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ABB case study - 2008/9 - MSc in Business Administration (Belgium)
- 1. ABACUS Asia Brown Accounting and Communication System Rebecca Baxter Serena Boccardo Andrej Romandic Miroslava Petrova Svilen Stefanov
- 2. 29/10/2008 Strategy implementation and control 2 Role of the ABACUS system at ABB • Provides timely, detailed and accurate information about activities vital to decision making • Helps support matrix structure by providing corporate reporting information • Helps managers execute their strategy
- 3. 29/10/2008 Strategy implementation and control 3 ABB’s Accounting and Control Policies • Uniform performance indicators and ratios –Full costs profit calculation –ROCE • Standardized input • Strict rules –Operating rules –Controller mentality rules • Availability of data to managers
- 4. 29/10/2008 Strategy implementation and control 4 The way ABB performs strategic planning • Each business area – a worldwide strategic plan • Targets for each Business area and for each region • Co – ordination between targets headed down by both Business area and region managers
- 5. 29/10/2008 Strategy implementation and control 5 ABB – use of the strategic control information • Evaluation of performance • Verification of whether strategic goals and targets are being met • Preparation of annual budget and updated forecasts • Communication of both numerical data and management comments • Quick decision making
- 6. 29/10/2008 Strategy implementation and control 5 ABB – use of the strategic control information • Evaluation of performance • Verification of whether strategic goals and targets are being met • Preparation of annual budget and updated forecasts • Communication of both numerical data and management comments • Quick decision making
Notes de l'éditeur
- Abacus is the computer-supported reporting system that ABB uses to manage ongoing information, to process it, and to provide pertinent reports to each level of the business. Hence, the first task Abacus carries out is helping managers all the way down to the smallest reporting unit (individual profit centers) to make timely, detailed and accurate decisions, in order to allocate resources, to compare performances, and to respect budgets. Thanks to the flexibility of Abacus, managers of each levels can cut the data and extract performance indicators (by company, by region, etc.). The matrix structure of ABB requires greater accountability and control with managers responsible for both specific business areas and countries. Top managers are also responsible for managing both specific business unites and countries and the flexibility of the ABACUS system helps them to do this from each point of view. Another role of the ABACUS system at ABB is to help top managers execute their strategy by providing performance feedback. Managers can easily see if the companies that they are in charge of are on track or not. Abacus compares performance with budget and forecasts and helps managers take corrective actions if the actual performance differs from the intended strategies and planned results.
- <number> Some of the accounting and control policies used at ABB compliment the complex matrix structure and large size of the company. First, uniform performance indicators and ratios are used company wide to measure performance. ABB calculates profit using a full cost concept instead of the direct cost concept. This means that all corporate costs are allocated to the operating units so that there is complete accountability at the profit center level. It is indispensable at a company like ABB which is highly decentralized to demonstrate that at each individual profit center value is being added at a competitive cost. All managers know what it is like to operate on thin margins and therefore feel personally accountable for profit and losses of the company. When managers know the full impact of giving away a small percentage during negotiations, they are less likely to do so. All profit center managers are also accountable for performance on all the dimensions of the ROCE ratio. Using this ratio allows managers to see how effectively profit centers are using the assets in their direct span of control to generate sales. ABB uses this ratio to measure performance of its companies. Using these indicators in all areas of the business makes it easy for managers to control performance. Another of ABB’s policies that we agree with is that all input is standardized company wide. Because of this, all information that is needed in all business units can be reported in the same format. This also, allows the ABACUS database to generate tailored reports to answer specific questions. This is essential for such a large company like ABB, otherwise information could never be as accessible to all managers and comparisons could not be made easily. Also, comments and explanations were required on progress and deviations respectively, which allowed corporate level managers to have feedback from lower level managers with whom they may never personally speak. We also agree with the operating rules that all employees must respect in regards to the ABACUS system. These rules are critical to the ability of the company to operate because consistency is so important at ABB. Some of the rules such as people should not report twice and that people should not comment on obvious things are rules that make the operation of ABB possible. Managers have little time because they are responsible for two levels of oversight so information should be quick and efficient. Everyone must play by the same rules or confusion and disorganization is likely. Also, all profit center managers are treated as business controllers and must adhere to 5 rules to improve their ‘controller mentality.’ These rules help managers understand the level of accountability and control that is required at a decentralized company like ABB. There are some advantages and disadvantages of the policy regarding the availability of data to all managers. Access to the ABACUS system was limited. Managers were required to enter two levels of passwords to access reports. Certain information was restricted depending on the managers’ authority and responsibility level meaning all managers did not have access to all available information. Reasons for this might include the confidentiality of company information. An ABB company in Italy could not access company information for a similar ABB company in France but maybe they had no need to. It is possible that companies operated so independently from each other that being able to see each others’ financial information was seen as a breach of confidentiality. Also, another reason that managers didn’t have access to all information might have been because that would give them too much authority and top managers less authority. Lower level managers were accountable for many things because ABB was so decentralized, but to give them the same access to information as top managers might have been unnecessary. Lower level managers needed to focus on their own market and their own business and not analyze data that was not relevant to their operation. On the other hand, access to this information could have allowed for best practices to be shared between companies. For example that company in Italy could see that the company in France was doing very well in an area that it was failing. Communication between these managers would encourage the creation of synergy because both companies would share best practices resulting in economies of scope. Although this is what Business Area managers were responsible for doing themselves, it could be beneficial to let managers closest to operations have discussions. This could create the opportunity for ABB to foster a learning organization. Another advantage would be that healthy competition would be stimulated because no manager at ABB wanted to be the low man on the ranking. Carlsson could already see the effect of sending out comparative data to different managers. If these managers could have access to comparative data themselves, they might continuously make it one of their goals to have better results than other similar ABB companies.
- <number> One of the ways that ABB performs strategic planning is by creating a worldwide strategic plan for each business unit. Based on this strategic plan, a target is agreed upon for each Business Area as well as for each region. Using a top-down method targets are broken down and communicated to the Business Areas and regions under a managers’ control. Because a lower level manager will receive two targets, one from his regional managers and one from his Business Area manager, they have to negotiate a consensus. Because ABB has a complex matrix structure, this system of strategic planning works well for them in some ways. Each manager is controlled by two managers This is an example of how ABB ‘overcomes its dilemma of wanting to be global and local at the same time’. When there are substantial differences in the targets of both the regional and the Business Area manager differences have to be reconciled. This can be a source of many tensions within the company. For example, a great deal of time is needed to come to a consensus if managers have different priorities. If managers do not agree the first time, there has to be a second round of negotiations. Moreover, if managers are required to meet multiple times face to face because of conflicts, travel and communications could get costly for ABB. These priorities are also factored into the bonus schemes. Since a certain percentage (25%) of a managers’ bonus is based on the achievement of his personal goals, budget targets might be biased to increase the chances of a favorable bonus outcome.
- <number> The strategic control information that is gathered using the ABACUS system is used in different ways at ABB. This data is vital to the operation of the business and the formulation and follow up of strategic plans. The ABACUS system allows managers to pull reports and trend data cut in any way they want. This allows managers to quickly evaluate performance of different companies by extracting performance indicators by company, region and world-wide product line. Sune Carlsson, one of the 11 vice presidents of ABB uses the information to compare the performance of different ABB companies to see if they have any problems. Managers could then for example, identify best practices that can be used in other ABB companies. This data can also be used to check if profit centers are on target and meeting strategic goals. Managers do this by pulling out trend data and searching for negative deviations. They hold their managers accountable for carrying out strategic goals and find poor results inexcusable. Discussions then follow focusing on what the manager can do to get back on track as soon as possible. The strategic control information is compiled once a month within 10 to 14 days after the end of the month. This information is necessary for annual budget preparation and updated forecasts. Because this data is only compiled once for each month, managers cannot continuously monitor the day to day performance of profit centers and are not able to quickly respond to poor performance. In addition to the numerical data, management comments are required to explain deviations from the budget and forecast. Comments are then later consolidated either by business unit or by region and used later in performance evaluation. Lastly, the strategic control information can be used for quick decision making. Data must be transmitted to ABB headquarters in accordance with strict timetables to ensure receipt. Also, information deadlines are always being shortened to create a sense of urgency in reporting. The quicker the data is looked at, the quicker it can be acted upon instead of just being a historical record. At ABB it is important that managers receive timely information each month about sales, order margins and other activities vital to decision making. Moreover, at ABB Barnavik’s management style is known for being quick and decisive. The fact that this data can be used for quick decision making fits well with his management style.