Cokins SAS May 5 2011 No 2

8/3/2019 Cokins SAS May 5 2011 No 2

1/72

Copyright 2010 SAS Institute Inc. All rights reserved.

Key Questions for ABC What?So what? Then what?

Gary [email protected]://blogs.sas.com/cokins919 531 2012 Cary, North Carolina

ABC ForumMay 5 , 2011Oslo, Norway
mailto:[email protected]://blogs.sas.com/cokinshttp://blogs.sas.com/cokinsmailto:[email protected]


2/72

2

Copyright 2010, SAS Institute Inc. All rights reserved.

About Gary Cokins

B.S. Industrial Engineering & Operations Research; Cornell

University, 1971

M.B.A. Finance & Accounting; Northwestern University,Kellogg Graduate School of Management, 1974

Previous Associations:- FMC Corporation- Consultant with: Deloitte,

KPMG Peat Marwick, &Electronic Data Systems [EDS]


3/72

3


Gary Cokins 2001 book ranks #1

Gary Cokins 1996 book ranks #2

Of 151 ABC titles,ranked by bestselling volume ..


4/72

4


SAS is the Worlds Largest Privately-Held SoftwareCompany(Prepackaged Software)

52 countries

11,115 employees

$2.5 billion sales

More than 400 offices

2010 - 2011 Best Company toWork for Fortune Magazine

Hundreds of user groups

43,000+ customer sitesin 112 countries


5/72

5


Managers who have previously failed or arestruggling at promoting or implementing ABCinto their decision support systems.

Who will benefit from this presentation?

Managers who intend to champion any or all

improvement techniques and need a compellingcall to action.


6/72

6


Key questions

What? So what? Then what?


7/72

7


Six Eras of Managerial Accounting

20,000 BC 1492 1910 1930 1980 2015

Ancient

Medieval

Industrial

RegulatoryCompliance

Consumer

Predictive

Analytics

StageOf

Costing

Maturity

A shift ofemphasis froma historical to apredictive viewof strategy and

operations

precious metaland papermoney piles,ultimatelyleading to

double-entrybookkeeping(Luca Pacioli,1492).

standard costaccounting (toreflectFrederickWinslowTaylors

manufacturingscientificmethods, 1910)

The USAs

GreatDepressionresulted inregulatoryreforms toprotectinvestors(1930s).

Causal cost

tracing ofincreasingly

diverse typesof products,services,channels andcustomers

Rocks andstone piles.


8/72

8


Will our young managers herald the BA era?

Your young generation of managers are already veryclever. The next slides demonstrate examples of howthey answered university exam questions.

http://www.youtube.com/watch?v=_CqgnZhb--Q
http://www.youtube.com/watch?v=_CqgnZhb--Qhttp://www.youtube.com/watch?v=_CqgnZhb--Qhttp://www.youtube.com/watch?v=_CqgnZhb--Qhttp://www.youtube.com/watch?v=_CqgnZhb--Q


9/72

9


AGENDA

What is enterprise performance management?

What is business analytics?

Three barrier categories: technical, design andorganizational behavior

5 Design Barriers obstacles and impedimentswith measurements, accounting, customer valuemanagement, budgeting and their root causes.

How to overcome the barriers

What does enterprise performance managementlook like?


10/72

10


A simple explanation of ABC

Mistrust of the managerial

accounting system for accuracy and transparency lead to

applying activity based costing.


11/72

11


Multiple-Stage Cost Assignment Tracing

SimpleABM

ExpandedABM

Resources

Resources

Activities

Objects

Objects

Activities


12/72

12


ABC/M Cost Assignment Network

Salary, FringeBenefits

DirectMaterial

Phone,Travel

SuppliesDepreciation

Rent,Interest,

Tax

Customers

BusinessSustaining

Products,Services

Resources(general ledger view)

Work

Activities(verb-noun)

FinalCost

Objects

Suppliers

(1)DemandsOnWorkC

osts(2)

CostsMeasuretheEffects

Support

Activities

EquipmentActivities

PeopleActivities

cost-to-servepaths


13/72

13


$ 30 sales- 28 expenses

= $ 2 profit

$ 2 profit

Unrealized profit revealed by ABM

Net RevenuesMinusABM costs=profit

More important than a better costing method are its results.


14/72

14


ActivityCosts

each activitys

driver quantity

unit activitydriver cost

x

(eg. # of registrations)

Price/Fee(Revenue)

ABM provides insight for the products or services cost

drivers and driver quantities.Work

Activities

Activity Costs pile up into outputs.


15/72

15


Supplier(direct material)

Key:

Enterprise

Cost

BusinessProcesses

Process A

Processes include activities that have high tolow value-addingcontent.

VA

NVA

Processes: Six Sigma, Lean Management,and Value Stream Mapping

$

$

$

$

$$

$

$

ABM also provides unit costs of outputs forcost visibility and benchmarking.


16/72

16


Rapid Prototyping withIterative Remodeling

Each iteration enhances the use of a PM system.

PM Models

3

PM System

(repeatable, reliable, relevant)

#0

#1

#2

#3210

ABC Error has Offsetting Properties


17/72

17


ABC Error has Offsetting PropertiesWith ABC, it is counter-intuitive that error does not compound. It dampens out.

The Dispersion of Error contained

in upstream assignments offset as

each downstream paths aggregated

into each final cost object.

Assignment error has a zero-sum

property:Over-

costedpath $s

(+)

Undercostedpath $s

(-)

=

+ -

+ -

Resource

Activities

FinalCost

Objects

Assignment

View

+ + -Contribution

View

Many-to-One

One-to-Many

The Two Path Views


18/72

18


Balancing Levels of Accuracy with Effort

Accuracyof

Final CostObjects

100%

0%

World ClassABC System Design

Little

Level of Data Collection Effort

GreatModest

A

B


19/72

19


Proof of error dampening from academics

ERRORS IN COSTING SYSTEMSSOMETIMES ONE MISTAKE COMPENSATES FOR THE OTHER!

-- MCA November, 2007 (p. 18-24) by Dr. Eva Labro, London School of Economics

A Simulation Analysis of Interactions among Errors in Costing

Systems

-- THE ACCOUNTING REVIEW, Vol. 82 No. 4, 2007 (p. 939-962) by Dr. Eva Labro,

London School of Economics; and Dr. Mario Vanhoucke, Ghent University


20/72

20


20

Correlation Analysis of Activity Drivers


21/72

21


Why are some customers more profitable than others?


22/72

22


Recursive Partitioning / Decision Trees

The single, largest factor forexplaining the profitvariation is AverageTransaction Value

Customers with lots of asmall average transactionvalue are less profitable


23/72

23


Managing IT as a business is now an imperative. No longer can ITbe seen as a technology supplier it must be seen to be addingvalue to the organization and providing strategic capability. ITperformance management enables IT to become service oriented,aligning itself with the organization to provide internal customer-driven solutions to problems.

Managing IT as a business

But it is difficult to maximize returns from IT when the productsand services appear to be free to internal customers.


24/72

24


Two Types of IT expenses: Assets and People

Hardware

People

Fixed Costs (virtual)IT assets become sunk costsimmediately at purchase. Theobjective to is maximize capacity use.

Flexible / Variable Costs (physical)People-related expenses (e.g.,salaries) can be flexibly assigned to

different work. Headcount isadjustable. The objective is to usepeople efficiently.


25/72

25


An existing Tile Chart as seen through the SASInformation Delivery Portal

IT Assets as a Visual Tile Chart


26/72

26


January OctoberOptimizing the Factory driven improvements

A tile chart illustrates how IT workloads can be analyzed and optimized. The left hand chartshows a number of servers that are significantly under-utilized (shaded blue). Under-utlizedservers were removed and the existing workload was shifted to lower-cost, multi-core servers.After 10 months, the chart on the right shows a fairly balanced workload (reds and orangesindicating workloads higher in processor utilization).

Asset Expenses are virtual (Fixed Costs)


27/72

27


AGENDA

What is enterprise performance management? What is business analytics?

Three barrier categories: technical, design andorganizational behavior





28/72

28


Products and standard service-lines are not the onlything for which accountants should compute costs.

What about costs that have nothing to do with productsand standard service-lines?

The problem with traditional accountings gross marginreporting is you dont see the bottom half of the picture.

But what about the Other Below-the-GM-lineCalculated Costs?


29/72

29


29

INCOME STATEMENT

Sales $ 100

- Product direct costs -20

- Overhead cost -10

----------------------------------------------

= Gross profit margin $ 70

What about Costs Below Product Costs ?

- selling costs -20

- distribution costs -10

- marketing costs -20

- administrative costs -10----------------------------------------------

= Total Profit $ 10

The accountantsreport these byeach product (butthey are wrong

without ABC).

?We have no visibility

of these costs bycustomer (except intotal) !


30/72

30


Indirect expenses

Distribution, Sales & Marketing

General, and Administration

Customer+

Direct material,

Direct labor &Equipment

Costs from Sales & Marketing are not Products

Channel+

Product


31/72

31


# 1- Customer Retention It is relatively much more

expensive to acquire a new customer than to retainan existing one.

# 2 Sources of Competitive Advantage As products

and standard service-lines become commodity-like,then the shift is towards service-differentiation.

Why Do Customer-related Costs Matter?The Perfect Storm

Wh D C l d C M ?


32/72

32


# 4 - Power ShiftThe Internet is shifting power irreversibly from sellers to buyers.

# 3 - CRMs One-to-One Marketing Pepper &Rodgers have hailed technology as the enabler to (1)identify customer segments, and (2) tailor marketingoffers.

Why Do Customer-related Costs Matter?The Perfect Storm


33/72

33


A C t P fit & L St t t


34/72

34


CUSTOMER: XYZ CORPORATION (CUSTOMER #1270)

Sales $$$ Margin $ Margin(Sales - Costs) % of Sales

Product-RelatedSupplier-Related costs (TCO) $ xxx $ xxx 98%

Direct Material xxx xxx 50%Brand Sustaining xxx xxx 48%Product Sustaining xxx xxx 46%Unit, Batch* xxx xxx 30%

Distribution-RelatedOutbound Freight Type* xxx xxx 28%Order Type* xxx xxx 26%Channel Type* xxx xxx 24%

Customer-RelatedCustomer-Sustaining xxx xxx 22%

Unit-Batch* xxx xxx 10%

Business Sustaining xxx xxx 8%

Operating Profit xxx 8%

*Activity Cost Driver Assignments use measurable quantity volume of Activity Output(Other ActvityAssignments traced based on informed (subjective) %s)

Product-relatedcosts

Channel &Customer-relatedcosts

A Customer Profit & Loss Statement

Mi ti C t t Hi h P fit bilit


35/72

35


High(Creamy)

Low(Low Fat)

Low High

Cost-to-Serve

Product MixMargin

VeryProfitable

Veryunprofitable

Types of Customers

Migrating Customers to Higher Profitability

KPI Li k f C t P fit t th S d


36/72

36


High(Creamy)

Low(Low Fat)

Low High

Cost-to-Serve

Product MixMargin

VeryProfitable

Veryunprofitable

Types of Customers

KPI Target

KPI Linkage of Customer Profits to the Scorecard

C t V l M t


37/72

37


Who is more important to pursue with the scarceresources of our marketing spend budget?

Our most profitable customers?Or our most valuable customers?

What is the difference?

The customer lifetime value is intended to

answer this question.

Customer Value Management

I i h ti l li


38/72

38


Dentist A

Sales = $750,000

profits = $100,000

Age 61

Dentist B

Sales = $375,000

profits = $40,000

Age 25

Which is more profitable?Which is more valuable?

Imagine you are pharmaceutical supplier.Which Customer is more Important?

V l C ti i CLV


39/72

39


Value Creation via CLV

Source: Customer Equity

Marketing;European Mgmt.

Journal; Vol 20, No. 3; June, 2002

Get more valuefrom these

Protectthese

After a CLV (or CP) is calculated and rank-orderedhighest to lowest customer, then

CustomerLifetime Value $

Existing Customers

retaindevelop,streamline

Actions for each customer produces Profit lift


40/72

40


Actions for each customer produces Profit-lift


Existing Customers*

retaindevelop,streamline

What actionswill lift theprofit curve?

Protectthese;grow them

* Ranked most to least valuable

CustomerLifetime Value $

Source: Customer Equity

Marketing;European Mgmt.


V l C ti i CLV


41/72

41


Value Creation via CLV

Existing Customers Possible New Customers

retaindevelop,

streamlinedo notacquire

acquireSource: Customer EquityMarketing;European Mgmt.



Be selectivepursing these

Protectthese;

grow them

CustomerLifetime Value $ also, be prudent attracting new customers.

Here is a real compan s CLV Form la


42/72

42


Here is a real companys CLV Formula

t

T

t

t

tt

N

i

itt

Pd

SLkR

ICLV

0

1

0)1(

)(

Sub. Maintenance

- Retention

(L)

- Customer Care (S)

Net Present Value of the Relationship(CLV)

Revenues

(R)

Cost ofProduct i

ki)

Cost of

Acquisition

I

DiscountRate

(d)

Probability forperiod t

(P)

Probabilityfor

Churn

Cross/Up

Sale

Willingnessto expend

more

My which type how much Hypothesis


43/72

43


The spending budget for sales and marketing is critical

but it should be treated as a preciously scarce resource tobe aimed at generating the highest long-term profits.

This means answering questions like:

Which type of customer is attractive to newly acquire,

retain, grow, or win back? And which types are not?How much should we spend attracting, retaining, growing,or recovering each customer segment?

My which-type how-much Hypothesis

A Shift in the CFOs Emphasis


44/72

44


The CFO must now help Sales and

Marketing to better target customers.

Segmentation, predictability, churn, offers,deals, risk and uncertainty must be

understood in the language of money.

A Shift in the CFOs Emphasis

AGENDA


45/72

45


AGENDA

What is enterprise performance management?

What is business analytics?

Four barrier categories: technical, perceptions,design and organizational behavior




Why is the budgeting process broken?


46/72

46


Why is the budgeting process broken?

The budget is typically a fiscal exercise by theaccountants that is:

-- disconnected from the executive teams strategy.

-- not based on future driver volumes.

What are the Organizational Behavior Barriers?


47/72

47


What are the Organizational Behavior Barriers?

Budgeting (and Rolling Financial Forecasts)

Excel Hell.

Excess power of managers with the loudest voice or

strongest muscles and with sandbag padding expertise.

Tradition incremental / decremental cost center line-item without cost driver interdependencies.

Spreadsheet Budgeting Its Incremental !


48/72

48


Current Year Budget YearWages 400,000.00$ Formula = Column B * 1.05

Supplies 50,000.00$

Rent 20,000.00$ Copy down

Computer 40,000.00$Travel 30,000.00$

Phone 20,000.00$

Total 560,000.00$

a b c

1

2

3

4

5

6

7

8

Sheet 1

Source: John Antos, The Value Creation Group

Spreadsheet BudgetingIt s Incremental !

Match the Budget Method to its Category


49/72

49



Demand-driven

Project-driven

Integrated

Budget(Rolling

FinancialForecasts)

Source: Mike Tinkler; www.synerma.com

(1) Non-Recurring Expenses // Strategic Initiatives
http://www.synerma.com/http://www.synerma.com/


50/72

50


Budgeting is typically disconnected fromthe strategy. But this problem is solved ifmanagement funds the managers projects.

(1) Non-Recurring Expenses // Strategic Initiatives

MeasurementPeriod;

1st Quarter

StrategicObjective

IdentifyProjects,

Initiatives,

orProcesses

KPIMeasure KPI Target KPI Actual

comments /explanation

Executive Team X X

Managers andEmployees X X their score X

(2) Recurring Expenses // Future Volume & Mix


51/72

51


Activity-Based Costing- Historical & Descriptive

- Starts with known:

spending

driver measuresoutput quantities

- Calculates costs

Activity-Based Planning- Predictive

- Requires capacity analysis

- Starts with estimated outputs

- Applies ABC/M rates

- Solves for Resource expenses

NowPast Future

ABC/M

ABP

(2) Recurring Expenses // Future Volume & Mix

Operational Resource Capacity Planning


52/72

52


Customers andService-recipients

Resources

Process Costs

Output &Outcome Costs

inputs

Resourceexpenses canbe calculated

withbackwards

ABC/M

Operational Resource Capacity Planning

Start Here.

The Shift towards Predictive Accounting


53/72

53


ABC/M ABP

Known

?

?

resources

workactivities

cost

objects

Provides consumptionrates

NowPast Future

ABC/M

ABP




54/72

54


ABC/M ABP

?

?

Estimated

resources

workactivities

cost

objects

NowPast Future

ABC/M

ABP




55/72

55


Recurringexpenses

Non-recurringexpenses

Demand-driven

Project-driven

volume & mixof drivers

productionand

ABP/B

strategymap andrisk grid

IntegratedBudget

(rollingfinancial

forecasts)

Budget method

Strategic & riskmitigation projects


Linking Strategy and Risk to the Budget


56/72

56


Define and adjust

strategy and risk, and

create strategy map

Create balanced

scorecard

Identify and

manage strategic

initiatives

Approve strategyrisk and capital

budget

Managerial

Accounting(e.g., Activity-based

Costing)

Derived budget

(and rolling

financial forecasts)

Strategy methods

(e.g., SWOT)

Manage and

improve core

processes

Financial Modeling

KPI dashboardfeedback

(2) capital budget(3) strategy budget

(4) risk budget

Operational Modeling(by employee teams)Strategic

objectives

knowledge

= financial information (e.g. $)

Strategy Modeling(by executives)

priority projects and processes

Forecast drivers(e.g. sales) ;

develop productionplan

Traditional and

driver-based

budgeting (e.g. PBB)

Capacity

resource plan

Driver volumesand mix

Results andoutcomes

Changes andresponses

e.g., hours,Pounds,

# employees

(1) Operationalbudget

KPItargets

Driver consumption rates

Acceptable?

Reviseplan

OK

No

Yes

Linking Strategy and Risk to the Budget

Accounting Treatments and Behavior of Capacity (expenses)Historical versus Predictive Accounting


57/72

57


NowPast Future

Descriptive

Predictive

unused

used

sunk

fixed(unadjustable)

variable(adjustablecapacity;

avoidable)

Traceable to

products,

channels,customers,

sustaining

unused

Historical versus Predictive Accounting

International Federation of Accountants Report


58/72

58


Evaluating the Costing Journey:A Costing Levels ContinuumMaturity ModelBy Gary Cokins, SAS Most organizations are

typically at lower levels ofmaturity in adopting

progressive managerialaccounting practices,methods and systems.

International Federation of Accountants Report

ACCOUNTING Source data capture


59/72

59


ACCOUNTING

FinancialAccounting

Cost Measurement

ManagerialAccounting

Cost AccountingFinancial Reporting

regulatory compliance

Cost Reporting &Analysis

(feedback on performance)

Decision Support/Cost Planning

[e.g., GAAP, IFRS]Costs of goods soldInventory valuation

Spending vs. budget varianceanalysis Profitability reporting Process analysis (e.g., lean,benchmarking, COQ) Performance measures Learning; corrective actions

Fully absorbed & incremental pricing Driver-based budgeting & rolling

financial forecasts What-if analysis Product, channel & customerrationalization Outsourcing & make vs. buy analysis

History FutureLow value-add Modest value-add High value-add

Source data capture(transactions /bookkeeping)

Non-financial datacapture

The Domain of Costing

TaxAccounting

Source: A Costing Levels Continuum Maturity Model by Gary Cokinspublished by the International Federation of Accountants, 2010

Costing Continuum / Levels of Maturity(most companies are Level 4D and 0P)


60/72

60Copyright 2010 SAS Institute Inc. All rights reserved.

1D

Level

#

2D 3D4D

5D

6D

7D

8D

Blind

ProcessVisibility

Output Visibility

ImprovedOutput

Information/Approximate

Accuracy

ImprovedTreatmentof Indirect

Costs

CustomerDemandSensitive

UnusedCapacity

Aware

(1) Descriptive Continuum

EXPENSE TRACKING, COSTREPORTING

and CONSUMPTION RATES

(2) Predictive Continuum

DEMAND DRIVEN PLANNINGwith CAPACITY SENSITIVITY

bookkeepingprocess andLean accounting

Direct costswithout (3) and with

(4) support coststo output groups

PushActivity-Basedcosting(ABC);

Productcosts

Standard

costing toindividualoutputs;

Project acct;Job ordercosting

Level 6 withChannel andcustomerprofitabilityReporting;

Cost-to-serve

Unused

capacitycosts(estimated)

(most companies are Level 4D and 0P)

Source: A Costing Levels Continuum Maturity Model by Gary Cokins published by the International Federation of Accountants, 2010

1P

2P

3P

4PPullActivity-based

ResourcePlanning

Time-drivenABC

ResourceConsumptio

nAccounting

Simulation

(ABRP);

ForecastdriverquantitiesX unitconsumption rates;

Driverbasedbudgeting

(TDABC);ForecastdriverquantitiesX time

consumptionrates;

Direct costfocus;

Repetitiveworkconditions

(RCA);Level 9 withproportionalcosting atdirect andsupportdepts.

Ultimate inconsumption rates;

0P

%G/L acct.

Incremental


61/72

Key questions


62/72

62


Key questions

What? So what? Then what?

The Intelligence Hierarchy


63/72

63


Power ofInformation

$ROI

RawData

StandardReports

Ad hoc

Reports &OLAP

DescriptiveModeling

(with analytics)

PredictiveModeling

Data Information Knowledge Intelligence

Optimization

The Intelligence Hierarchy

Transactional systems (e.g., ERP)the reptilian brain stem

(breathing, blinking, digesting)

Business Analytics and Performance Managementthe cerebral cortex

(thinking and decision making)

Two types ofsoftware arelike a brains

two halves.

How Does It All Fit Together?


64/72

64


OrganizationsResources

(capacity)

Strategy,Mission

How Does It All Fit Together?

ERP, etc.Customer

Satisfaction

Scorecards

CRM

ROI

$Shareholders

SupplierInputs

In Summary first, we energize


65/72

65


OrganizationResources

(capacity)

Strategy,Mission

In Summary first, we energizewith good managerial accounting.

ERP, etc.Customer

Satisfaction

Scorecards

CRM

ROI

$Shareholders

SupplierInputs

Managerial

accounting

PM is Circulatory and Simultaneous


66/72

66



(capacity)

CRM

ROI

$

ERP, etc.

Risk Mgmt.,Strategy map,KPIs

KPIScoresFeedback

Order fulfillment

Strategy,Mission

CustomerSatisfaction


SupplierInputs

Scorecards

Targeting

needs

Shareholder Wealth Creation is not a goal. It is a result!

Shareholders



67/72

67



(capacity)

CRM

ROI

$

ERP, etc.

Risk Mgmt.,Strategy map,

KPIs

KPIScoresFeedback

Order fulfillment

Strategy,Mission

CustomerSatisfaction

Shareholders


SupplierInputs

Scorecards

Targeting

Shareholder Wealth Creation is not a goal. It is a result!

leakage(waste)

wasted resources

needs

Less productivity reduces Shareholder Wealth

A 30 Minute Webcast of points made during


68/72

68


http://videoplayer.nlps.com/?FMN_SEPT09_SEG2

A 30 Minute Webcast of points made duringthis presentation

By www.smartpros.com Financial Management Network

The Complete Vision of Analytics-based Performance Management
http://videoplayer.nlps.com/?FMN_SEPT09_SEG2http://www.smartpros.com/http://www.smartpros.com/http://videoplayer.nlps.com/?FMN_SEPT09_SEG2http://videoplayer.nlps.com/?FMN_SEPT09_SEG2http://videoplayer.nlps.com/?FMN_SEPT09_SEG2http://videoplayer.nlps.com/?FMN_SEPT09_SEG2


69/72

69


e Co p ete s o o a yt cs based e o a ce a age e t

Make the RPM of the PM and BA gears spin better, faster, cheaper and smarter

From Theory to Practice


70/72

70


o eo y to act ce

Your success depends

on how well and how fastthe right information andintelligence gets to theright people.


71/72

71


Thank You

Visit our corporate Web Site:www.sas.com

Or feel free to contact:Gary Cokins, CPIMSAS Performance Managementwww.sas.com919 531 [email protected]


72/72

Documents

Cokins SAS May 5 2011 No 2