The notion of activity-based costing is not new, but only now is the software becoming available to establish it as an enterprise-wide management strategy. ABM breaks a product or service down into processes, and analyses those processes to determine a more accurate cost structure. This encompasses tangible and intangible elements, including detailed time breakdowns, numbers of personnel allocated to certain tasks, and distribution methods. A product may cost little to make in terms of materials, but due to high distribution costs, its profitability may still be below target. By measuring all of the processes surrounding product or service delivery, a business can understand what needs to change in order to achieve maximum profitability on the bottom line.
Once it has built up a picture of its most profitable areas, a smart business will link these findings with detailed knowledge about the profitability of its customers, using data from a customer relationship management (CRM) system. Integrating these findings can form the basis of totally new aspects in its value-creation strategy.
However, as strategy is necessarily formed at board level, it tends to be a conceptual, blue-sky view. Often, the only sense employees have of it is in the form of a vision or mission statement. This can leave them feeling confused as to the relevance and value of their own role.
Balanced Scorecard is a software application that allows an enterprise to translate conceptual strategy into concrete action and thus remove the 'blinders' on all organisational levels. With BSC, a series of key performance indicators (KPIs) are established against strategic objectives, providing defined and measurable goals. Each enterprise can implement as many or as few KPIs as it sees fit. Some have established KPIs for each employee, but perhaps a more feasible approach is to implement them by department.
The enterprise benefits because activity can be measured against strategic direction; and if something can be measured, it can be improved. Employees also benefit; firstly because they understand the value of their individual contribution, and secondly because KPIs can be used to fuel incentive schemes.
An organisation implementing these strategic enterprise management techniques will find that by aligning its people and activities in the right strategic direction as well as for increased profitability, it will be able to work in far greater harmony and achieve a far healthier bottom line.
Michael Klemen is Senior Vice President, Applications Marketing, Oracle EMEA. Questions and comments may be sent to email@example.com