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Coburn, S., H. Grove and C. Fukami. 1995. Benchmarking with ABCM. Management Accounting (January): 56-60.

Summary by Ben Miele
Master of Accountancy Program
University of South Florida, Summer 2002

ABM Main Page | Benchmarking Main Page

During the 1990’s the Marketing Resources Group of US West, (a regional western telephone company) benchmarked their accounting department using activity-based cost management (ABCM). The Marketing Resources Group (MRG) produces telephone directories both white and yellow pages for US West. In the mid-1990’s US West was one of the 30 largest corporations in the United States. The results of benchmarking with ABCM caused the group to redirect its strategies for improving accounting productivity. The study was performed by a team of MRG accountants under the direction of MRG’s controller.

ABCM is an approach where activity based cost (ABC) models provide economic information for management decision making.

Benchmarking is measuring against an established standard (developed from a large enough sample of "best" Company practices) to determine where an operation ranks. It is an analysis method that points out areas where possible improvements can be made. Benchmarking "standards" are based on "best practices" not perfect practices. (Note: definition was deducted from article as no direct definition was provided).

Benchmarking with ABCM involves using benchmarking as an initial step to rank various processes within a department, group, or operation. It establishes a point of reference to work from and also points out possible major processes requiring improvement.

Activity based costing provides historical cost trends, cost breakdowns by major resource pools, and cost roll-downs of core activities by major and then specific tasks. Also the cost per outcome, of outcome measures established from available standard benchmarks, can be easily arrived at with ABC.

A better analysis of benchmarking results is achieved using ABC’s ability to analyze all the way back to specific employee tasks. This ability then allows changes to be made at the sources of the problem (nipping the problem at the bud); allowing a Company to get moving in the right direction quickly. Waste can be effectively eliminated and positive changes introduced (at the source) on a timely basis.

Benchmarking with ABCM provides a much more powerful tool for analyzing areas of improvement and instituting positive strategic changes, than either of the tools individually could ever achieve. Benchmarking with ABCM is a good way for both justifying/validating strategic changes and also for follow-up monitoring to determine the success of a given strategy over time.

Revised accounting strategies

Prior to benchmarking with ABCM, MRG made some changes to their accounting strategies based on customer surveys. "As a starting point, customers were surveyed to determine their uses and needs concerning the various accounting products, which included typical financial and managerial accounting reports" (p. 56, par. 3). Benchmarking with ABCM was used to monitor the success of these initial strategy changes and to point out additional areas for improvement.

Customers of MRG (MRG managers and employees) were surveyed to determine their uses and needs of accounting reports and information. From the survey the values of existing and desired accounting products were identified. The customer’s needs indicated the desire for more management decision support products verses routine transaction processing. Based on the results of the surveys the following strategies were implemented to promote productivity: a common chart of accounts and common financial statements were introduced, the accounting staff was reorganized and resources were redeployed (to support the customer need for more and better management decision products), and shared accounting services and computer technology advances were employed (to decrease costs).

The assessment of revised accounting strategy

The impacts of the changes within the accounting department were assessed using a combination of benchmarking, and ABCM trend analysis over the period 1989 to 1993. Application of benchmarking with ABCM was accomplished with the following steps:

1. Major activities were identified and are included in Table 2 in column titled "Process and Core Activity". Using the Pareto approach, approximately 20% of the accounting activities took up 80% of the time. To identify major accounting activities, accounting personnel completed interviews, and full-time equivalent (FTE) analyses of their job tasks.

2. Major resource pools were established and are included in Table 1. General ledger accounts were resorted into major costs pools of similar resources. Four major cost pools were formed (a possible fifth pool, facilities, was not used, see Appendix item l). The Human Resources pool included the accounting employees, the Technology pool represented computer usage by the accountants, the Direct Assignment pool was mostly billing activity outsourced to another division of US West (see Appendix item f), the Other pool was for printing, postage, supplies, and training.

Table 1
Accounting Resource Pool Costs, 1989-93 (000,000)
Resurce Pool 1989 1990 1991 1992 1993
Human Resources $6.6 $6.7 $7.7 $7.7 $9.0
Technology 6.5 4.0 5.8 5.8 4.1
Direct Assignment 7.1 7.6 7.6 6.9 7.0
Other 1.0 1.4 1.1 1.8 1.7
Total Accounting Costs $21.2 $19.7 $22.2 $22.2 $21.8


Table 2
ABCM Information for Accounting Productivity Analysis, 1989-93
MRG Cost Per Outcome
Transaction Processing: 1989 1990 1991 1992 1993
Billing-Outsource $7.0 Invoices $1 $1 $1 $1 $1
Accounts Receivable 2.6 Invoices 4 3 2 2 2
General ledger 1.2 Closes 135 109 79 68 70*
Accounts Payable 1.5 Invoices 14 13 7 9 9
Payroll 1.0 Checks 13 11 9 7 7
Credit and Collections .9 Accounts - - 13 13 12
Process Total $14.2
Finance Management:
Finance Management 1.9 Months - - 32 143 155*
Systems Development 1.6 Months 194 75 226 217 131*
Department Administration 1.3 Months 104 156 74 90 107*
Process Total $4.8
Decision Support:
Management Reporting 1.6 Months 52 64 77 92 135*
Cost Accounting .4 Products 738 422 421 362 419
Process Total $2.0
Control Management:
Budgeting .6 Budgets 280 275 308 337 404*
Internal Audit .2 Months 11 16 21 28 21*
Process Total $.8
Total Acctg Dept & Activity Cost $21.8 Million
* In $1,000's

3. Cost driver information was collected, costs were assigned to each activity, and cost per outcome was calculated. These are summarized and trended in Table 2 for a five-year period. The costs per outcomes for the last year (1993) were used for comparison with available benchmarks in Table 3. Certain cost drivers were found to trigger resource consumption during performance of the thirteen core accounting activities. Costs were assigned to these activities by breaking the activities down into the four major resource pools. The major activity cost drivers for each resource pool were as follows:

Human Resources-Full time equivalent (FTE) Headcount

Technology-Central Processing Unit (CPU) Time

Direct Assignment-Direct Use

Other-FTE Headcount

It is important to realize that each major process (and core activity), except for outsourced billing includes costs of each of the 4 resource pools.

Outcome measures defined as a key outcome of each accounting activity were obtained from available accounting benchmark measures from outside consultants. (mostly from A.T. Kearney study that sampled 25 of the fortune 100 and world class companies). Costs per outcome were calculated as shown in table 2. Since the associated outcome measures are the result of performing the major activities (and sub-activities) they too include costs of each of the 4 major resource pools.

Table 3
ABCM and Benchmark Information For Accounting Productivity Analysis, 1993
Accounting Process and
Core Activity Costs: (000,000)
Percent MRG Cost
Per Outcome
Available Benchmarks:
Fortune 100 World Class
Transaction Processing:
Billing-Outsource $7.0 $1.40
Accounts Receivable 2.6 2.40
Receivables Subtotal 9.6 44% $3.80 $15.00 $4.60
General Ledger 1.2 70,336
Accounts Payable 1.5 8.90 7.00 1.80
Payroll 1.0 7.30 5.00 1.72
Credit & Collections .9 21 12.00 16.00 5.60
Process Subtotal $14.2 65% 61%
Finance Management:
Finance Management 1.9 154,595
Systems Development 1.6 130,879
Dept. Administration 1.3 107,294
Process Subtotal $4.8 22% 16%
Decision Support:
Management Reporting 1.6 134,747
Cost Accounting 0.4 419
Process Subtotal 2.0 9% 16%
Control Management:
Budgeting .6 403,873
Internal Audit .2 20,828
Process Subtotal $.8 4% 7%
Total Accounting Costs $21.8 100% 100%
Percent of Employees from Accounting 4.2% 6.0% 2.5%
Percent of Accounting Costs to Sales 2.1% 3.1% 1.7%

4. Processes were analyzed using percentages and/or costs per outcome, compared to available benchmarks as summarized in Table 3. MRG’s accounting productivity strategies were compared with benchmarks of fortune 100 and world class companies. Given the results of Table 3; Table 2 was then reviewed for trends to help isolate areas for improvement. It was noted that due to MRG’s accounting productivity strategies discussed earlier, costs per various outcome measures for transaction processing have generally decreased. Increases in costs per outcome in the finance management and decision support processes has generally increased due to MRG’s strategy to redeploy resources to management decision products, as requested by internal customers. (See Appendix item m). As seen near the bottom of Table 3, overall, MRG’s accounting operation is doing better than the Fortune 100 companies but is still below world class practices.

5. Opportunities for improvement can be identified using Table 3 and further isolated using Table 2. After this, a detailed analysis can be performed, as illustrated in Table 4. Both the benchmark and the ABC information was used to identify additional areas for improvement, while ABC information was used to resolve, and/or institute new or better productivity strategies. The general ledger activity was investigated since its costs per outcome using table 2 information were the highest of all the transaction process activities. To begin analyzing general ledger processing, the cost activity was rolled down to the task levels representing various cost aggregation groupings as shown in Table 4.

As can be seen at Table 4, the general ledger activity costs of 1.2 million were first rolled down to the four major resource pools, then the technology resource pool (chosen over Human Resources for strategic reasons**) was rolled down to the specific technology tasks. The task with the highest activity costs, reporting, was then rolled down to the specific report activities. It can be seen from Table 4 that the trial balance and general ledger reports, together, account for 66% of total reporting costs. Trial balances and general ledger reports were then targeted for improvement. Improvements were made by reducing cycle time for monthly closings from twelve to six days. This was done by switching from a mainframe system to a desk top computer system. (See Appendix item g).

** See Appendix item e

Table 4
ABCM Information Relationships, 1993
Core Activity: Amount Percent ($70,336 for each
monthly closing)
General Ledger $1,200,000 100%
Resource Pools: Cost Driver
Human Resources $590,000 .49 FTE Headcount
Technology 560,000 .47 CPU Time
Direct Assignment 20,000 .02 Direct Usage
Other 30,000 .02 FTE Headcount
Total Activity Cost $1,200,000 100%
Technology Tasks:
Reporting $252,000 .45
Communications 185,000 .33
Processing 73,000 .13
Other 50,000 .09
Total Technology Cost: $560,000 100%
Types of Reports: Monthly
Frequency
Cost
Per Job
Trial Balances $96,000 .38 17 $5,600
General Ledgers 71,000 .28 12 5,900
Management Reports 58,000 .23 14 4,100
Other 27,000 .11 7 3,900
Total Reporting Cost $252,000 100%

The tables above (adapted from Tables 1, 2, 3, and 4 as presented in the article) provide excellent tools for analyzing productivity. Table 1 provides a five year historical trend of resource pool costs. Table 3 is used as a way to initially target possible problem areas. Table 2 provides trends that allow areas for improvement to be better isolated. Table 4 is used to begin the detail analysis process that will narrow the problem down to activities and then to specific tasks and/or reports. Therefore, benchmarking provides a point of reference and starting point for identifying areas for improvement, while ABC allows a detailed analysis capable of arriving at strategic changes that can result in true productivity gains and/or cost savings.

Appendix – Benchmarking with ABCM – Pros, Cons, and Other comments for further discussion

Pros

a. ABC provides a wealth of data and information that can be used in a variety of analyses, including benchmarking.

b. It is important for Companies to review operations for waste and eliminate it. As noted in the article many strategies were implemented without the help of benchmarking. Benchmarking should be used cautiously and the results can only be properly interpreted if a Company understands its costs. Using benchmarking with ABC, then, is a good technique.

c. Benchmarking with ABCM provides a good way of assessing accounting productivity strategies. Reductions that can be achieved in transaction processing costs allows accounting resources to be redeployed for more useful purposes, like management and decision support processes (which are being requested more and more by the internal customers of the various accounting products). Benchmarking with ABCM is good tool for targeting areas for further improvements and/or additional opportunities.

d. Key strategies that will work, seemingly with or without benchmarking with ABCM, appear to be sharing of accounting services to reduce transaction processing costs, and use of technology advances aimed at reducing CPU time and hence transaction processing cost also. These strategies free up resources that can be redeployed (i.e. money saved in transaction processing time can be used elsewhere) in the area of human resources (hiring additional personnel and/or better training). User (customer) needs are more and more focused on better decision making, which results from good judgment currently obtainable through and from capable, experienced, well-trained employees.

e. Although, the human resources pool was the highest cost for general ledger activities, it was not automatically chosen for further analysis. This was done in order to shield the benchmarking and ABCM approach from acquiring the reputation of being another way of laying off employees.

Cons

f. MRG is better than world class in its accounts receivable practices because of the low outsource cost it pays for invoicing by another division of US West. It is not clear from the article, whether MRG is being charged the true cost for this outsourcing within the Company. The Company’s and not MRG’s cost of billing should be the one used in the analyses. If the cost shown in the analyses does represent the Company’s true cost, then it should have been clearly stated. If it wasn’t the true cost then MRG can not be touted as doing well in this area, since a portion of the cost has just been shifted to another division of the Company.

g. The key areas/reasons for MRG’s success is the savings resulting from their strategies of shared accounting services, and taking advantage of technology improvements. The shared accounting services strategy was in place before benchmarking with ABCM was ever used. Benchmarking with ABCM was able to point out this and other strong areas as well as weak areas. The one area where MRG did make an improvement using the benchmarking with ABCM technique, namely switching from mainframes to desktop computing systems, is a fairly common productivity enhancer that due to mere technology advances would most likely occur independently and not as a result of the benchmarking analysis.

h. MRG’s accounting department seemed to be using, in addition to ABC and benchmarking, techniques to downsize and reengineer the department, notable is the full-time equivalent (FTE) analysis of each accounting employee’s job tasks. Throughout the article there are a number of references to additional activities that would be expected to take place after performing the benchmarking with ABCM analysis, not before and during. For instance the FTE analysis just mentioned would be expected to take place after determining that the human resources pool (and FTE headcount cost driver) was the largest cost within general ledger transaction processing.

i. Benchmarking can be a useful tool, only if a Company understands its costs and how to analyze them.

j. It is interesting the way budgets work, although there was a company-wide freeze on accounting, total accounting costs were fairly consistent over the five years, any savings in one area were used in other areas. MRG may never reach benchmarks if their total cost base is not brought down. They may just have a simple case of operating at a higher than needed budget that has been somehow justified by the controller and approved by the board of directors.

k. The controller may have been doing just that, saving/justifying the existing budget, to guard against additional budget cuts. The freeze instituted was already a signal from upper company management that accounting costs were getting to high. Upper management strategically identified the problem by freezing the budget. The accounting department responded by admitting that they have some waste, and could be providing more and better products. Justifying there existence by way of benchmarking with ABCM was a way to help identify/verify areas for improvement, where savings generated in a lower need area were transferred to higher need areas. The higher needs areas involve human judgment, so instead of downsizing, personnel was actually increased, but redirected to better address the needs of internal customers.

l. It is not clear why a facilities cost was not assigned to the accounting operation. I haven’t seen any accounting operations that are run outside on the Company lawn or parking lot. Even if they were there would be some cost involved (probably a lot) to just achieve the feat! It is clear that attaching a facilities cost would cause MRG to be even further from the benchmarks.

m. As a result of savings from technology advances, more accounting employees were hired to support management decision products. Training costs associated with these new hires was included in the "other" resource pool. It is not clear why these training costs were not included in the human resource pool. Again, it looks like another possible attempt by MRG to make the benchmarking analysis look better.

Other

n. MRG did not survey external customers, which would be primarily yellow page advertisers who are billed for advertising.

o. Survey performed within MRG determined that the biggest users of accounting products were the accountants themselves.

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Related summaries:

Campbell, A. 1999. Tailored, not benchmarked: A fresh look at corporate planning. Harvard Business Review (March-April): 41-44, 46,48, 50. (Summary).

Elnathan, D., T. W. Lin and S. M. Young. 1996. Benchmarking and management accounting: A framework for research. Journal of Management Accounting Research (8): 37-54. (Summary).

Murray, M. A., R. A. Zimmermann and D. J. Flaherty. 1997. Can benchmarking give you a competitive edge? Management Accounting (August): 46-48 and 50. (Summary).