A Review On The ABM System Information Technology Essay

This paper will focus on the benefits of utilizing Activity-based management (ABM) system within the workplace. ABM is defined as: “a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization… Activity-based management focuses on managing activities to reduce costs and improve customer value.” [1] 

In order to maintain confidentiality, for the purpose of this paper I will refer to my workplace as XYZ Inc. XYZ Inc. in this instance is a Third Party Administrator (TPA) of employee health benefits. XYZ Inc. sells and administers various insurance products and services to an array of clients throughout various industries.

Introduction:

Organizations implement Activity-based management (ABM) due to the fact it is believed that this will aid them in making better decisions, improve performance and earn more money on assets deployed.

Regardless of ones approach or belief, each organization requires information to make decisions, set priorities, allocate resources and monitor actions taken. ABM systems exist only to meet the information requirement. The information and knowledge gained are of value and benefit only when the information is used to improve the business.

This paper will illustrate: where I believe ABM would be useful at XYZ Inc.; how ABM is currently used at XYZ Inc.; lastly, the overall usefulness of ABM.

Recommended Application of ABM at XYZ Inc.:

ABM information has wide use and applicability in XYZ Inc. There are many uses for ABM information which range from determining product/service costs to evaluating acquisition candidates.

I feel that XYZ Inc. would benefit greatly by practicing ABM within its operations. XYZ Inc. would benefit from ABM by implementing its practices: To Determine Product/Service Cost; To Improve Performance of Processes and Activities; To Cut Costs/Downsize Operations; and Various other applications such as: To manage projects, to budget and to support acquisition analysis.

Current use of ABM at XYZ Inc.:

Currently ABM is claimed to be used in the areas of determining product/service cost, improving the performance of processes and activities and in terms of determining the budget. However, in other vital areas such as: determining when to cut costs/downsize, managing projects and acquisition analysis, ABM practices are not present. These areas definitely require the attention of ABM in order to ensure the best and most informed decisions are made relative to these vital areas of the operation.

Although XYZ Inc. collects all the data they need for costing (i.e. Number of Employees to ensure, Insurance Premium Bulk Rates, Geographic Location etc…), they don’t use it effectively or appropriately. As XYZ Inc. sole purpose is to undercut the competition and provide the lowest possible insurance premium rates to clients in order to attain their business. This is not allowing XYZ Inc. to effectively price their products/services. XYZ Inc. also receives feedback from its clients and customers relating to problems with its services, pointing to bottleneck issues within the claims reimbursements processes. Again, XYZ Inc. does not effectively utilize the information that is being forwarded to them in terms of how to remedy the issue. Rather in information is just ignored with hopes that the issue will in some fashion correct itself. Lastly, in terms of budgeting, the information collected here is used in a more serious manner. Senior management looks closely and most often times solely at expenditures throughout the year; almost instantaneously issuing a corporate update outlining where cutbacks will occur in the upcoming year. Most often times Senior management only looks at the large expenditures without taking into account correlating factors or benefits that may have be attained via the expenditures.

Collecting all the pertinent data and utilizing it in a productive fashion, in theory would lead to more effective and efficient operations of the organization. However, when human power and capital is spent to ascertain such data and it is not used in accordance with betterment of the organization, this in turn leads to extreme discouragement and the action of accurate record keeping seems to become more and more pointless, creating a sense of uselessness in a vicious cycle and spiral downward within the organizations efficiency and effectiveness. When data is collected, it needs to be utilized in a fashion whereby everyone involved can reap and clearly see the benefits of attaining the data and using it in an effective and efficient manner for the betterment of the organization.

Usefulness of ABM in Specified Application Areas:

In the areas identified earlier, I will describe how ABM would be useful within the following applications.

To Determine Product/Service Cost:

In this area accuracy is required for operational and strategic decisions of product mix, product pricing, product line investments and production alternatives. Most ABM implementations are directed toward product/service cost. However, managers use Activity-based costing (ABC) to determine the actual, true cost of products and services. Organizations use ABC because they believe the understanding of true product/service cost will lead to better decisions of product mix, product pricing and product sourcing. Better decisions lead to increased profits. However, knowing true product/service cost does not necessarily result in better product/service decisions. If an organization is selling all it can at a market driven sales price, there may be no opportunity to increase the selling price or changes the mix of products. In these situations, accurate product/service cost information will force the organization to look at the activities associated with making or delivering an unprofitable product/service. To effect reductions in product/service cost, activities will have to be improved; requiring the implementation of ABM system.

To Improve Performance of Processes and Activities:

Many organizations use ABM as a structured way to select and examine key activity work processes, which are critical to the success of the organization. Activities are defined, analyzed and assigned a cost, in order to determine an organizations current or “as is” situation. With an organizations current or “as is” situation established, activities and processes with high potential for improvement can be selected and the efforts/actions undertaken to realize the improvement opportunity. Through identifying “the biggest bang for the buck,” improvement can be focused.

ABM is also used to monitor the result of improvement initiatives. Through reporting cost and performance of processes and activities, people and teams responsible for improvement have a scorecard to judge the result of effort. The ABM system is used to provide the feedback necessary to sustain improvement initiatives.

To Cut Cost/Downsize:

Some organizations use ABM to cut cost, downsize, or restructure operations. This is the unfavourable side of ABM. In all actuality, ABM is an effective tool for cost cutting/reduction.

In situations where financial returns are unacceptable to stockholders or when survival of the organization is at steak, organizations often take significant cost reduction actions. These actions typically take the form of layoffs, plant closings and idled equipment. Often taken across the board in all areas of the organization, they are rarely effective. Unless the volume of work is reduced, these cost reductions just leave the same work to be done by fewer people. Eventually, the cost creeps back into the organization.

Activity-based cost reduction is focused on the activities of the organization. Cut activities, cost will follow.

Other Applications:

To Budget:

To Support Acquisition Analysis:

To ensure the future prosperity of XYZ Inc. ABM practices should be adhered to and utilized on a going forward basis.

Conclusion:

A prerequisite to benefiting from ABM is the willingness to assign responsibility for effecting decisions, actions and changes necessary to deliver the desired benefit. Decisions must be made and actions must be taken. Specific responsibility has to be assigned to reduce/eliminate non-value-added activities, improve value-added activities and reduce or eliminate the associated cost drivers.

The value and benefit of ABM can only be measured by the decisions, actions and improvements that result due to the fact individuals were motivated to take action, based on the knowledge and information provided. Implementers of ABM systems should be warned that all efforts to implement an ABM system will be wasted if no one uses or takes action on the information provided.

The value and benefit of ABM can be difficult to quantify. The result of some decisions can be difficult to quantify, while others cannot. Expect people to want process improvements to be credited to their project or initiative versus giving the necessary credit to the ABM system which was the driver of information leading to success.

ABM information drives and supports all improvement initiatives. It can be difficult to measure and quantify its role in improvement and decision making. Activity-based management measure the result of decisions and improvements, regardless of who or what initiative gets credit. While some organizations view ABM as a tool to support improvement initiatives and decision making. The dollar sign makes this information tool useful. Organizations and managers are bottom line driven, and dollars and cents are the language of business. The dollar sign inspires people to take action. The ABM information system tracks improvements and provides individuals, managers and teams with process-based cost and operating information to judge the result of their decisions and efforts.