Resource Management + OFTA case study (27 Aug 2005)
1. Effective
Resource
Management
How Activity-based Costing
could facilitate effective
resource management
Presented by
Workshop
Jointly Organised by AIA & HKU
Saturday, 29 March 2003 SPACE
Saturday 27 August 2005
Dr Joseph Yau, HKU SPACE
Mr Alan Lung, ABCM Consulting
ABCM Consulting
2. Contents:
Perspectives in Resource Management
2.30-2.45
Building an analytical framework -- from
2.45-3.00
historical data to fact-based management
Highlights of ABC theories: The CAM-I
3.00-4.00
Cross, Resource, Activity, Cost Object
and Drivers
Case Study – OFTA and Manufacturing
4.15-4.30
Cases
Some Practical Implementation Issues
4.30-4.45
Group Discussion and Group
4.45-6.00
Presentation
ABCM Consulting
3. What is resource management?
• An accounting term?
• A public administration jargon?
• Resource = Money? Property?
• Resource = Knowledge, Skill, People?
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4. Managing Resources in a
Government (Bureaucratic)
Organizations
• Resource Allocation
• Resource Deployment and Re-
deployment
• Resource Review
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5. Please suggest ways for HKSAR Government to
allocate the following resources
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6. HRG/DRG is not likely to be
implemented soon …
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7. Typical Resource Allocation
• Policy Objectives
• Key Result Areas by Programme (or CSF?)
Global
Allocation
Proposed
Distribution Refined
Distribution
Key
Performance
Indicators Execution
Programme Objectives
Initiatives
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8. What are the features of effective
Resource Management?
• Availability of physical, human,
financial and intangible resources
• Deployment and re-deployment
• High value-added in core and
supporting processes
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9. What are the handicaps in the
government sector?
• Salaries constitute a very high %
of total cost
• Little room for reduction in direct
costs
• Difficult to identify non-value-
added activities
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10. Output/Outcome
Management: How much “Inputs”
(Resource) are used to produce specific
outputs? Were those “Outputs” (Services) useful
to the “Outcomes” (Policy Objectives)?
OUTCOMES
OUTPUTS
IN PUTS
Activities
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11. Are all your customers Profitable?
Profitability Analysis by Total Profit($) and Margin(%)
Best
customer
Profit($)
low priority in
Total
productionQuantity
Profit
(before
HQ Costs)
Manufacturing
FOB Cost
increase
Revenue
Material
quantity
Cost
increase
FOB
Margin(%)
cost
reduction
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12. CPA: Customer Profitability
Analysis
cumulative
profit
Hidden
profit
Actual
profit
Differences in Cost-to-serve
Different customers
use different 0 Products ranked: most profitable first..
activities Customer A Customer B
cumulative
profit
Hidden
profit Customers are
Actual
profit
easier to influence
than products
0 Products ranked: most profitable first..
Product A Product B
Possibilities to influence
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13. Management
Business planning, finance and control
Training and management development
Housing
MIS
Staff, logistics and quality assurance
Produc Ser-
ary
Manu- Marketi
t Procur Assem Strategic Cost Management
Deliver
facturi ng and Product costing
Prim
develo ement bly y vice
ng Sales Price setting
p-ment
..and do you recognize the
Portfolio management
Customer profitability
ABC
hidden profit ??
cumulative
profit
Hidden
Traditiona profit
l
Actual
profit
0
Products ranked: most profitable first..
Product A Product B
Hidden profit...drive to improve
ABCM Consulting
14. 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
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15. Project Objective for a PCB
Manufacturer
Determine the costs of all activities and resources
associated with the PCBs production
Evaluate and test the appropriateness of Activity
Based Costing for a PCB manufacturer
Reveal the “true cost” for the PCBs production at the
company’s core activities
ABCM Consulting
16. Contents:
Perspectives in Resource Management
2.30-2.45
Building an analytical framework -- from
2.45-3.00
historical data to fact-based management
Highlights of ABC theories: The CAM-I
3.00-4.00
Cross, Resource, Activity, Cost Object
and Drivers
Case Study – OFTA and Manufacturing
4.15-4.30
Cases
Some Practical Implementation Issues
4.30-4.45
Group Discussion and Group
4.45-6.00
Presentation
ABCM Consulting
19. Short History of Balanced Scorecard
2004: Intangible Assets are the key
value drivers in organisations – they
account for 75% of value!
Strategy Maps – describing how an
organisation intend to create and
sustain value for shareholders
Link processes to measurements (BSC) –
put emphasis on the Value Creation
Processes
Aligning intangible assets (Human
Capital, Information Capital and
Organisation Capital) to strategy –
alignment of Knowledge
Management concepts and BSC Consulting
ABCM
20. Strategy is also a New
Destination (Getting from A to B)
Successfully
Executed
Strategy
Landmark 2
Landmark 1
Formation of a
Strategy
26. St r at egy/ Goals
Balanced Scorecard’s
relationship to ABC:
Grow t h & Custom er People Process Et hics & Financial
I nnovat ion Sat i sf act ion Com mit m ent Quali ty Compl iance
Crit ical Success Fact or s ( CSFs)
Or ganizat ion Perfor m ance Measur es
Functional View
Divisional or Pr ocess Level Per for m ance Measur es
Resources
Process View
St r ategy/ Goals
Balanced Scorecard and
Gr ow t h & Cust om er Pe opl e Pr oce ss Et h i cs & F in ancia l
Cost
I n n ovat io n Sa t isf act ion Co mm it men t Qu ali t y Com p li an ce
Cri t ical Success Factors ( CSFs)
ABC/M share:
Drivers Activities Or gani zat ion Per for m ance M easur es - Activities,
Divi sion al or Pro cess Level Per for man ce M easur es - Resources,
- Cost
Cost Objects
http://www.cam-i.org ABCM Consulting
27. Contents:
Perspectives in Resource Management
2.30-2.45
Building an analytical framework -- from
2.45-3.00
historical data to fact-based management
Highlights of ABC theories: The CAM-I
3.00-4.00
Cross, Resource, Activity, Cost Object
and Drivers
Case Study – OFTA and Manufacturing
4.15-4.30
Cases
Some Practical Implementation Issues
4.30-4.45
Group Discussion and Group
4.45-6.00
Presentation
ABCM Consulting
28. “Most companies in Hong Kong
use financial statements to run
their business – a situation that
is neither adequate
nor satisfactory …”
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29. “How do we use fact-based and
quantity-based management
information systems to measure
ourselves objectively ?”
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30. 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!
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31. What is ABC?
• Resources are consumed by Activities
• Activities are consumed by Products/Services
Products
Resources Activities &
Services
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33. The Need for ABC
A key to understanding ABC is to understand how cost
behavior truly varies in relation to other factors
Changes in Cost Structure
100%
Overhead The demand for
overhead activities
Cost Direct are not much linked
Material
Components to sales or
production volume.
They result from:
• The diversity and
complexity of
Direct (recurring) Labor products, services
and customers
• Quality levels
• Rates of needed
1950s 1990s change
0%
Old-fashioned Hierarchical Integrated
Stages in Business Evolution
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34. Management
do you recognize the peanut
Business planning, finance and control
Training and management development
Housing
MIS
Staff, logistics and quality assurance
Produc Ser-
ary
Manu- Marketi
t Procur Assem Strategic Cost Management
Deliver
facturi ng and Product costing
Prim
develo ement bly y vice
ng Sales Price setting
p-ment
butter (i.e. spreading)
Portfolio management
Customer profitability
“Simple" clients that..
effect ??
“Pain in the .." clients that..
• Plan their ordering • Demand quick, ad hoc delivery
• Order big volumes at one time • Order small quantities
• Order on time • Order too late
• Order standard product • Order only special products
Not getting rewarded because Not paying for the extra costs
traditional calculation.. they cause..
Lots of wrong decisions are caused by poor calculation practices..
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35. Resource
“An economic element that is
applied to or used in the
performance of activities.”
Defines what is needed
Defines what is needed
Adapted from The CAM-I Glossary of
Activity-Based Management, Edited by
Norm Raffish and Peter B.B. Turney,
(Arlington: CAM-I, 1991.)
ABCM Consulting
37. Activity
“Work performed within an organization.”
What we do
What we do
Adapted from The CAM-I Glossary of
Activity-Based Management, Edited by
Norm Raffish and Peter B.B. Turney,
(Arlington: CAM-I, 1991.)
ABCM Consulting
39. Cost Object
“Any customer, product, service, contract,
project, or other work unit for which a separate
cost measurement is desired.”
What we work on
What we work on
Adapted from The CAM-I Glossary of
Activity-Based Management, Edited by
Norm Raffish and Peter B.B. Turney,
(Arlington: CAM-I, 1991.)
ABCM Consulting
41. Management
Business planning, finance and control
Training and management development
Housing
MIS
Staff, logistics and quality assurance
Produc Ser-
ary
Manu- Marketi
t Procur Assem Strategic Cost Management
Deliver
facturi ng and Product costing
Prim
develo ement bly y vice
ng Sales Price setting
p-ment
..and do you recognize the
Portfolio management
Customer profitability
ABC
hidden profit ??
cumulative
profit
Hidden
Traditiona profit
l
Actual
profit
0
Products ranked: most profitable first..
Product A Product B
Hidden profit...drive to improve
ABCM Consulting
42. Management
Business planning, finance and control
Training and management development
Housing
MIS
Staff, logistics and quality assurance
Produc Ser-
ary
Manu- Marketi
t Procur Assem Strategic Cost Management
Deliver
facturi ng and Product costing
Prim
develo ement bly y vice
ng Sales Price setting
Realize hidden profit
p-ment
Portfolio management
Customer profitability
Loss making products Profitable products
(or customers) (or customers)
POTENTIAL: POTENTIAL and REDUCE RISK:
•Increase price (competition can’t do it •Sell more of this product or to this kind
cheaper either!) of customer
•Stop (let your competitor serve these •Know how much you can decrease
loss-making customers) price in case the market dictates so
•Reduce cost •Get more volume by discounting (at a
level where you are still profitable)
•Lower specs
•Pamper thes customers, don’t let
•Process improvement competition take these!
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43. Management
Business planning, finance and control
Training and management development
Housing
MIS
Staff, logistics and quality assurance
Produc Process Optimization Ser-
Manu- Marketi
t Procur Process Costingand Deliver
Assem
facturi ng
develo ement Activity-Based-Costing
bly y vice
ng Sales
p-ment Evalution of Process Improvements
ABM creates new insight
Investment decisions
Make or Buy
Reporting on Cost
Activity-based-report
Categories
Shipping Dept Budget
Shipping Dept Budget ($ 1000)
($ 1000)
Plan trucks 29
Salaries 600
Transport 838
Material 372
Load trucks 130
Energy etc. 32
Waiting time trucks 185
Depreciation 275
Check delivery 32
Office supplies 28
Manage staff & resources 27
Other 8
Train staff 36
1315
Maintain buildings 38
1315
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44. Management Control the Support Staff
Business planning, financeActivity Analysis
Overhead and control
Training and management development
Housing Transfer Pricing
MIS Transparency in Overhead and Staff Departments
Staff, logistics and quality assurance
Service Level Agreements
Produc Ser-
Manu- Marketi
t Procur Assem Deliver
facturi ng and
develo ement bly y vice
ng Sales
Control the Support Staff
p-ment
• Overhead Activity Analysis
• Transfer Pricing
• Transparency in Overhead
and Staff Departments
• Service Level Agreements
30-50% of costs is overhead
Many people
E.g. the IT
in headoffice,
department
management
and staff
Cost Management makes
overhead manageable
ABCM Consulting
45. 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.
Data Data+ Information
A Ms. Strategy
General B
A blizzard of Ledger C
transactions (expense /
Mr. Operations
account A
balances) B
M
An Optical Decision makers
Lens
Accumulator (Reassigns
Costs)
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46. Three Views of Cost
Operational View
Today
Financial Strategic
View Yesterday Tomorrow View
?
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47. HOW ABC IS USED
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
Number of 0 20 40 60 80 100 120
Sites
16
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48. Contents:
Perspectives in Resource Management
2.30-2.45
Building an analytical framework -- from
2.45-3.00
historical data to fact-based management
Highlights of ABC theories: The CAM-I
3.00-4.00
Cross, Resource, Activity, Cost Object
and Drivers
Case Study – OFTA and Manufacturing
4.15-4.30
Cases
Some Practical Implementation Issues
4.30-4.45
Group Discussion and Group
4.45-6.00
Presentation
ABCM Consulting
49. Switching
from
Input Accounting
to
Output/Outcome
Management
at
OFTA
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50. About OFTA
• Executive arm of the Telecommunications
Authority (Established by statue in 1993)
• Technical and economic regulator
• Dual role of ensuring
– fair competition,
– that Hong Kong gets the best telecom services
• Trading Fund Organization – ensuring “Cost
Recovery”
• Place high priority on training and
development
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51. A Systematic Way to
Understand Costs
• Full Cost Recovery from fees charged
• Relative cost and benefits of services
delivered
• High cost is weigh against social
benefits
• ABC versus traditional costing:
– “Cost Triggers” vs.
“Revenue Based” and “Headcount
Based” accounting
• Pricing of “Products” based on
true costs
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52. OFTA
ABC Conceptual Cost Flow
General Ledger Resources Activities Cost Objects
G/L
Cost Pool Resource Cost Activity Cost
Drivers Drivers Drivers
Licences
Classification of G/L Items into Cost Resource Cost Pools - Activities - by Section
Baseline by Staff Grade
G/L Items Cost Baseline Computer Services
Computer Services
Business Sustaining
Audit Fee Cost For example:
Telephone - mobile Direct Operation Support
Printing Administration Trouble-shooting and Maintenance
Depreciation For example: System and Network Administration
Electricity Communication SITM Security Management
Staff Salaries ITM Development
Advertising Computer & Elect. ITO Licensing System Redevelopment
Equip IT Preventive Maintenance
. Web Updating Activity Driver
. Utilities Standards Supervision (Evenly Assigned) Surveys
. Support Cost (Ave. % of time spent)
. Office expenses Percentage PRS-2G
. Resource Standards No of requests PRS-3G
External Affairs 1
. Driver: No. of Systems Mobile Radio System
. Office Facilities Allocation Time # of headcount
External Affairs 1 Fixed Network
Keys External Affairs 2 # of licences
Maintenance Survey # of reports
Ship Station
(office & Equip) External Affairs 2 # of cases Fixed Carrier (Restricted)
# of participants Broadcast Relay Station
Administrative Services # of applications Radio Paging System
Depreciation Administrative Services
(Note) . .
. .
Corporate Affairs Corporate Affairs . .
Publicity & . .
Promotion .
Finance Finance .
.
People Cost RMU + Investigation &
RMU + Investigation & Prosecution
Prosecution
Senior Management
Cost Inspection & Licensing
Inspection & Licensing
Transportation Regulatory & Training
. Regulatory & Training
. Business Sustaining
.
. Other Section's Support
. Cost
.
Note: In the model, depreciation categorised as: Activity
- Land & Building Support Cost
- Computer, Furniture & Fixtures Intra-
- Telecom Equipment
- Vehicle Assignment
ABC provides more relevant information as it turns more indirect costs into direct costs
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53. ABC Conceptual Flow at OFTA
• For 2002/03, OFTA has
– No of Resource items: 165
– No of Activities: 599
– No of Cost objects (products): 50
• Results
– Project commenced in May 2003 and first
management report issued in Sept 2003
– More understanding on the costs of
telecommunications licences
– Enterprise-wide model developed with less indirect
costs and more direct costs identified
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54. “The ABCM exercise in OFTA gives us an
opportunity to evaluate services costs and re-
deploy resources in a more effective manner.
But senior management should be prepared to
communicate openly and explain the reasons
behind an ABC exercise to avoid having the
potential misconception problems”
WONG Kwok-shu, Assistant Director
Office of the Telecommunications Authority
ABCM Consulting
55. 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)
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56. Experience Learnt
• Avoid setting too aggressive targets
– Agree the cost objects with top and middle management
– Restrict the number of activities and cost objects
– Allow enough time for checking and review
• Importance of management support and teamwork
– Seek support from top management
– Require team efforts (project team members
and other staff)
• Importance of face to face communication
– Conduct in-house interviews to complete the
Activity Dictionary (24 interviews arranged
with duration of 2 hours each)
– Convene meetings to explain the logic and
reasons for ABC implementation
(4 meetings held)
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57. Future direction of ABC at OFTA:
Automation & Refinement
• Automate data integration between
ABC database and data gathering
process
– e.g. develop time log system to
capture time spent
• Refining the ABC Model framework
– capture of regular cost and driver data
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58. Future direction of ABC at OFTA:
Predictive Planning
• Launch Activity Based Management
Initiatives
– continuous improvement on ABC information to
facilitate predictive resources management and
pricing decisions
ABC
ABB
Past Now Future
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59. Future direction of ABC at OFTA:
Output/Outcome Management
OUTCOMES
OUTPUTS
IN PUTS
Activities
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60. Conclusion – About OFTA
• Executive arm of the Telecommunications Authority (Established by statue in 1993)
• Technical and economic regulator
• Dual role of ensuring
– fair competition,
– that Hong Kong gets the
best telecom services
• Trading Fund Organization – ensuring “Cost Recovery”
OUTPUTS
• Place high priority on training and development
ABCM Consulting
Future direction of ABC at OFTA:
Output/Outcome
Management
OUTCOMES
OUTPUTS
IN PUTS
Activities
www.qprcostcontrol.com
ABCM Consulting
61. Contents:
Perspectives in Resource Management
2.30-2.45
Building an analytical framework -- from
2.45-3.00
historical data to fact-based management
Highlights of ABC theories: The CAM-I
3.00-4.00
Cross, Resource, Activity, Cost Object
and Drivers
Case Study – OFTA and Manufacturing
4.15-4.30
Cases
Some Practical Implementation Issues
4.30-4.45
Group Discussion and Group
4.45-6.00
Presentation
ABCM Consulting
62. Implementing Fact-based Resource
Management
• Mis-conception About ABC
Implementation – too
complicated
• Rapid Prototyping
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63. Mis-conception about ABC
Implementation
• It involves a massive enterprise-wide
involvement of people and mudslide of
data
• No result until the ABC system is
completely constructed
• It will take forever to implement and
perhaps may not worth the effort
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64. ABC Application Adopting Iterative
Prototyping
• Education and awareness
• High-level modeling (Model “0”)
• Analyzing Model “0” to get buy-in
• Securing and propagating the
Learning: A Communication Plan
• Lower-level modeling (Models “1”,
“2” etc)
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65. Level “0” Modeling
• Usually starts with the ledger expenditure
data
• Obtain crude data through interviews to
identify work activities, work products, and
the time involved
• Aim at “aggregated” (i.e. grouped) cost
drivers
• It will only take a few days to complete
• ABC Team will spend more time on learning
the approximation error in the ABC “cost
assignment”
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66. Rapid Prototyping, BEFORE
Piloting
• Not to work on detailed costing, just
to stimulate participants
• Will not necessarily provide final
answer
• It starts with crude approximations
• Accuracy to be refined in the lower-
level models
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67. The Typical ABC Team
• A Project Leader
• Professionals
• Application services
• In-house modeler (not necessary be
accountant or cost engineer)
• External consultant (NOT a must)
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68. Contents:
Perspectives in Resource Management
2.30-2.45
Building an analytical framework -- from
2.45-3.00
historical data to fact-based management
Highlights of ABC theories: The CAM-I
3.00-4.00
Cross, Resource, Activity, Cost Object
and Drivers
Case Study – OFTA and Manufacturing
4.15-4.30
Cases
Some Practical Implementation Issues
4.30-4.45
Group Discussion and Group
4.45-6.00
Presentation
ABCM Consulting
69. Thank you!
Q&A
For more information, contact:
Alan Lung, Consultant & General Manager
ABCM Consulting(China)Ltd
Tel: +852 2503-1383 Fax: +852 2503-3645
E-mail: alanlung@abcmconsulting.com
ABCM Consulting
Notes de l'éditeur
Framework Employees now have tangible, measurable goals that they can address that will support the execution of organizational strategy. Employee action is now directed towards achieving CSF ’ s. Measuring progress towards CSF ’ s indicates success at implementing strategy.