Conventional Wisdom or Myth?
by Tom Pryor

I just finished watching the World Series. Baseball is a game loaded with conventional wisdom, axioms and strategies so time-honored that they are accepted without question.

But what if everything players have been taught since youth really are not true? What if the tactics some baseball managers rely on to shift percentages in their favor actually don't? What if some of the conventional wisdom accepted as fact is actually fiction? Ken Daley, baseball writer for the Dallas Morning News, recently investigated some of baseball's universally accepted truths. Here's a small sample…

Depending upon its source, conventional wisdom can turn out to more myth than fact. Thousands of organizations worldwide have successfully used Activity Based Costing (ABC) to more accurately allocate, classify, analyze, reduce and predict costs than their traditional, legacy systems. Because "C" stands for cost, conventional wisdom says ABC systems can favorably impact cost, not sales. Managers assume that ABC can positively affect the bottom line but it cannot impact the top line. Truth is, ABC will impact both cost and sales. ABC is truly a multidimensional tool.

To increase sales, ask yourself the following ten questions:

1. Is our Sales Department performing sales activities?

Many ICMS customers over the years have found that only 50% of sales personnel time is spent selling. Implementers of ABC often find that their sales reps and home office sales staff are spending most of their time performing secondary activities such as "Do Reports", "Attend Meetings", and "Resolve Errors". To increase sales revenue, redeploy secondary time to primary activities such as "Make Sales Presentations", "Prepare Bids" and "Call Customers".

2. Are we overpricing the products and services our customers want but cannot afford?

ABC often shows that core products and services are overcosted, and therefore overpriced. Overhead and capital costs added to support low volume, specialty products and services should not be allocated to your core business. Smart customers won't pay for your cost accounting mistakes.

3. Do we offer features whose costs make the price of our product or service unattractive?

A very useful, but often-overlooked use of ABC, is feature costing, e.g. define the cost of activities related to a product feature. For example, Levi Strauss used ABC feature costing to predict the cost of new apparel. A zipper is a feature that is costed (material plus activities) in their ABC model. What product or service features do you offer and how much do they cost? Could you reduce some costly features to increase sales? Or should you add some features? For more information on feature costing, read Driving Value Using Activity Based Budgeting.

NOTE: ICMS uses ABC feature costing. While there are several excellent ABC software products in the marketplace, many companies are buying our CMS-PC 4.0 software because it performs all the basic functions of ABM, ABC and ABB without the costly features of our competition.

4. Are we making it easy for our customers to buy from us?

When all other things are equal, customers gravitate to suppliers whom are easy to do business with. A major factor in Amazon.com's consistent revenue growth is how easy they make it for customers to shop and order products. To continue revenue growth and reduce costs in 2001, Amazon.com has been using a combination of Six Sigma and ABC to improve the cost, cycle time and quality of the order fulfillment process. The more effective they become, the more they sell.

5. Are our activities and processes aligned with our sales strategy?

If your activities and processes are not synchronized with the corporate mission statement, customers will be confused and buy elsewhere. Southwest Airlines promotes itself as an on-time, low cost provider of air travel. Southwest's aligns its processes to make that happen. As a result, Southwest Airlines is the low cost provider of air travel. In a down economy, they made money in 3rd Quarter 2001, when larger competitors did not. ABC helps confirm and control low cost products, services and processes.

6. What is more time consuming and expensive, finding a new customer or selling to an existing one?

It takes longer to find a new customer than call on an old one. As you might expect, a sale to a previous customers is easier to make at a much lower cost … no marketing activities, fewer sales trips, no initial setup cost. Are your sales and marketing activities focused on new or old customers? Is it the right balance? ABC will provide answers to these questions and others by quantifying current resource allocations.

7. Are we overpricing our products and underpricing our services?

Someone once told me the story of a consultant who charged $1,000 for a 15-minute repair of a faulty machine. The customer demanded an itemized invoice. The consultant listed his two activities as "Fix Machine: $5.00" and "Gain Knowledge to Find the Problem: $995.00". Some companies, like Owens & Minor, are using ABC to create menu-based pricing to flourish during a recession. ABC allows O&M to separate product costs from service costs, thereby encouraging customers to buy more products per shipment in order to lower monthly charges for the "Deliver Product" service.

8. Can we take market share from our competition if we lower our price?

If your market is price sensitive, use ABC to identify excess capacity (waste) in your processes. Using an ABC software model, calculate what product costs would be at practical capacity. Provide sales and marketing a report that compares current cost to practical capacity future cost. Pricing based on practical capacity costs may open the door to a more aggressive pricing strategy that results in more volume without giving up profitability.

9. Is there a new product or service that we can offer customers that fits our existing processes?

Give an ABC Bill of Activity to a group of your best employees. Challenge them to brainstorm one or more new products or services that would be appealing to customers and fit your existing processes. For example, ABC has helped a number of food manufacturers sell their excess capacity costs to private label customers. I remember touring an Ocean Spray Cranberry Cocktail packaging plant that was filling apple juice bottles for a private label competitor.

10. What missed opportunities or deductions reduce our sales revenue?

I was helping a customer with their activity analysis last year. One of the most time consuming activities we found in the sales department was "Prepare Bids". I asked what I thought was a simple question … "How many bids result in a sale?" The employees replied, "We don't know." They knew how many bids they created, but not the number won. As it happened in this situation, gathering data for your ABC model can often uncover activities that need not only a cost measure but also a productivity measure, e.g. percentage of bids won. The resulting analysis we performed helped my client improve their sales by improving their bid process.

"Rich Dad Poor Dad" is a New York Times best seller because it debunks conventional wisdom. Author Robert Kiyosaki says his poor dad taught, "Our home is our largest investment and our greatest asset." Kiyosaki's rich dad counters conventional thinking by saying, "My house is a liability, and if your house is your largest investment, you're in trouble." Conventional wisdom implies that cost systems impact cost, not sales. But that is not true with Activity Based Costing. And while it may seem unconventional to implement ABC during a recession, truth is, this is the best time implement change. The events of September 11th give all of us cause to take a contrarians view, not a conventional view of our personal and professional life.

Send your comments on this article to Tom Pryor at TomPryor@icms.net. Call 817-475-2945 to talk to an ABM expert about your ABM needs.

E-mail a friend this article

This free e-mail is a service of ICMS, Inc.
For more information on ICMS products and services, call 817-475-2945.

Read other ABM articles

ICMS, Inc.
PO Box 13206 Arlington, Texas  76094
Phone: 817-475-2945
E-mail: tompryor@icms.net