Beneath The Surface

One ABC risk is getting bogged down in excessive detail. There's no end to the minute activities that can be identified in the process of conducting business, notes Cokins. The trick is to keep the level of detail manageable, collecting and analyzing useful information without expending too much time and energy.

ABC uses data from several sources. Some firms engage in time-motion studies to analyze complex activities. Others interview workers about what they do in their jobs. Most use information from existing accounting systems. Key data commonly includes figures such as the number of customer orders processed, total purchases and the number of new accounts opened, says Cokins.

Most ABC practitioners find that special-purpose ABC software is required to make the task manageable. At $6,000 and up for one package sold by ABC Technologies, software can add significantly to outlays for this type of accounting technique. There are, however, some pilot packages available for $500.

ABC produces bottom-line results only after practice. Although some companies see results almost instantly, it typically takes three months or so for most businesses to experience the benefits of ABC. And, depending on your product or business cycle, it could take much longer.

Seeing an ABC project through to payoff can be tough because of the time and attention to detail required, Cokins warns. "It fails when it doesn't catch enough people's attention," he says. "When it fails, it means it didn't catch fire."

Cokins recommends starting small with broad cost categories and relatively sweeping assignments of activity costs. For instance, a firm with 10,000 customers might divide them into 15 or 20 types and analyze activities associated with each group rather than each customer. "Think of it as a pyramid, and start at the top," advises Cokins. "Disaggregate costs only as needed. And ask yourself first, `Is the climb worth the view?' "

One way to improve management buy-in while limiting the downside factors is to involve only a small group of well-informed workers in the ABC project, at least in the beginning. These people can be used to gather data and perform analyses, then spearhead the effort to communicate findings back to workers.

Communication is delicate, adds Pindale. Some Bluemount workers feared ABC would result in job cuts as tasks were automated. In fact, automation did take the place of some employees, but those workers were redeployed into activities that added value but were not suitable to automation, says Pindale. At Bluemount, making sure employees understood the goals and techniques of ABC was essential to controlling dissent.

This article was originally published in the October 1999 print edition of Entrepreneur with the headline: Beneath The Surface.