Resource Management + OFTA case study (27 Aug 2005)

ABCM Consulting

Presented byPresented by

Saturday, 29 March 2003Saturday, 29 March 2003

Effective Resource

ManagementHow Activity-based Costing

could facilitate effective resource management

WorkshopJointly Organised by AIA & HKU

SPACESaturday 27 August 2005

Dr Joseph Yau, HKU SPACEMr Alan Lung, ABCM Consulting

ABCM Consulting

Contents:Perspectives in Resource Management

Building an analytical framework -- from historical data to fact-based management

Highlights of ABC theories: The CAM-I Cross, Resource, Activity, Cost Object and Drivers

Case Study – OFTA and Manufacturing Cases

Some Practical Implementation Issues

Group Discussion and Group Presentation

2.30-2.45

2.45-3.00

3.00-4.00

4.15-4.30

4.30-4.45

4.45-6.00

ABCM Consulting

What is resource management?

• An accounting term?• A public administration jargon?• Resource = Money? Property?• Resource = Knowledge, Skill,

People?

ABCM Consulting

Managing Resources in a Government (Bureaucratic) Organizations

• Resource Allocation• Resource Deployment and Re-

deployment• Resource Review

ABCM Consulting

Please suggest ways for HKSAR Government to allocate the following resources

ABCM Consulting

HRG/DRG is not likely to be implemented soon …

ABCM Consulting

Typical Resource Allocation

• Policy Objectives• Key Result Areas by Programme (or CSF?)

Programme Objectives

Initiatives

Global Allocation

Proposed Distribution

Key Performance Indicators

Refined Distribution

Execution

ABCM Consulting

What are the features of effective Resource

Management?

• Availability of physical, human, financial and intangible resources

• Deployment and re-deployment

• High value-added in core and supporting processes

ABCM Consulting

What are the handicaps in the government sector?

• Salaries constitute a very high % of total cost

• Little room for reduction in direct costs

• Difficult to identify non-value-added activities

ABCM Consulting

Activities

IN

PU

TS

OU

TP

UT

S

OU

TC

OM

ES

Output/Outcome Management: How much “Inputs”

(Resource) are used to produce specific outputs? Were those “Outputs” (Services)

useful to the “Outcomes” (Policy Objectives)?

ABCM Consulting

Are all your customers Profitable?Profitability Analysis by Total Profit($) and Margin(%)

Manufacturing Cost

Profit (before HQ Costs)

FOB Revenue

Material Cost

Quantity

cost reduction

increase quantityincrease FOB

low priority in production

Best customer

Tota

l P

rofi

t($)

Marg

in(%

)

ABCM Consulting

CPA: Customer Profitability Analysis

cumulativeprofit

Actualprofit

0

Product B

Hidden profit

Products ranked: most profitable first..

Product A

cumulativeprofit

Actualprofit

0

Customer B

Hidden profit


Customer A

Customers are easier to influence

than products

Possibilities to influence

Diff

eren

ces

in C

ost-

to-s

erve

Different customers use different

activities

ABCM Consulting

..and do you recognize the hidden profit ??

cumulativeprofit

Actualprofit

0

Product A Product B

Hidden profit

ABC

Traditional


Hidden profit...drive to improve

Staff, logistics and quality assuranceMISHousingTraining and management developmentBusiness planning, finance and controlManagement

Product

develop-ment

Procurement

Manu-facturi

ng

Assembly

Marketing and Sales

Delivery

Ser- vice P

rim

ary

Strategic Cost ManagementProduct costing

Price settingPortfolio managementCustomer profitability

ABCM Consulting

Other reasons for using ABC at a Label Manufacturer

• Customer request short TAT increase service level

• Tighter Cost Control• Eliminate Non-value added activities• Identify the profitable customer/product• Evaluate if we intend to keep the account

which are in lost. If so, what we can do to minimize it

• Achieve corporative objective

ABCM Consulting

Project Objective for a PCB Manufacturer

Determine the costs of all activities and resources associated with the PCBs production

Evaluate and test the appropriateness of Activity Based Costing for a PCB manufacturer

Reveal the “true cost” for the PCBs production at the company’s core activities

ABCM Consulting







2.30-2.45

2.45-3.00

3.00-4.00

4.15-4.30

4.30-4.45

4.45-6.00

ABCM Consulting

BSC is closely related to ABC...

ABCM Consulting

Short History of the Balanced Scorecard

ABCM Consulting

Short History of Balanced Scorecard

2004: Intangible Assets are the key value drivers in organisations – they account for 75% of value!

Strategy Maps – describing how an organisation intend to create and sustain value for shareholders

Link processes to measurements (BSC) – put emphasis on the Value Creation Processes

Aligning intangible assets (Human Capital, Information Capital and Organisation Capital) to strategy – alignment of Knowledge Management concepts and BSC

Formation of a Strategy

Landmark 1

Successfully Executed Strategy

Landmark 2

Strategy is also a New Destination (Getting from A to B)

ABCM Consulting

… the cockpit analogy

ABCM Consulting

Mission

Where do we want to

be ?

Strategy

How do we get there ?

Learning &

Development

Financial Customer Process

ABCM Consulting

… the Value Creation Tree

ABCM Consulting

Draft Map F

i na

nc

i al

Achieve Profitability

Blue Sky Airlines Strategy Map

Increase Revenues

Maintain Low Costs

Cu

st o

me

r Increase Customer

Loyalty

Meet Flight Schedules

Increase Market Share

Inte

r na

l P

r oc

es

se

s

Understand Customer Segments

Maintain Fast Ground Turnaround

Improve Operating Efficiency

Em

plo

ye

e

Le

ar n

ing

&

Gro

wth

Maintain Employee

Productivity

Hire, train, and retain the right people

Provide constant

communication

Preserve our culture

ABCM Consulting

Strategic Feedback & Learning

Employee actions contribute toward achieving desired results.

Measurement of progress toward objective indicates success in strategic execution.

Strategy

Employee Action

Critical Success Factors

ABCM Consulting

Functional View

Process View

Activities

Resources

Cost Objects

CostDrivers

Strategy/ Goals

Critical Success Factors (CSFs)

Organization Performance Measures

Growth &Innovation

CustomerSatisfaction

PeopleCommitment

Process Quality

FinancialEthics & Compliance

Divisional or Process Level Performance Measures

Strategy/ Goals



Growth &Innovation


PeopleCommitment

Process Quality



Strategy/ Goals



Growth &Innovation


PeopleCommitment

Process Quality



Growth &Innovation


Balanced Scorecard’s relationship to ABC:

Balanced Scorecard and ABC/M share:- Activities,- Resources,

- Cost

http://www.cam-i.org

ABCM Consulting







2.30-2.45

2.45-3.00

3.00-4.00

4.15-4.30

4.30-4.45

4.45-6.00

ABCM Consulting

“Most companies in Hong Kong use financial statements

to run their business – a situation that is neither

adequate nor satisfactory …”

ABCM Consulting

“How do we use fact-based and quantity-based

management information systems to measure ourselves

objectively ?”

ABCM Consulting

Limitation of Traditional Financial Accounting Approach

• Broad-brush allocations e.g. based on product volume, revenue size, no. of staff ……..

• Historical … not forward-looking• Non-value-added activities and cost

due to inefficiency can NEVER be detected!

ABCM Consulting

• Resources are consumed by Activities

• Activities are consumed by Products/Services

ActivitiesProducts

&Services

Resources

What is ABC?

ABCM Consulting

Cost Assignment View

Process View

Cost Drivers PerformanceMeasures

CostObjects

Activities

Resources

Resource Cost

Assignment

Activity Cost Assignment

ResourceDrivers

ResourceDrivers

ActivityDrivers

ActivityDrivers

ABCM Consulting

The Need for ABC

The demand for overhead activities are not much linked to sales or production volume. They result from:• The diversity and

complexity of products, services and customers

• Quality levels• Rates of needed

change

A key to understanding ABC is to understand how cost behavior truly varies in relation to other factors

Cost Components

Stages in Business Evolution

IntegratedOld-fashioned Hierarchical

Changes in Cost Structure100%

Overhead

Direct (recurring) Labor

Material

1950s 1990s

Direct

0%

ABCM Consulting

do you recognize the peanut butter (i.e.

spreading) effect ??“Simple" clients that..

• Plan their ordering• Order big volumes at one time• Order on time• Order standard product

Not getting rewarded because

traditional calculation..

“Pain in the .." clients that..

• Demand quick, ad hoc delivery• Order small quantities • Order too late• Order only special products

Not paying for the extra costs

they cause..

Lots of wrong decisions are caused by poor calculation practices..


Product

develop-ment

Procurement

Manu-facturi

ng

Assembly

Marketing and Sales

Delivery

Ser- vice P

rim

ary



ABCM Consulting

Resource

“An economic element that is applied to or used in the performance of activities.”

Defines what is neededDefines what is needed

Adapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.)

ABCM Consulting

Resource Examples

Salaries

Technology

Travel

Supplies

Facilities

ABCM Consulting

Activity

“Work performed within an organization.”

What we doWhat we doAdapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.)

ABCM Consulting

Activity Examples

Unloading trucks

Processing purchase orders

Training employees

Maintaining vehicles

Forecasting sales

ABCM Consulting

Cost Object

“Any customer, product, service, contract, project, or other work unit for which a separate cost measurement is desired.”

What we work onWhat we work on

Adapted from The CAM-I Glossary of Activity-Based Management, Edited by Norm Raffish and Peter B.B. Turney, (Arlington: CAM-I, 1991.)

ABCM Consulting

Cost Object Examples

Customers

Products

Services

Contracts

Projects

ABCM Consulting

..and do you recognize the hidden profit ??

cumulativeprofit

Actualprofit

0

Product A Product B

Hidden profit

ABC

Traditional


Hidden profit...drive to improve


Product

develop-ment

Procurement

Manu-facturi

ng

Assembly

Marketing and Sales

Delivery

Ser- vice P

rim

ary



ABCM Consulting

Realize hidden profit

POTENTIAL:

•Increase price (competition can’t do it cheaper either!)

•Stop (let your competitor serve these loss-making customers)

•Reduce cost

•Lower specs

•Process improvement

Loss making products(or customers)

POTENTIAL and REDUCE RISK:

•Sell more of this product or to this kind of customer

•Know how much you can decrease price in case the market dictates so

•Get more volume by discounting (at a level where you are still profitable)

•Pamper thes customers, don’t let competition take these!

Profitable products(or customers)


Product

develop-ment

Procurement

Manu-facturi

ng

Assembly

Marketing and Sales

Delivery

Ser- vice P

rim

ary



ABCM Consulting

ABM creates new insightReporting on Cost Categories

Activity-based-report

Shipping Dept

Salaries

Material

Energy etc.

Depreciation

Office supplies

Other

600

372

32

275

28

8

1315

Budget($ 1000)

Shipping Dept Budget($ 1000)

Plan trucks

Transport

Load trucks

Waiting time trucks

Check delivery

Manage staff & resources

Train staff

Maintain buildings

29

838

130

185

32

27

36

38

1315


Product

develop-ment

Procurement

Manu-facturi

ng

Assembly

Marketing and Sales

Delivery

Ser- vice

Process OptimizationProcess Costing

Activity-Based-CostingEvalution of Process Improvements

Investment decisionsMake or Buy

ABCM Consulting

Control the Support Staff

• Overhead Activity Analysis

• Transfer Pricing• Transparency in

Overhead and Staff Departments

• Service Level Agreements


Product

develop-ment

Procurement

Manu-facturi

ng

Assembly

Marketing and Sales

Delivery

Ser- vice

Control the Support StaffOverhead Activity Analysis

Transfer PricingTransparency in Overhead and Staff Departments

Service Level Agreements

Many people in headoffice, management and staff

E.g. the IT department

30-50% of costs is overhead

Cost Management makes overhead manageable

ABCM Consulting

ABC Doesn’t Replace the Accounting System

An ABC/ABM system does not replace the accounting system. It restates the same data and adds operating relationships to more effectively support decision making.

GeneralGeneralLedgerLedger((expense expense accountaccountbalances)balances)

A blizzard oftransactions

AnAccumulator

OpticalLens

(Reassigns Costs)

Decision makers

AABBCC//AABBMM

Ms. Strategy

Mr. Operations

DataData Data+Data+ InformationInformation

ABCM Consulting

Three Views of Cost

FinancialView

Operational View

StrategicViewYesterdayYesterday

TodayToday

TomorrowTomorrow

?

ABCM Consulting

HOW ABC IS USEDHOW ABC IS USED

16

Number of Sites

0 20 40 60 80 100 120

Product Costing

Cost Reduction

Profitability Analysis

Process Improvement

Cost Estimation

Performance Measurement

Pricing Models

Business Process Re-engineering

Benchmarking

Target Costing

Inventory Valuation

Capacity Utilization

Budgeting

Other

Capital Justification

Downsizing

Project Management

Compensation/Gain-sharing

ABCM Consulting







2.30-2.45

2.45-3.00

3.00-4.00

4.15-4.30

4.30-4.45

4.45-6.00

ABCM Consulting

Switchingfrom

Input Accounting to

Output/Outcome Management

at OFTA

ABCM Consulting

About OFTA

• Executive arm of the Telecommunications Authority (Established by statue in 1993)

• Technical and economic regulator • Dual role of ensuring

– fair competition, – that Hong Kong gets the best telecom services

• Trading Fund Organization – ensuring “Cost Recovery”

• Place high priority on training and development

ABCM Consulting

A Systematic Way to Understand Costs

• Full Cost Recovery from fees charged

• Relative cost and benefits of services delivered

• High cost is weigh against social benefits

• ABC versus traditional costing:– “Cost Triggers” vs.

“Revenue Based” and “Headcount Based” accounting

• Pricing of “Products” based on true costs

ABCM Consulting

OFTAABC Conceptual Cost Flow

Activities - by Section

G/L

Resources

Classification of G/L Items into CostBaseline

G/L Items Cost Baseline

Audit Fee Telephone - mobile Printing Depreciation Electricity Staff Salaries Advertising

. . . . . . .

Business SustainingCost

Administration

Communication

Computer & Elect.Equip

Office expenses

Maintenance(office & Equip)

People Cost

Senior ManagementCost

Utilities

Transportation

Office Facilities

Publicity &Promotion

ResourceDriver:Time

Survey

Cost Pool Drivers

Resource Cost Pools -by Staff Grade

Computer Services

Standards

For example:SITMITMITOIT

External Affairs 2

External Affairs 1

RMU + Investigation &Prosecution

Finance

Inspection & Licensing

Regulatory & Training

Licences

PRS-2GPRS-3GMobile Radio SystemFixed NetworkShip StationFixed Carrier (Restricted)Broadcast Relay StationRadio Paging System

Activities Cost Objects

For example:Direct Operation SupportTrouble-shooting and MaintenanceSystem and Network AdministrationSecurity ManagementDevelopmentLicensing System RedevelopmentPreventive MaintenanceWeb UpdatingSupervision (Evenly Assigned)Support Cost (Ave. % of time spent)

Administrative Services

ActivitySupport Cost

Intra-Assignment

Depreciation(Note)

Corporate Affairs

Computer Services

Standards

External Affairs 2

External Affairs 1

RMU + Investigation &Prosecution

Finance

Inspection & Licensing

Regulatory & Training

Administrative Services

Corporate Affairs

Business Sustaining

Other Section's SupportCost

Activity DriverSurveys

PercentageNo of requestsNo. of Systems# of headcount

# of licences# of reports# of cases

# of participants# of applications

.

.

.

.

General Ledger

Resource Cost Drivers

Activity Cost Drivers

Note: In the model, depreciation categorised as:- Land & Building- Computer, Furniture & Fixtures- Telecom Equipment- Vehicle

ABC provides more relevant information as it turns more indirect costs into direct costs

. . . . . .

AllocationKeys

. . . . . . .

ABCM Consulting

ABC Conceptual Flow at OFTA

• For 2002/03, OFTA has– No of Resource items: 165– No of Activities: 599– No of Cost objects (products): 50

• Results– Project commenced in May 2003 and first

management report issued in Sept 2003– More understanding on the costs of

telecommunications licences– Enterprise-wide model developed with less

indirect costs and more direct costs identified

ABCM Consulting

“The ABCM exercise in OFTA gives us an opportunity to evaluate services costs and re-deploy resources in a more effective manner.

But senior management should be prepared to communicate openly and explain the reasons behind an ABC exercise to avoid having the potential misconception problems”

WONG Kwok-shu, Assistant DirectorOffice of the Telecommunications Authority

ABCM Consulting

Four Stages of Implementation

• Stage One: Consultants to provide conceptual training and conduct a pilot study

• Stage Two: Map out plan to roll-out using own staff

• Stage Three: Further conceptualization and explanation to staff at each level

• Stage Four: Organization-wide implementation (to be completed in 2004/2005 Financial Year)

ABCM Consulting

Experience Learnt• Avoid setting too aggressive targets

– Agree the cost objects with top and middle management– Restrict the number of activities and cost objects– Allow enough time for checking and review

• Importance of management support and teamwork– Seek support from top management– Require team efforts (project team members and

other staff)

• Importance of face to face communication– Conduct in-house interviews to complete the Activity

Dictionary (24 interviews arranged with duration of 2 hours each)– Convene meetings to explain the logic and reasons for

ABC implementation (4 meetings held)

ABCM Consulting

Future direction of ABC at OFTA:

Automation & Refinement

• Automate data integration between ABC database and data gathering process– e.g. develop time log system to

capture time spent

• Refining the ABC Model framework– capture of regular cost and driver

data

ABCM Consulting


Predictive Planning• Launch Activity Based Management

Initiatives– continuous improvement on ABC

information to facilitate predictive resources management and pricing decisions

NowPast Future

ABC

ABB

ABCM Consulting

Activities

IN

PU

TS

OU

TP

UT

S

OU

TC

OM

ES

Future direction of ABC at OFTA: Output/Outcome

Management

ABCM Consulting

Conclusion – About OFTA• Executive arm of the Telecommunications Authority (Established by statue in

1993)

• Technical and economic regulator

• Dual role of ensuring– fair competition, – that Hong Kong gets the

best telecom services• Trading Fund Organization – ensuring “Cost Recovery”• Place high priority on training and development

OU

TP

UT

S

www.qprcostcontrol.com

ABCM Consulting

ActivitiesIN

PU

TS

OU

TP

UT

S

OU

TC

OM

ES


Output/Outcome Management

ABCM Consulting







2.30-2.45

2.45-3.00

3.00-4.00

4.15-4.30

4.30-4.45

4.45-6.00

ABCM Consulting

Implementing Fact-based Resource Management

• Mis-conception About ABC Implementation – too complicated

• Rapid Prototyping

ABCM Consulting

Mis-conception about ABC Implementation

• It involves a massive enterprise-wide involvement of people and mudslide of data

• No result until the ABC system is completely constructed

• It will take forever to implement and perhaps may not worth the effort

ABCM Consulting

ABC Application Adopting Iterative Prototyping

• Education and awareness• High-level modeling (Model

“0”) • Analyzing Model “0” to get

buy-in• Securing and propagating the

Learning: A Communication Plan

• Lower-level modeling (Models “1”, “2” etc)

ABCM Consulting

Level “0” Modeling

• Usually starts with the ledger expenditure data

• Obtain crude data through interviews to identify work activities, work products, and the time involved

• Aim at “aggregated” (i.e. grouped) cost drivers

• It will only take a few days to complete• ABC Team will spend more time on

learning the approximation error in the ABC “cost assignment”

ABCM Consulting

Rapid Prototyping, BEFORE Piloting

• Not to work on detailed costing, just to stimulate participants

• Will not necessarily provide final answer

• It starts with crude approximations

• Accuracy to be refined in the lower-level models

ABCM Consulting

The Typical ABC Team

• A Project Leader• Professionals• Application services• In-house modeler (not necessary

be accountant or cost engineer)• External consultant (NOT a must)

ABCM Consulting







2.30-2.45

2.45-3.00

3.00-4.00

4.15-4.30

4.30-4.45

4.45-6.00

ABCM Consulting

Thank you!

Q&AFor more information, contact:

Alan Lung, Consultant & General ManagerABCM Consulting(China)Ltd

Tel: +852 2503-1383 Fax: +852 2503-3645E-mail: [email protected]

Documents

Resource Management + OFTA case study (27 Aug 2005)