ABC made simple

Integration with financial systems was the development that was supposed to make activity-based costing (ABC) software really take off.

Now that theory may be put to the test, as major package vendors incorporate ABC facilities into their ranges and ABC software specialists improve the connectivity of their products.

Activity-based costing seems to go in and out of fashion almost from one month to the next. Suppliers of ABC computer systems agree that the UK is not exactly a hot-bed of activity in this area, and that most of the excitement is being generated in the US and on the Continent.

Claiming to be the world leader in ABC software, with over 4,000 installations, ABC Technologies can offer a fair overview. Its technical director Doug Squibb says: ‘Interest is very high in mainland Europe. It’s getting to be big news in Germany. In the UK there’s some reticence, though where it is done it’s usually done well. Business schools abroad are interested in it, but we’ve had relatively little interest from those in the UK, even though universities here use our software in managing their own operations.’

Cost management

In the past ABC software has tended to be used, often by management consultants, to obtain a one-off snapshot of where an organisation is running up costs, as an aid to process improvement. Most experts feel that more is to be gained from a system which can be used on a continuing basis to monitor, and manage, costs. Activity-based budgeting and activity-based management (ABB and ABM) can only happen once a degree of integration with the main financial systems is achieved: since otherwise feeding the ABC system with data is likely to be impracticable.

There are two approaches to this: one is to share data between ledger systems and ABC software by transferring data to and fro periodically.

The other is to make both systems work off the same database. The latter is the approach that SAP has adopted in adding ABC capabilities to its product range, says SAP UK business consultant Adrian Li.

‘The system works on the principle of one version of the truth. Everyone is using the same source data, but taking different views of the same business event. Activity-based costing and management is one of the views that you can take of the event.’

Traditional general ledger software is geared up to satisfying financial requirements, Li points out, whereas a lot of the ‘value added’ comes from the management accounting area. SAP’s software tries to satisfy both requirements at once. ‘You can capture costs against traditional cost centres, and then those costs are automatically attributed to processes based on user-input cost drivers.

‘At this point, you have defined rules that say this type of expense is attributed in such-and-such a way. For instance, in the case of personnel-related costs, you might have decided that headcount is a fair way to allocate costs. You can define more or less detailed cost allocations as you prefer.’

Li says the advantage of SAP’s approach is that traditional function-based cost reporting can be performed within the same system as activity-based reporting. ‘In the past, you had to choose between a functional view and a process view, or else replicate the data,’ he says.

Li admits that it’s fairly easy to transfer data between nominal ledger files and a specialist ABC package (as Scottish Courage is doing – see case study). ‘But that’s replication again. What we offer is genuine integration – single-source data with different views.’

Other financial-package vendors are adding ABC capabilities to their range. Over in the US, Peoplesoft, for instance, is piloting a cost-management module that supports ABC among other methods, and is intended primarily for the manufacturing arena. Martin Mackay, European product strategy manager for Peoplesoft in the UK, suggests that the Peoplesoft GL’s flexible accounting keys can be used to achieve some ABC within the standard package.

‘The only limit on the accounting key is the size of the screen. So you can put the cost drivers into the key, and then use our reporting facilities to achieve the type of analysis you want.’

When the same vendor supplies both your main ledgers and your ABC package, the question of whether the two will work together shouldn’t have to be asked. But ‘one-stop shopping’ isn’t the only way to achieve integration, as the Scottish Courage story shows.

Know your needs

David Pettifer is Price Waterhouse’s director of cost management for Europe. He says: ‘You need to differentiate between “integrated” systems and “embedded” ones – embedded means that the ABC/ABM software is part of the same suite. You can achieve important levels of integration without everything having to come from the same supplier. What’s most important is for the organisation to understand its ABC/ABM requirements and match those to the most appropriate software.’ Pettifer argues that embedded products may have less sophisticated ABC functionality than products from specialist suppliers – an argument in favour of a ‘best of breed’ approach.

As part of its range of cost-management solutions, PW offers Activa, a product written in the Powerbuilder 4GL and able to be implemented on a range of different platforms, which Pettifer says facilitates its integration with existing GL systems. PW sometimes also uses PC-based packages to build a disposable prototype at the beginning of an ABC project. ‘That’s used to build the client’s awareness of the method and to pin down their requirements. The next stage is to select a mainstream software solution.

That solution is then piloted and rolled out.’

Suppliers of PC-based systems would argue that they can also be used to provide industrial-strength ABC solutions, and often stress the ease with which they can be linked into other people’s financial systems.

ABC Technologies offers both EasyABC, a relatively low-cost piloting and diagnostic tool, and the OROS suite, which Doug Squibb calls an ‘enterprise-wide decision support solution’ based on ABC principles.

Squibb stresses the ‘openness’ of the OROS product, which uses industry-standard technologies like ODBC and SQL as well as text files to exchange data with other systems: ‘Our product majors in integration with existing systems. It’s also a relatively low-cost solution – to implement OROS probably costs about a tenth of what it might cost to implement new financial systems with built-in ABC facilities.’

Squibb argues that scheduled downloads are a perfectly adequate way of sharing data between a GL and an ABC system: ‘ABC isn’t real-time anyway.

You don’t close your ledgers until the end of the month, so you can schedule monthly downloads.’

Other arguments Squibb deploys in favour of PC-based systems include speed of set-up, ease of connectivity to other feeder systems apart from the general ledger, and up-to-date software. ‘Modifying our software is a very fast process. Where ABC is part of a complex software suite, it may not move as quickly.’

One thing everyone agrees on is that choosing software is a small part of successful ABC and ABM. ‘In a way the tool is irrelevant,’ says Squibb.

‘It’s the implementation that’s important, and who you get the data out to. Customers who want software to tell them how many people or how much space they need are bound to be disappointed. We can’t supply answers, we can only supply questions.’

Scottish Courage Brewing has been implementing Quality Product Research’s (QPR) CostControl, a PC-based, activity-based costing/management package.

At the same time, it’s joined forces with QPR to extend the system to cover activity-based budgeting and to deal with variable costs as well as overheads. Senior project accountant Billy Mason says, ‘We’ve implemented the software for product costing and budgeting at our Fountain brewery.

We’ve just completed a six-month pilot scheme there, and are satisfied that it’s met our objectives on costing and budgeting.

‘We’ve now decided that this is a system we can use for cost-management purposes as well. Although cost management wasn’t one of our primary objectives at the outset, we’ve realised that it’s one of the areas where we can derive most benefit.’ At the same time, Scottish Courage is rolling the system out to its other breweries, and hopes to have all six live by the end of 1996.

Scottish Courage’s main ledger system runs on a heavily customised mainframe system, dating from the 1970s. Although the ledger and ABC systems are separate, Scottish Courage is intending to build links between them, with QPR amending its software accordingly. ‘When we create a budget in the cost-control module, we want to be able to feed it into the nominal ledger, and use it as part of our budgetary control system, and to help with production of our quarterly forecasts. We also want to take the actual costs that we’ve incurred out of our GL system and run them through the ABC model.

None of that is technically difficult, but we do have a few problems getting information out of and into our old general ledger,’ Mason says.

That’s partly because the nominal ledger is set up to reflect the company’s departmental structure rather than its business processes. In future, Mason thinks that Scottish Courage may decide to re-engineer its general ledger system: ‘We could run it in a more activity-based manner, bringing the two systems closer together.’

The initial motivation for adopting ABC and ABB was a desire to get more accurate product costings, and to take some of the pain out of the budgeting cycle, which used to take up to 120 man days per site annually, plus 20 days per quarter.

Now Mason sees the greatest benefits coming from process analysis and improvement. ‘We’re encouraging managers to categorise activities within a process into those that add value and those that don’t. Some of those that don’t, such as rework and rejects, should be eliminated, although some, like quality control, have to be done, but may be improved. We see massive benefits in this area because the beer part of our company in particular is under severe pressure to reduce costs as the market is fairly flat in sales terms. The system will also help us forecast and manage our resource requirements.’

Scottish Courage chose QPR’s software primarily because it was easy to use. ‘Some products require you to be a proficient programmer, but this can be passed straight to our operations people.’ The budgeting software Scottish Courage has helped to develop will now be sold on to other users by QPR.