budgetary control mechanism can reach heights of absurdity. CASE STUDY In a government research organization, the scientists received funds to under- take research projects. Towards the financial year end, the researchers had unspent funds, but there were insufficient hours of research capacity to conduct the research before the year end. The fund providers wanted the funds spent (for fear of their own funds for the following year being reduced), but were only concerned that the money was spent on ‘project-related’ costs. In this case, buy- ing equipment was acceptable. As specialist equipment would be pointless, the THE ABM FRAMEWORK 29 Chapter 05 9/24/01 3:07 PM Page 29
- 50. researchers looked forsomething more generic. Two weeks later, three large vehicles arrived on site delivering top-of-the-range-desktop computers. As there was no immediate scientific purpose for the computers, they remained in their boxes and researchers used them as additional seats. Among the support departments, frustrations reached boiling point when they saw the vehicles being unloaded. The cap on their costs always prevented them procur- ing decent equipment. Worse was to come. Given the different funding regimes for the two groups, the overhead functions were not allowed to use the spare computers languishing in their boxes. Like cost centre accounting systems, budgetary control mechanisms make no attempt to cost the outputs of all the work, or in many cases to even bother to define the output. If real customers are at the end of a supply chain of activities in such environments, then their needs can be well down the list of priorities, with ‘meeting the budget’ firmly at the top. COST ALLOCATION ACCOUNTING Where an organization has the characteristics of a business then it generally has a need to distribute its costs to an output so that it can price its products or services. Revenues also come into the picture, and we talk about ‘revenues minus total cost leaves us the profit’. To make the costs visible, ‘true’ cost accounting systems were established to capture and distribute costs to the outputs, such as goods or ser- vices. These cost accounting systems use the classic model of cost distribution which was designed around the major sector of the economy at the time: manu- facturing. In this system, the focus of gathering costs and collecting them under generic headings relied upon the simple classifications of direct labour, direct materials, and overhead. Businesses and business-like organizations have relied upon the historical model of cost accounting for over a hundred years. However, the traditional cost accounting methodology does create significant inaccuracies in output costs because of the manner in which overhead costs are apportioned to output rather than assigned or traced to output. When this erroneous method of cost distribution finds its way into the ultimate price of the output, it leads to poor management decisions about which products or services to promote hard, or which to discontinue, and which customers it should sell to or drop. As traditional accounting has such a grip on most organizations, we would argue that it is in the areas of the fundamental flaws it contains that ABM really makes a difference. In particular, ABM is superior to traditional accounting in a number of ways: PART I: THE CONTEXT 30 Chapter 05 9/24/01 3:07 PM Page 30
- 51. ● ABM providesvisibility in the way costs flow through the business. ● ABM establishes the links between activities and those factors, internal or external, that drive the level of activity up or down. ● ABM eliminates the false divide between direct costs and overheads. ● ABM separates out those costs that deal with today’s business from those that secure the future. ● ABM ignores gross margin and uses accurate product and customer contribu- tions as the basis for comparing product and customer profitability. ● ABM exchanges functional myopia for a cross-functional process view of the organization. ● ABM exchanges the stilted definitions of value-added and non-value-added for sensitive categories that highlight the subtle impact of internal process failures and external customer behaviour. ABM VERSUS TRADITIONAL TREATMENTS OF COSTS At many levels, ABM brings a different perspective to how costs are treated. ABM challenges the traditional approaches to product costing, gross margins, profit- ability, functions and hierarchies, value-added and non-value-added, and budget- ing. TRADITIONAL PRODUCT COSTING It is in the area of product costing that serious weaknesses in the traditional approach first became a cause for concern. In the days when traditional account- ing practices were being formed and internationalized, the dominant industries were in the manufacturing sector. In a typical large manufacturing company, there would be large numbers of employees concerned with direct manufacturing and a much smaller number in the overhead departments. In a situation where the direct labour costs could be as high as 90 per cent and overheads 10 per cent of total costs, it was important to achieve some accuracy in terms of the hours, and therefore costs, required to make components and assem- blies. Work-study and other techniques found a ready use in determining the direct labour content of any product. The direct material costs were also simple to calculate for each product, based on raw material content, scrap rates, bought-out parts and so on. Working out how much of the overhead activity was actually asso- ciated with each product was seen as a lot of effort for such a small improvement in the accuracy of the product cost. This led to the use of the Overhead Recovery Rate (ORR) as the fundamental method of product costing. To derive a method of calculating the proportion of overheads to allocate to each THE ABM FRAMEWORK 31 Chapter 05 9/24/01 3:07 PM Page 31
- 52. product, a simpleratio was derived, known as the ORR. A company would simply find the overall ratio between total overhead costs and total direct labour, say 10 per cent. The direct labour for each product made, and any new ones developed, would then have 10 per cent added to account for the overhead, and so give the product cost. As manufacturing became more complex, the proportion of overhead activities to direct activities started to increase. Product costs now became far more sensi- tive to the indirect and overhead costs associated with each product. The tradi- tional ORR became highly suspect as a means of calculating product costs. Some products could be seriously under-costed, and thus probably highly competitive, but an increase in sales volume would actually erode profitability. Conversely, over-costed products would be unattractively priced, and few sales made. As the proportion of overhead costs increased in a business, the more serious the distortion in product costing became through using the ORR method. ABM PRODUCT COSTING In ABM, the indirect and overhead costs are determined for each product. The characteristics of two products can be quite different in the way they need over- head activity to support manufacture. CASE STUDY A company that had traditionally made its name manufacturing bogies for rail- way trucks and carriages had branched out into making braking systems for long-haul diesel road vehicles. While the technology surrounding the railway business had not developed significantly over the years, the road vehicle tech- nologies had advanced in complexity at a rapid rate. Using direct labour as the determinant of the proportion of overhead costs had led to over-priced railway products and under-priced road vehicle products. The growth in the road vehicle business then seriously eroded overall profits, and the stable rail business was drifting to competitors. Figure 5.1 shows two of the company’s products costed using the conven- tional ORR, in this case 300 per cent. For product Pr1, the direct labour had 50 units of cost, so the manufacturing overhead was assumed to be 300 per cent of this: 150 units of cost. Product Pr2 again used 300 per cent, and this was applied to the direct labour cost of 200 units, giving a manufacturing overhead of 600 units of cost. Using a conventional ORR took no account of the real differences in the amount of overheads that either product required. PART I: THE CONTEXT 32 Chapter 05 9/24/01 3:07 PM Page 32
- 53. Product Pr1, aroad vehicle braking system, was complex, had many produc- tion changes, and used difficult manufacturing technology. There were also many discussions with specialist suppliers. Product Pr2, a railway truck bogie, used simple manufacturing technology, enjoyed a steady demand with few changes to schedules, and had used the same suppliers of raw material over a long period. Using the ABM approach, the direct and actual overhead costs reflected the real situation, as shown in Figure 5.2. Note that for Pr1 the conventional approach gave a contribution nearly double what it actually was. In other words, in reality the product was less profitable than they thought. Conversely, Pr2 was much more profitable than they thought. Using the overhead recovery approach meant that Pr1 was under-priced. They had orders, but made little profit. Sales of Pr2 could be higher if it wasn’t over-priced. THE ABM FRAMEWORK 33 Conventional approach Products Pr1 Pr2 Direct material 200 100 Direct labour 50 200 Calculate overhead 50 x 200 x using ORR based on direct labour 300% 300% Calculated production overhead 150 600 Total direct + overhead 400 900 Revenue 1250 1300 Gross margin 1000 1000 Product contribution 850 400 Figure 5.1 Conventional product costing Chapter 05 9/24/01 3:07 PM Page 33
- 54. TRADITIONAL VIEW OFGROSS MARGIN In traditional accounting, we find the term ‘gross margin’, defined as the revenue minus the direct costs. As long as the gross margin is a positive number, then the product is deemed to make a ‘contribution to overheads’. In other words, whatever the overheads actually are, at least there are some funds to pay for them. The issue is that we do not know, other than at the overall company level, whether this con- tribution has any bearing whatsoever on the real overheads involved in producing each particular product. ABM VIEW OF PRODUCT CONTRIBUTION (PRODUCT PROFITABILITY) In the product costing examples above, the ABM analysis uncovered the actual indirect and overhead costs associated with producing each product. Now when we calculate the revenue less the actual product costs, we have a number that is called the ABM Product Contribution. In other words, if this is a positive number, then we know that product costs are covered and the sum left over now con- tributes to the other overhead costs in the business such as sales, R&D, invoicing and so on. PART I: THE CONTEXT 34 Conventional approach Products Pr1 Pr2 Direct material 200 100 Direct labour 50 200 Calculate overhead 50 x 200 x using ORR based 300% 300% on direct labour Calculated production overhead 150 600 Total direct + overhead 400 900 Revenue 1250 1300 Gross margin 1000 1000 Product contribution 850 400 ABM approach Products Pr1 Pr2 Direct material 200 100 Direct labour 50 200 Actual overhead activity costs Purchasing 120 30 Planning 50 80 Material handling 100 50 Inspection 180 40 Maintenance 80 20 ABM production overhead 530 220 Total direct + overhead 780 520 Revenue 1250 1300 Gross margin 1000 1000 Product contribution 470 780 Figure 5.2 Comparing product costing methods Chapter 05 9/24/01 3:07 PM Page 34
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- 56. NOTES [1] Sacrifices ofthe same kind were continued. Livy, xxii. 57: “Interim ex fatalibus libris sacrificia aliquot extraordinaria facta: inter quæ Gallus et Galla, Græcus et Græca, in Foro Boario sub terra vivi demissi sunt in locum saxo conseptum, jam ante hostiis humanis, minime Romano sacro, imbutum.” [2] Jovienus Pontanus, in the fifth Book of his History of his own Times. He died 1503. [3] These cauldrons walled into the sides of the churches are probably the old sacrificial cauldrons of the Teutons and Norse. When heathenism was abandoned, the instrument of the old Pagan rites was planted in the church wall in token of the abolition of heathenism. [4] There is a rare copper-plate, representing the story, published in Cologne in 1604, from a painting that used to be in the church, but which was destroyed in 1783. After her resurrection, Richmod, who was a real person, is said to have borne her husband three sons. [5] Magdeburg, Danzig, Glückstadt, Dünkirchen, Hamburg, Nürnberg, Dresden, etc. (see Petersen: “Die Pferdekópfe auf den Bauerhäusern,” Kiel, 1860). [6] Herodotus, iv. 103: “Enemies whom the Scythians have subdued they treat as follows: each having cut off a head, carries it home with him, then hoisting it on a long pole, he raises it above the roof of his house— and they say that these act as guardians to the household.” [7] The floreated points of metal or stone at the apex of a gable are a reminiscence of the bunch of grain offered to Odin’s horse. [8] Aigla, c. 60. An Icelandic law forbade a vessel coming within sight of the island without first removing its figure-head, lest it should frighten away the guardian spirits of the land. Thattr Thorsteins Uxafots, i. [9] Finnboga saga, c. 34.
- 57. [10] Hood isWood or Woden. The Wood-dove in Devon is Hood-dove, and Wood Hill in Yorkshire is Hood Hill. [11] See numerous examples in “The Western Antiquary,” November, 1881. [12] On a discovery of horse-heads in Elsdon Church, by E. C. Robertson, Alnwick, 1882. [13] “Sir Tristram,” by Thomas of Erceldoune, ed. Sir Walter Scott, 1806, p. 153. [14] See an interesting paper and map, by Dr. Prowse, in the Transactions of the Devon Association, 1891. [15] Two types, the earliest, convex on both faces. The later, flat on one side, convex on the other. The earlier type (Chelles) is the same as our Drift implements. Till the two types have been found, the one superposed on the other, we cannot be assured of their sequence. [16] In the artistic faculty. The sketches on bone of the reindeer race were not approached in beauty by any other early race. [17] “The Past and the Present,” by A. Mitchell, M.D., 1880. [18] The author found and planned some hut circles very similar to those found in Cornwall and Down, on a height above Laruns. There was a dolmen at Buzy at the opening of the valley. [19] Hor. Sat. ii. 8. [20] Fornaldar Sögur. iii. p. 387. [21] Heimskringla, i., c. 12. [22] I have given an account of the Carro already in my book, “In Troubadour Land.” [23] Roman and Greek ladies employed parasols to shade their faces from the sun, and to keep off showers. See s. v. Umbraculum in Smith’s Dictionary of Greek and Roman Antiquities. [24] A good deal of information relative to umbrellas may be got out of Sangster (W.). “Umbrellas and their History.” London: Cassell & Co., Ltd. [25] The first Englishman who carried an umbrella was Jonas Hanway, who died in 1786, but it was known in England earlier. Beaumont and Fletcher allude to it in “Rule a Wife and Have a Wife”: “Now are you glad, now is your mind at ease; Now you have got a shadow, an umbrella, To keep the scorching world’s opinion
- 58. From your faircredit.” And Ben Jonson, in “The Devil is an Ass”: “And there she lay, flat spread as an umbrella.” Kersey in his Dictionary, 1708, describes an umbrella as a “screen commonly used by women to keep off rain.” [26] Castrén, Nordische Reisen, St. Petersburg, 1853, p. 290. [27] “The Beggynhof,” London, 1869, p. 68. [28] Ed. Viger, IV., p. 161. [29] So Grimm and others following him; but I am more inclined to see in Herodias, Herr-raud the Red Lord, i.e., Thor. [30] “A Dyalogue describing the orygynall ground of these Lutheran facyons,” 1531. A later work on the excesses of sectaries is Featley’s (D.) Dippers Dipt, 1660. [31] Quoted in Westminster Review, Jan., 1860, p. 194. [32] “Autobiography of Peter Cartwright.” London, 1862 (7th ed.) [33] “The Epidemics of the Middle Ages.” London, 1859. [34] The word is, of course, derived from Instrumentum. [35] See “Fretella,” in Ducange, “Fistulæ species.” [36] M. Gilbert prints, “As the dew flies,” etc.; this is a mistake—“doo” is dove. [37] Possibly we may have this in the still popular Cornish lament, “Have you seen my Billy coming?” [38] On December 14, 1624, as many as 128 ballads were licensed, the names of which are given. “The Blind Beggar (of Bethnal Green);” “Maudline of Bristowe (The Merchant’s Daughter of Bristol);” “Sweet Nansie I doe love thee;” “The Lady’s Fall;” “My minde to me a kingdom is” (Sir Edward Dyer’s famous song); “Margaret, my sweetest;” “In London dwelt a merchantman;” “I am sorry, I am sorry;” “In May when flowers springe;” “I am a poore woman and blinde;” “The Devil and the Paritor (Apparitor);” “It was a Lady’s daughter;” “Roger’s Will;” “Bateman (Lord);” “Bride’s Good Morrow;” “The King and the Shepherd;” “As I went forth one summer’s day;” “Amintas on a summer’s day;” “Ah me, not to thee alone;” “Sir John Barley Corne;” “It was a youthful knight;” “Jane Shore;” “Before my face;” “George Barnwell;” “From Sluggish Sleepe;” “Down by a forrest;” “The Miller and the King;” “Chevie Chase;” “How shall we good
- 59. husbands live;” “Jerusalem,my happie home;” “The King and the Tanner;” “Single life the only way;” “The Lord of Lorne;” “In the daies of old;” “I spide a Nymph trip over the plaine;” “Shakeing hay;” “Troy Toun;” “Walking of late abroad;” “Kisse and bide me welcome home;” “The chirping larke;” “John Carelesse;” “Tell me, Susan, certenly;” “Spanish Lady;” “When Arthur first in Court;” “Diana and her darlings;” “Dear love, regard my life;” “Bride’s buryal;” “Shakeing of the sheets;” “A rich merchantman;” “Gilian of Bramfield;” “Fortune my Foe;” “Cripple of Cornwall;” “Whipping the catt at Abingdon;” “On yonder hill there springs;” “Upon a summertime;” “The Miser of Norfolk.” [39] Friedrich (J.B.) Geschichte des Räthsels, Dresden, 1860. [40] “Le Dieu Gaulois du Soleil,” Paris, 1886. [41] “Scriptores rer. German. Frankof.,” 1718, p. 508. [42] “Eckhard, Monument. Jutreboc,” p. 59. [43] “Anton, Versaml. uber Sitten d. alten Slawen,” II. p. 97. [44] The date on this stone is only 1807, so that the practice must be very modern. [45] Other dolmens with holes at Trye-le-Château, Presles, les Mauduits, in Seine et Oise; at Vic-sur-Aisne; at Bellehaye, and at Villicor—Saint Sépulcre (Oise); and others are in the Morbihan, Charente, etc. [46] What we in England term cromlechs, the French more correctly call dolmens. [47] The building up of part of the circle round a cairn was probably to block the way of the spirit in the direction of the village occupied by the living. [48] Bull. de la Soc. d’anthropologie de Paris, t. ix., p. 198. [49] Reinsberg Düringsfeld. “Trad. et Legendes de la Belgique,” 1870, T. II., p. 239. [50] Journal of the British Archæological Association, vol. xxxviii., 1882. [51] They are found, for instance, on tombstones near Inverness. [52] The majority of these vessels, which abound in the West of England, were unquestionably measures of corn. But all were not so; those that have rounded hollows like cups, and not square cut, were for holy water. [53] “Heimskringla,” Saga III., c. 8.
- 60. Transcriber’s Notes: Variations inspelling and hyphenation remain as in the original unless noted below. Caption Fig. 17, “BO H” changed to “BO’H”. Page 130, comma changed to period after “the stick of the umbrella.” Page 173, period added after “a dancing or jumping mania.” Page 210, “th” inserted in “they” (“they do not wholly agree”). Ads section, punctuation and format regularized. Note 35, single quotation mark changed to double after “Fretella.” Original scans of this book can be found here.
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