Abm avoiding pitfalls

Statements on

Management
Accounting
Statement Number 4CC
May 15, 1998

PRACTICES AND TECHNIQUES:

Implementing
Activity-Based Management:
Avoiding the Pitfalls

In accordance with the charge to the Management Accounting
Practices (MAP) Committee to issue statements on management
accounting principles and practices, Statements on Management
Accounting are promulgated to reflect official positions of the
Institute of Management Accountants (IMA). The work of the
MAP Committee is based on a framework for management
accounting, whose principal categories are:
1. Objectives
2. Terminology
3. Concepts
4. Practices and Techniques
5. Management of Accounting Activities

Statement on Management Accounting

Statement No. 4CC
May 15, 1998

Practices and Techniques:
Implementing Activity-Based
Management: Avoiding the Pitfalls

Institute of Management Accountants
Arthur Andersen LLP

Published by
10 Paragon Drive
Montvale, NJ 07645-1760

Copyright © 1998 in the United States of America
by Arthur Andersen LLP
All rights reserved

IMA Publication Number 98331
ISBN 0-86641-268-9

Acknowledgments

Statement 4CC, “Implementing Activity-Based Management: Avoiding
the Pitfalls,” was approved for issuance as a Statement on Management
Accounting by the Management Accounting Committee (MAC) of the
Institute of Management Accountants (IMA). IMA appreciates the col-
laborative efforts of the Cost Management Competency Center at Arthur
Andersen LLP and the work of Dr. C. J. McNair, CMA, of Babson
College, who drafted the manuscript.
Special thanks go to Randolf Holst, CMA, Knowledge Manager at Arthur
Andersen, for his continuing oversight during the development of the
Statement. IMA also thanks the members of the Management Account-
ing Committee for their contributions to this effort.

Table of Contents
Paragraph
I. Rationale ...................................................................... 1
II. Scope ......................................................................... 6
III. Key Differences between ABC and ABM .................... 10
IV. Uses and Benefits of ABM .......................................... 15
V. The Role of the Management Accountant
in ABM Projects ................................................... 29
VI. ABM Implementation Phases ...................................... 31
VII. Common ABM Pitfalls and Solutions ......................... 51
Planning ................................................................ 52
Analyzing Activities .............................................. 62
Costing Activities/Products and Services .............. 70
Analyzing Data and Documenting Results ........... 76
Developing an Ongoing Data Collection
and Reporting System .................................... 85
Achieving Full Integration .................................... 90
VIII. Best Practices in ABM ................................................. 97
IX. Conclusion ................................................................ 106
X. Appendix
Expanded CAM-I Based Management Model
Checklist for Evaluating ABM Software Packages
XI. Bibliography

Table of Exhibits
Following
Paragraph
Exhibit 1: General Uses of ABM Information ....................... 15
Exhibit 2: Relationship of Cost of Data Collection
to its Potential Revenue ................................................ 44
Exhibit 3: Hoffman-La Roche Activity-Based Management
Training Schedule .......................................................... 54
Exhibit 4: Value-Added Decision Rankings ........................... 69
Exhibit 5: ABM and the Strategic Management Process ....... 92

In Appendix
Expanded CAM-I ABC Model
CAM-I ABM Model
Checklist for Evaluating Software Packages

I. RATIONALE
1 Customers are the driving force for any organization. While this is
not a new insight, it is the catalyst behind the development of new
organizational structures. Reflecting the recognition that
interdependent processes are the keys to creating value for customers,
organizations are shifting from managing vertically to managing
horizontally.
2 Creating and improving processes to increase customer and
shareholder value is the primary goal of managers in these new
organizations. To reach this goal, they need relevant, defensible
and transparent information. Yet, the development of management
information systems to track and provide information about the
process-based, value-enhancing aspects of a business have lagged
significantly behind the needs of its managers. The ultimate test of
the information system is whether the information motivates and
assists in attaining strategic, operational, and/or tactical objectives
in a timely, effective, and efficient manner.
3 Activity-based costing/activity-based management (ABC/ABM) fills
this information void by providing cost and operating information
that mirrors the horizontal view. ABM identifies the key activities
performed in an organization, providing a defensible and
transparent measure of their associated costs and causes. ABM
bundles value analysis, cost driver assessment, and performance
measurement in order to initiate, drive, and support improvement
efforts and to enhance decision making. Focused on shaping the
future, not explaining the past, ABM incorporates opportunity
cost analysis into the standard set of estimating tools used by the
finance professional. This creates an economically rich basis for
supporting business.
4 Since 1994 the number of companies and organizations embracing
activity-based management systems has grown significantly—from
over 3,000 known organizations in 1994 to more than 15,000
today.
5 However, companies use ABM with varying results, suggesting

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the successful application of ABM requires the mastery of new
management tools and techniques as well as a management mind
shift. Analysis, not control, must become the focus of managers
using financial and nonfinancial information in a process-driven,
customer-centered organization. Defining, measuring, and
improving the ability of an organization to create value has to
become the stimulus shaping management information systems,
as well as the actions and decisions they support. Achieving this
goal lies at the heart of ABM.

II. SCOPE
6 This Statement on Management Accounting (SMA) is addressed
to management accountants and others who may lead or participate
in efforts to implement ABM management in their organizations.
It supplements the Institute of Management Accountants’ SMA
4T, “Implementing Activity-Based Costing,” which was published
in 1993 and describes the basic ABC implementation process.

7 From 1993 until today, the emphasis has shifted from ABC to
ABM, or the use of ABC information to manage and improve
process performance. In fact, the time since the publication of SMA
4T has witnessed several significant trends, including shifts from:
• pilot tests to full implementations;
• manufacturing companies to all industries;
• single applications of ABC information to multiple, integrated
applications of ABM cost and performance information;
• single/select users to multiple users;
• reducing costs to creating value; and
• financial measures to process measures.

8 This Statement complements SMA 4T by incorporating these latest
developments. In addition, this Statement pinpoints the differences
between ABC and ABM, discusses how to avoid the most common
implementation pitfalls, and illustrates how ABM can link with
other improvement efforts to enhance a company’s performance.
The ABM concepts, tools, and techniques presented apply to all

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organizations that produce and sell a product or provide a service,
including all levels of government.
9 The following Statement assumes that the reader is already familiar
with basic ABC concepts. It is written to help management
accountants and others to understand:
• the key differences between ABC and ABM;
• ABM best practices;
• uses and benefits of ABM;
• the roles and responsibilities of management accountants in
ABM projects;
• the phases of implementing ABM;
• the key pitfalls in each phase of ABM implementation and
how to avoid them;
• the importance of integrating ABM into the organization; and
• how to evaluate ABM software packages.

III. KEY DIFFERENCES BETWEEN ABC AND ABM
10 There is significant confusion regarding the semantics and acronyms
associated with activity-based information. To clarify these issues,
the Consortium for Advanced Manufacturing-International
(CAM-I)1 has initiated the development of a comprehensive glossary
of ABC/ABM terms.

11 Activity-based costing is defined as a methodology that measures
the cost and performance of activities, resources, and cost objects.
Specifically, resources are assigned to activities, then activities are
assigned to cost objects based on their use. ABC recognizes the
causal relationships of cost drivers to activities.

1
CAM-I is a not-for-profit, cooperative membership organization established in 1972 to
support research and development in areas of strategic importance to manufacturing
industries. Since 1972, the membership has expanded to include several industries out-
side manufacturing. The definitions presented here for both ABM and ABC are based
on the CAM-I Glossary originally published in 1990.

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12 Activity-based management is subsequently defined by CAM-I as
a discipline that focuses on the management of activities as the
route to improving the value received by the customer and the
profit achieved by providing this value. ABM includes cost driver
analysis, activity analysis, and performance measurement, drawing
on ABC as its major source of data.

13 In simple terms ABC is used to answer the question, “What do
things cost?” while ABM takes a process view to understand what
causes costs to occur. Using ABC data, ABM focuses on how to
redirect and improve the use of resources to increase the value
created for customers and other stakeholders. The key differences
between ABC and ABM are:
• ABC focuses on understanding costs and their drivers; ABM
seeks to change them;
• ABC can provide information on process, product, and market
performance; ABM finds ways to improve them;
• ABC is cost centered; ABM lies at the heart of the management
process;
• ABC is the result of a static analysis of the organization; ABM
is embedded in the dynamics of change;
• ABC is predominantly historical and focused on controlling
existing costs; ABM is forward looking, seeking ways to avoid
unnecessary costs and put existing resources to maximum use;
• ABC reports on internal operational and tactical results; ABM
is strategic, focused on understanding the key elements of value
from the customer’s perspective;
• ABC is a source of explanatory data; and
• ABM provides actionable information.
14 ABM is not a replacement for existing initiatives such as total
quality management (TQM), business process redesign (BPR),
benchmarking, or just-in-time (JIT). It is, instead, part of an
integrated information system that puts teeth into these
improvement initiatives by establishing accountability, measuring

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results, and setting priorities. ABM information has a wide use
and applicability in process-based organizations.

IV. USES AND BENEFITS OF ABM
15 ABM refers to the entire set of actions that can be taken on a better
information basis with activity-based cost information.
Organizations implement ABM for different reasons. They believe
ABM will help them make better decisions, improve performance,
and earn more money on assets deployed. As suggested by Exhibit
1, companies in many situations can find value in ABM information.

Exhibit 1. General Uses of ABM Information

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16 Some of the specific uses of ABM in organizations today include
attribute analysis, strategic decision making, benchmarking,
operations analysis, profitability/pricing analysis, and process
improvement.

17 Attribute analysis classifies and combines cost and performance
data into manageable, controllable clusters. ABC/ABM systems
can use many different attribute or “data tags” for a specific cost.
Data attributes allow a company to perform analysis on many
different dimensions of a management problem using the same basic
warehouse of data. Some common forms of attribute analysis are:
• value analysis, which utilizes information collected about
business processes and examines various attributes of the
process (e.g., diversity, capacity, and complexity) to identify
candidates for improvement efforts;
• time variability analysis, which seeks to understand variances
in the time needed to complete an activity or provide a service
and to develop ways to reduce these variances; and
• cost of quality, which is a management reporting technique
that identifies and measures quality costs within an
organization using four basic categories: prevention, detection,
internal failure, and external failure.
18 Strategic analysis explores various ways a company can create
and sustain a competitive advantage in the marketplace.
Emphasizing long-term objectives and challenges, strategic analysis
seeks to impact future costs and improve future profitability by
clarifying the cost of various cost objects such as products,
customers, and channels. Strategic analysis emphasizes future
opportunities and challenges, using a combination of both physical
and financial measures to explore the impact of alternative strategic
positions. Ways in which ABM supports strategic analysis include:
• strategic planning;
• consolidation of operations analysis;
• acquisition analysis; and
• analysis of revenue and profitability growth potential.

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19 For example, the ABM initiative at Hewlett-Packard-North
American Distribution Organization, provides both strategic and
operational information including full customer segment costing,
full product costing, simple product costing, and targeting of
improvement opportunities.
20 Benchmarking is a methodology that identifies an activity as the
standard, or benchmark, by which a similar activity will be judged.
It is used to assist managers in identifying a process or technique
to increase the effectiveness or efficiency of an activity. ABM
supports different types of benchmarking, including:
• internal benchmarking;
• industry/competitive benchmarking; and
• best-in-class benchmarking.
21 For example, ABM has been successfully applied within AT&T’s
Business Communications Services (BCS) to support its
benchmarking efforts. Unit costs are used as metrics for
benchmarking internal work groups as well as comparing the BCS
to other billing centers. Work groups that are more cost efficient
at performing an activity can share information with other internal
groups and billing centers. By having access to reliable cost data,
management can investigate cost discrepancies and more effectively
plan process improvements to achieve cost reductions.
22 Operations analysis seeks to identify, measure, and improve current
performance of key processes and operations within a firm. Areas
where ABM is useful include:
• “what-if” analysis;
• project management;
• creation and use of activity-based performance measures;
• capacity management;
• constraint analysis; and
• process-based costing.
23 Profitability/pricing analysis is a key area for any company. ABM
assists a company in analyzing the costs and benefits of products
and processes in both the “as is” and post-improvement “to be”

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scenarios. ABM also supports prelaunch analysis and improvement
of product profitability. Areas in which ABM has proven useful in
adopting organizations include:
• product/service profitability analysis;
• business process reengineering;
• distribution channel profitability analysis;
• market segment profitability analysis; and
• target and life-cycle costing.
24 ABM is used in a target costing program at AT&T Paradyne to
project future activity and product costs. An ABM target costing
process was established for all new and major existing products to
facilitate life-cycle cost management. The target costing process
begins with specified features and functionality that can be sold to
achieve a significant market position. From there, product and
manufacturing associate teams interlock on a targeted product cost
that is a buildup of material and activity cost.
25 Process improvement lies at the heart of modern management
techniques. Focused on identifying the causes of variation, waste,
and inefficiency, process improvement includes both incremental
and quantum change efforts that seek to increase the value created
per resources consumed by an organization. Uses being made of
ABM for process improvement include:
• business process modeling;
• total quality initiatives;
• business process reengineering; and
• analysis of outsourcing and shared service opportunities.
26 The Pennzoil Production and Exploration Company (PEPCO) used
ABM as a key measurement tool to identify costs by process and
to support its reengineering efforts. To keep pace with lower crude
and natural gas prices and slowing North American operation,
PEPCO needed to find ways to reengineer existing processes to
streamline and improve efficiency.
27 ABM provided the data for PEPCO to change the cost structure of
its exploration and production efforts. It achieved this by determining

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what resources were actually required to support its properties based
on current operation. In addition, the reengineering link enabled
the company to consider those same properties and determine how
it could best meet its economic objectives with fewer resources
through a variety of operations improvement analyses.

28 ABM is used to support a broad array of management initiatives
to help organizations create more value for their customers while
reducing the cost of operations. Benefits derived from ABM’s use
include:
• identification of redundant costs;
• analysis of value-added and nonvalue-added costs;
• quantification of the costs of quality by element;
• identification of customer-focused activities;
• analysis of the cost of complexity;
• identification of process costs and support of process analysis;
• measurement of the impact of reengineering efforts;
• better understanding of cost drivers;
• evaluation of manufacturing flexibility investments; and
• activity-based budgeting.

V. THE ROLE OF THE MANAGEMENT ACCOUNTANT
29 The management accountant plays a central role in creating and
maintaining activity-based cost information to support activity-
based management. Serving as the financial expert on cross-func-
tional work teams, management accountants support analysis of
current performance, identification of improvement efforts, and
prioritization of potential projects. The role of management ac-
countants in ABM efforts comprises the following activities:
• creation of the ABC database;
• maintenance of the ABM data warehouse;
• assurance and monitoring of data integrity within the
warehouse;
• analysis of the costs and benefits of improvement projects;
• ongoing audit and analysis of project performance against
goals;

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• creation and support of management reporting structures;
• provision of cost estimates and reports to meet management’s
decision-making needs;
• participation on cross-functional teams at all levels of the
organization;
• education of line managers on the economics of business within
process settings;
• participation in the development of desktop decision support
tools for line managers;
• creation and revision of cost estimates as process changes are
made;
• target and life-cycle cost and profit analysis;
• strategic and operational budget and planning support; and
• tracking the results/benefits of the ABC/ABM initiative.
30 In some organizations, management accountants are driving process
management efforts, but this can result in ABM being seen as
another accounting tool rather than as a management technique
to improve profitability and performance against customer
expectations. If management accounting does drive the ABM
project, it is critical that a strong champion outside the finance
group be recruited to support the implementation.

VI. ABM IMPLEMENTATION PHASES
31 Pilot efforts to experiment with ABM do not always take a
company-wide perspective. As a result, isolated pockets of ABM
knowledge can develop independent of other management
initiatives. This is not necessarily a negative situation, but to achieve
its full potential ABM information systems need to become
integrated with mainstream information systems and reflect the
organization’s cultures and values. As most organizations have
learned, a holistic approach to ABM implementation is crucial to
gaining and sustaining all of ABM’s benefits.
32 When a total approach to ABM implementation is taken, it is
important first to complete an overall assessment of the key
processes, activities, and data availability. The elements to be

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included in the assessment are:
• business process relationship map;
• documentation and relationship of key business processes;
• preliminary list of key and significant activities;
• identification on a preliminary basis of major activities, including
possible performance measures and potential cost drivers;
• preliminary costing of activities and business processes;
• estimates of nonvalue-added activities and costs;
• linkage of business processes and activities to the organization’s
strategic plan;
• application of ABC product/service costing;
• availability of data and information required for the installation;
• existing system capabilities and ability to integrate with activity
information;
• primary uses for activity-based information;
• available resources and implementation requirements; and
• recommendations for implementation, steps to be taken, and
key time lines.
33 This preliminary information supports the development of an
overall implementation plan. Using a building block approach,
the implementation can be completed for one major segment of
the business at a time. The steps that need to be completed for
each segment include detailed planning, analysis, data gathering,
cost tracing, and documentation. Total implementation is complete
when a cost-effective, ongoing data collection and reporting system
has been developed.
34 Whether applied on a small scale to a specific area of an
organization, such as a department, function, or applications, or
used for a large-scale implementation in a specific plant or applied
simultaneously to several plants, facilities, departments, or
functions, there is no one right way to implement ABM. In fact,
the general steps involved in taking a holistic approach to ABM
implementation can be expressed in a number of ways and can be
performed in different sequences.

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35 Any approach used should include the same core set of steps:
planning, activity analysis, activity/product costing, documenting
results, data gathering and analysis, developing a data collection
and reporting system, and achieving full integration. Choosing a
specific model or implementation approach is a matter of personal
preference and the specific features and requirements the model is
designed to support. Most models, once implemented, yield similar
end results. A brief summary of each of the steps in ABM
implementation follows.

Planning
36 The planning phase focuses on identifying the purpose, objectives,
and expectations for each specific element of the ABM total
implementation. The development of a detailed project plan is a
critical element of the planning phase. The project plan should
include a time line with assigned responsibilities for task
completion, clear definition of the resources required to complete
each stage of the implementation, the selection of specific
individuals to complete the work, and a precise denotation of the
data collection methods to be employed.

37 The scope of the project, management expectations regarding the
output of the project, and issues surrounding team development
are also important for developing a comprehensive ABM
implementation plan. While planning represents only a small part
of the total time and effort of an ABM initiative, it has a major
impact on its overall success.

Analyzing Activities
38 Activity analysis, lying at the heart of any ABC/ABM effort, is the
second major part of an ABM implementation. It comprises several
key steps, including cataloguing of specific activities and business
processes, definition of outputs and output measures, value-added
analysis, identification of cost drivers, and detailed specification
of activity performance. As this list suggests, activity analysis
normally consumes the major part (50 to 55 percent) of the time
and resources allocated to implementation.

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Costing Activities, Products, and Services
39 Activity analysis provides basic information for constructing
the ABC cost system. Developing the ABC estimates is the most
mechanical part of any ABM implementation. Focused on
identifying and documenting cost tracing methodologies and
core assumptions, the costing phase ties the financial reporting
system to the newly developed activity and process structures of
the ABM system.
40 The development or choice of a specific software system to export,
import, and accept the data used to generate the activity-based
estimates and to apply these estimates to create product and service
costs makes up the bulk of the work completed during this stage.
Since the software systems selected or developed as part of this
step are often used for the ongoing reporting of activity information
and performance, it is important that they be relatively simple to
update and maintain.
Documenting Results
41 While often neglected, documentation is an important part of an
ABC/ABM implementation. The work completed, significant
results, recommendations, and conclusions should all be included
in the documented records of the project. Focused on supporting
downstream action and decisions regarding next steps,
documentation serves as a crucial bridge between planning and
operating an ABM system.
42 The time spent recording past results and detailing required future
actions serves to reinforce the learning process, communicate and
assess progress, and adjust the detailed implementation plan to
accommodate unforeseen problems and concerns. When a building
block implementation approach is used, it is even more important
to record the sequence, results, and issues surrounding the activity
analysis and development of ABC estimates.
Gathering and Analyzing Data
43 During the planning stages of the implementation, emphasis is
placed on gathering information and data to document the purpose,

13

expectations, and objectives of the initiative. As attention turns to
activity analysis and the creation of the ABC estimating system,
data gathering takes on more importance as the key to understanding
the existing knowledge base in the organization. To complete the
activity/product-costing step, information about the consumption
of resources by activities needs to be collected and analyzed.
44 The recommendations, conclusions, and identification of next steps
that take place during documentation require a significant amount
of data and information. As suggested by Exhibit 2, though, data
gathering is an integral part of every phase of the implementation.
The payoff to ensuring that the company can achieve total
integration of the ABM system lies at the heart of maximizing the
relevance of the information it creates. Because it can consume
between 25 to 50 percent of the total effort needed to complete
the implementation, creating efficient and effective data-gathering
methods is an essential part of the ABM initiative.

Exhibit 2. Relationship of Cost of Data Collection
to Its Potential Relevance

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Developing an Ongoing Data Collection and
Reporting System
45 The development of a cost-effective, efficient data collection and
reporting system is the final aspect of a holistic ABM
implementation. The information gathered during implementation
provides a static snapshot of the activities, and their resource usage,
at one particular point in time. While much is learned from this
snapshot, ongoing data collection is necessary to reap the total
benefits of the ABC/ABM initiative. To be useful for strategic and
operational decision making, activity information must be collected
and reported on a continuous basis.
46 There are two major stages in implementing the ongoing ABM
information and reporting system:
• establishing the basic data collection and analysis procedures and
• ongoing system maintenance.
47 During the first stage, it is often necessary to create new methods
for collecting data and new driver-based measures to support the
system’s use. A hands-on effort, stage one requires the active support
of the information systems group as well as the collaboration of
managers across the organization as new measures, data formats,
and due dates for various measures and reports are developed.

48 In the second stage, the maintenance requirements of the system
are addressed. Activities, measures, products, and services are
constantly added and deleted within an organization; the system
must be adjusted for each major change. One of the best ways to
ensure this is to implement an ABM-updating process as a core
part of the firm’s project management protocols.

Achieving Full Integration
49 Integrating ABM with existing management practices is necessary
to achieve its full benefits. If ABM is treated as a separate,
freestanding management initiative, it will not survive. The real
value of ABM comes from the knowledge and information it
provides to support improvement efforts and the management

15

decision process. Full integration of ABM within the fabric of the
organization’s other information and management systems is
complete when people in the organization embrace activity
management, take ownership, and internalize it as a better way of
doing business and making decisions.

50 Full integration does not occur overnight. Fully integrating ABM
with current and existing organizational philosophies, cultures,
preferences, and values can take years to complete. Ongoing efforts
are required to drive activity-based thinking deep into the
organization. Attention must be paid to linking ABM with the
basic information systems used to manage the organization and its
ongoing operations. Achieving full integration should be the overall
goal and the final measure of success for any ABM initiative.

VII. COMMON ABM PITFALLS AND SOLUTIONS
51 Understanding the steps in effectively implementing ABM is
important, but as anyone who has actually undertaken a project
of this magnitude knows, many pitfalls and problems may occur
during the life of the project and beyond. Knowledge of these pitfalls
helps an implementation team develop methods to avoid them
and to deal effectively with problems as they occur. Each stage of
the implementation process brings with it its own unique challenges,
as the following discussion suggests.

Planning
52 During the planning phase, a number of distinctive pitfalls and
problems can plague the implementation effort, including:
• lack of senior management buy-in and commitment;
• failure to gain complete agreement on implementation
objectives;
• planning team’s inability to articulate why it is doing the project;
• failure to create a dedicated project team; and
• lack of understanding of the kinds of financial, operational,
and strategic information the organization expects.

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53 These pitfalls and problems are not insurmountable. In fact, getting
ABM off the ground is more than possible—it’s probable, especially
when the following solutions are applied to deal with the common
pitfalls of the planning phase:
• link the initiative to key business objectives and clearly articulate
how the ABM project will deliver improvement in that area;
• find an executive who owns the initiative, will hold an umbrella
over it, help it to develop, and showcase the benefits of using
ABM;
• expose senior management to potential benefits of ABM through
visits to other successful companies and via benchmarking
reports;
• find competitors who are using or experimenting with the
approach;
• understand fully the ongoing commitment costs of ABM before
adopting it;
• ensure the complexity of ABM is not underestimated;
• select a team leader to lead the ABM project who understands
the business and works well with people from many functional
areas within the company;
• ensure the time to complete a comprehensive ABM
implementation is not underestimated; and
• train employees on how ABM will be used.
54 In regards to training, for example, the New Jersey subsidiary of
Hoffman-La Roche, a major pharmaceutical company, conducted
training classes in necessary processes immediately before the
implementation team was ready to perform the particular ABM
phase. At the beginning of the activity analysis, the project manager
explained concepts such as the activity dictionary, how activities
would be defined, and the definition of drivers. Before the model
design phase began, the project manager walked the members
through procedures as they actually built a sample model on the
software. Exhibit 3 illustrates the training schedule used by
Hoffman-La Roche.

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Exhibit 3. Hoffman-La Roche Activity-Based
Management Training Schedule

Completion
Responsibility Date

1000 Project Organization

• 1100 Perform “ABM Introduction”
mini-training
• 1200 Finalize project calendar

2000 Activity Analysis

• 2100 Perform “Activity Analysis”
mini-training
• 2200 Schedule and conduct
process focus groups
• 2300 Prepare preliminary Activity
Dictionary

3000 Model Design

• 3100 Perform “ABM Software
Refresher” mini-training

• 3200 Design preliminary model
schematic
Source: Player and Keys, 1995: 85

55 Implementing ABM is part of an overall organizational
commitment to the continuous improvement philosophy. At the
heart of this philosophy is the notion of the “5 why’s.” The essence
of this concept is that the driving purpose behind any improvement
lies in understanding the root cause of poor performance. Asking
team members to answer a string of “whys” helps identify the root
cause questions until the basic assumption or problem is isolated.

56 How can the “5 why’s” be used to deal with planning pitfalls? By
gaining consensus among the team members on the problems the
ABM implementation will address, and how the planned
improvements will help the organization achieve its strategic goals.

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Specifically, the questions that could be asked and answered are:
• Why is the company undertaking the project?
• Why will ABM make this a better company?
• Why do we need to understand product costs?
• Why do we need to understand what causes costs?
• Why is reducing and avoiding costs important?
57 If the implementation team or sponsors can reach agreement on
the answers to these questions, the critical linkage between ABM
and the strategic and operational objectives of the organization
can be clearly and cleanly defined and articulated.
58 Having defined the reasons behind the project, as well as its
preliminary objectives, it becomes time to communicate the
potential benefits and challenges the ABM initiative represents.
One useful source of convincing information is benchmarking.
External benchmarking projects can result in useful ”straw men”
models of ABM implementations and operations. Looking at best-
in-class, or best practice, uses of ABM information can help sway
an otherwise reluctant management team. Serving as an objective
source of data and documented results, benchmarking can help
the implementation team overcome a significant number of barriers
in the planning and ongoing application of ABM concepts to the
organization.
59 Regardless of what method is used to gain detailed information of
proven ABM successes and benefits, it is important to factor the
Awareness, Buy-in, Ownership (ABO) Continuum2 into the
planning efforts. Specifically, the ABO Continuum is:
• awareness: Executives know something important is
happening, and they show interest in it. Managers seek to
learn more about the proposed change, attend meetings, and
challenge traditional methods.

2
The ABO Continuum is a term coined by Andersen Consulting and should not be used
without the company’s knowledge and appropriate attribution to the original source.

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• buy-in: Executives begin to take personal responsibility for
the change. They are willing to commit time, people, and
money to the change. Executives begin to implement the change
and communicate the benefits of the change to other people in
the organization.
• ownership: Executives assume ultimate responsibility for the
change. Managers recruit others to help apply and teach new
concepts and initiate efforts to continue the process of change.
60 In moving through the ABO Continuum with senior management,
the ABM team can simultaneously address the commitment pitfall
and gain a better understanding of their expectations for the
financial, operational, and strategic information the system needs
to provide. During the planning phase, then, it is important to
gain commitment, and that is done by gaining a solid understanding
of what ABM can and will do for the organization and its
stakeholders. Only when these objectives and benefits can be
articulated and agreed on should the project move into the next
phase of implementation.

61 The leadership and composition of the ABC/ABM implementation
team should reflect the major focus of the project. For instance,
if the primary information needs of a company are centered in
marketing and distribution (e.g., customer or product line
profitability), team membership should be heavily weighted in favor
of these two functions. Similarly, if manufacturing is the area of
major cost and concern, the ABM team should be populated with
key representatives of the manufacturing management team.

Analyzing Activities
62 While analyzing activities, the structure of the project and the
implications of its scope for the organization begin to be felt. The
effort can seen unwieldy at times, as suggested by the following
common pitfalls:
• the number of activities for which detailed information must
be gathered seems overwhelming;

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• there appear to be no significant activities;
• resources dedicated to the project are inadequate to support
the analysis, resulting in the project taking a back burner to
other, “more important” work;
• there is inadequate attention to training to build and form
internal expertise; and
• failure to communicate to employees the purpose behind the
project and its questions leads to the potential for negative
feelings and defensive behaviors.

63 An ABM implementation faces many of the same challenges and
problems as any major change initiative. The lessons learned during
earlier efforts to implement total quality management (TQM) and
ISO 9000(+) certification procedures and to create a learning
organization apply to the ABM project. It is critical that earlier
lessons be revisited, both to increase understanding of the ABM
effort and to build on the successes of and knowledge gained from
these earlier efforts. Specific ways the pitfalls of the activity analysis
phase can be addressed include:
• have a clear understanding of why the initiative is being
undertaken. What business problem is it trying to solve?;
• focus on the right level of detail; 10,000 feet is too high, but it
is just as bad to get too close to the ground early in the
implementation process;
• involve employees in the selection of activities and cost drivers;
• include information on how activities interrelate instead of
detailed data on individual tasks; and
• limit the number of activities to those that are significant.

64 Each layer of detail in an ABM system translates to data collection,
maintenance, and management challenges. According to experienced
users, the amount of data to be managed grows exponentially as
the level of detail is expanded. Unless an organization wants to
dedicate significant resources to storing and retrieving ABM data,
it is critical to pare down the data and detail it collects.

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65 An organization’s ABM success depends not on the number of
activities or drivers it uses but on how relevant that number is to a
specific business objective. For example, Tektronix has two
activities and two drivers in the cost system utilized in its
oscilloscope plant. On the other hand, Caterpillar uses multiple
cost systems, many cost centers, and several overhead bases. Both
companies are leaders in their respective industries and have been
successful in competing against foreign competition.

66 One way to effectively reduce or hone in on the appropriate level
of detail is to return to the questions used during the planning
phase to set the scope of the project. One of the biggest dangers
faced by the ABM project at this stage is “runaway scope.” The
plan is important because it provides an ongoing reminder and
source of discipline to keep the scope of the project from creeping.

67 Reaching an agreement on which activities are significant and which
are not is a highly political exercise. Everyone feels the work they
do is important. A failure to accommodate these beliefs can set the
project up for failure. To reach the conflicting goals of controlled
scope and organizational commitment to the ABM effort, it is
useful to run a series of group brainstorming and problem solving
meetings. During these meetings, individuals who actually perform
specfic activities can negotiate and compromise openly to arrive
at a set of activities, processes, and definitions acceptable to all.
Granted, these meetings will consume implementation resources
and may lengthen the project, but the ultimate benefits will greatly
outweigh any up-front costs.

68 Another way to address problems surrounding identification and
definition of core activities is to ask the management team or a
similar group to think about the organization from the customer’s
perspective. What things are done to service directly, or indirectly,
the needs of current and future customers? What activities are
critical to ensure the long-term health and competitiveness of the
organization? Finally, what activities are needed to support the
needs of other stakeholders? Categorizing activities by who is served

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by their output can help focus attention and gain agreement on
the things the company must do well if it is going to survive, let
alone prosper, today and in the future.

69 Dayton Technologies, a producer of components for vinyl window
manufacturers, determines whether an activity is value-added by
asking whether or not the customer receives any benefit. An even
tougher test is, “Would the customer pay for this activity as part
of the product or service transaction?” This approach to defining
and quantifying value is detailed in Exhibit 4.

Exhibit 4. Value-Added Decision Rankings

Value-added
VA1: Is the activity of value to external customers?
VA2: Is the activity required to meet corporate requirements?

Nonvalue-added
VA3: Is the activity required for sound business practices?
VA4: Is the activity of value to internal customers?
VA5: Is the activity a waste?

Costing Activities/Products and Services
70 The costing activities/products and services phase of an ABM
implementation may be mechanical, but that does not mean that
it is not fraught with its own unique challenges and potential
pitfalls, such as:
• inaccurate assignment of costs to activities and to cost objects;
• resource and activity drivers are at too high a level of detail;
• activity drivers do not adequately reflect the consumption rate
and pattern of their respective activities;
• capacity, or potential of the resources in the pool to support
work, is not defined;
• old habits, such as allocation of top-level costs, are not broken;

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• responsibility and controllability of the costs is not cleanly
identified; and
• excessively complex assumptions and assignments are made.
71 Reaching the right level of detail in the ABM cost system begins
with understanding the core activities, but it cannot end there.
Why? Because the basic, unavoidable fact is that many, if not most,
of the resources used by a company are joint, or shared among
several areas or users. ABM cannot make this fact go away. In
fact, one of its major benefits is to force the organization to deal
directly with the issues surrounding shared resources and to
determine who uses a resource or activity, why, and how much.
This information can go a long way in creating cost consciousness
and in reducing the total costs incurred by the organization. What
remedies can be used to deal with these potential problems? Some
approaches that have been used in successful ABM implementations
include:
• making data integrity a high priority;
• reconciling ABM data to the financial accounting system;
• avoiding using revenues as a driver;
• avoiding allocating costs when they cannot be assigned
accurately;
• using ABM methodology that is consistent with accepted
practice;
• using total cost in decision-making and process improvement
efforts; and
• using practical capacity to assign costs to cost objects.

72 An ABM system’s value lies in its believability and its ability to
support and direct the actions of the organization and its managers.
It is not just another accounting system.

73 It is during this mechanical phase of the project that the focus can
be most easily lost. There is also significant danger that the ABM
initiative, advertised as a management tool, will begin to be seen
as an accounting project during the costing activities/products and
services phase. The project team must actively and frequently

24

communicate the objectives, goals, and scope of the project during
this phase, keeping everyone’s eyes on the “big picture.”
Succumbing to the comfort of the detail at this point in the
implementation process can lead to the ultimate failure of the entire
ABM initiative.
74 Whenever an excessive focus on the detail, or myopia, begins to
creep into the implementation, it is critical to return to the original
planning documents and the strategic objectives they define. The
integrity of the data entered into the ABM system is clearly a high
priority if the system is to be accepted by the organization and its
managers, but excessive attention to detail at this point can also
be dangerous. It may be useful to create a separate permanent team
to ensure the integrity of the data today and in the future. This team
can report directly to the ABM project team, which is charged with
keeping the implementation moving toward its larger goals.
75 The final product of the ABM implementation is clearly no better
than the quality of the data it relies on to complete its analysis,
planning, and reporting functions. Ensuring this quality and
reaching sustainable solutions to the knotty problems of shared
resources must be a primary concern of the implementation team.
If inadequate attention is paid at this juncture, the old adage of
“garbage in—garbage out” can become a reality.
Analyzing Data and Documenting Results
76 At this point in the ABM implementation, new information
becomes available to managers at all levels of the organization. It
is a “moment of truth,” one that brings with it its own unique
challenges and pitfalls, including:
• managers do not take action on the ABM information;
• no activities are eliminated;
• cost drivers are not evaluated;
• some parties are adversely affected by the ABM information;
and
• a high degree of disbelief in the new numbers develops.
77 Prior to the data analysis and documenting results phase, the ABM

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system is an abstraction, a concept. As the costing phase is
completed, though, the system begins to operate in a very visible
way. Given that the output is good news, bad news, or old news, it
is very important to actively address the implementation pitfalls
at this stage. Failure to do so can result in an implementation that
is in name only. Some ways these pitfalls can be addressed are:
• require managers to justify inaction as well as action on ABM
information;
• focus ABM not just on cost and cost reduction but also on
value and value creation;
• monitor the number of changes made using the ABM
information;
• ensure that a large number of people are receiving and using
the information;
• hold training and information sessions to discuss the system
and its reports; and
• hold feedback sessions to gather criticisms, concerns, and
problems with the ABM system from affected managers.
78 Personal resistance to change is the major behavioral barrier facing
any change effort. ABM is not immune to this problem. Inertia,
the tendency of a body at rest to remain at rest, is as common a
problem to human organisms as it is to a rock. It takes energy to
move away from the status quo, to embrace a new way of thinking
about and doing work. With this newness comes the risk arising
from fear of the unknown, lack of understanding of the new system,
and uncertainty regarding how ABM will affect their job,
performance, and standing in the organization.

79 In many ways, ABM leaves managers feeling they are playing the
same old game with a new set of rules. Accounting is the language
of business, a dialect that defines success and failure, objectives
and results. ABM changes this language in many subtle and not so
subtle ways. The impact of these changes hits hardest the people
who knew the old game well, the former “stars” of the organization.
These stars normally have significant personal power and influence;
when they are uncomfortable, major barriers to change are created.

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80 At the departmental level, ABM meets another implementation
challenge. ABM does not focus on departments and functions; it is
defined on activities that are often cross-functional in nature. To
managers accustomed to a functional structure, it is very difficult
to understand what ABM really means and how it can be used
effectively. The shift to a nonfunctional, interdepartmental focus
can prove very valuable to the organization as a whole, but it can
also pose a very real threat to the power wielded by individual
departments.

81 One key to overcoming these fears is training. The use of role
playing, simulation-based scenario analysis, and case exercises can
help employees learn about a new system and its impact. Through
“play,” threatened individuals can find new ways to succeed using
approaches and information more closely tied to the strategic and
operational goals of a process-driven organization.
82 If the resistance encountered is judged to be too large to manage
through training alone, it may become necessary to add a layer of
detail to the ABM system at the intradepartmental level. Activity
costs may then be “rolled up” from the data at the departmental
level. While this solution adds cost and complexity to the ABM
system, it may provide the essential compromise needed to gain
departmental and organizational support.
83 An ABM system will provide new information and insights, but
unless it is acted upon, no benefits will be reaped. Effort must be
made to emphasize the decisions ABM information can support,
not the value of the numbers themselves. Time must be spent
familiarizing managers with this information and finding ways to
apply it effectively to issues that matter to them. Several ways the
“nonuse” pitfall can be addressed include:
• place more emphasis on involving managers from across the
organization in the design and development of the ABM system;
• spend more time training managers how to use the information;
• set specific objectives for the ABM system that tie directly to
the types of decisions it is meant to support;

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• target certain managers who are most likely to use and benefit
from the ABM system;
• identify a champion in the organization who will use ABM
and encourage others to use it; and
• consider a pilot ABM system to generate information for
specific decisions so early successes can be achieved.

84 The pitfalls and challenges in the data analysis and documentation
phase shape the future of any ABM system. Spending time to
familiarize people with the system, to deal consciously and actively
with the politics of change, and to mediate the risk and fear
individuals experience is as important as getting the numbers right.
ABM is an information system; if the information is not used, it is
useless.

Developing an Ongoing Data Collection
and Reporting System
85 Moving from planning to implementation and into operation is
the natural sequence of any successful project. As this transition
takes place, it becomes increasingly important to solidify the project
and its gains and to create sustainable frameworks for action. While
the need to create effective, efficient data collection and reporting
systems is essential to any ABM effort, it is also a stage fraught
with its own potential pitfalls, including:
• driver data collection is primarily manual;
• no provision is made for the regular updating of the ABM
information;
• reports do not contain the information managers need or want;
• reports are too long;
• reports contain too many numbers;
• a very small font must be used to get all the numbers on one
sheet, making them unreadable;
• unnecessary accounting terminology is used in the reports;
• it takes too long to capture the data; and
• labor collection, if used, is cumbersome.

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86 Technologies such as bar coding and imaging can help a company
deal with some of these data-driven problems, but the key to their
solution lies in good planning. Some ways in which an ABM
implementation can plan for and overcome these data and reporting
pitfalls are:
• minimize the effort required to reconcile data and balance
reports, as well as to update and maintain the system;
• develop a written plan for how the system will affect decision
making. Note what the decisions are, how the system will
help in making them, whose responsibility they are, and when
they will be made;
• avoid complexity when possible;
• involve information services systems people early in the ABM
system design and development stages;
• use graphics and summary figures as the primary report,
providing detailed information in an appendix or query format;
• use innovative data display and user interfaces; and
• provide users with the flexibility and capability to build
customized reports.
87 Reports that are difficult to understand are not going to be used.
Complex formats and excessively detailed reports do not reflect
favorably on the financial department. They simply suggest to
users that whoever prepared the report was not trained to
communicate information effectively and efficiently.
88 A report that is easily readable but that arrives too late is also of
little value. Interactive, real-time desktop reporting and analysis
systems and tools provide a way to reduce the physical effort
required to get information to managers who need it. Another
way to ensure information is there when it is needed, and only
when it is needed, is to link report frequency with the decisions
they support. Strategic decisions do not require daily information;
the detail would hide the major trends essential to managers at
this level. Monthly reports are too late for operating managers
who are putting out fires and actively managing day-to-day detail.

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89 Users, the customers of the ABM system, should be actively
recruited to provide guidance in the creation of reports and the
development of decision support tools using the ABM database.
What information do they, the users, need and want? Have the
reports been explained to users so they can use and understand
them? To find answers to these questions, management accountants
must get close to the organization, leave the safety of their offices,
and actively engage in dialogue with individuals at every level and
functional area within the company.

Achieving Full Integration
90 Full integration of ABM information with the existing data and
report structures of the organization signals a mature
implementation. Once integrated, the ABM data can be fine-
tuned and directed toward areas of major need or opportunity,
yielding value-added analysis and decision support. It is at this
stage that the ABM system comes into its own, leaving the land of
novelty and entering into the world of value creation and continuous
improvement. No longer a new tool or interesting project, a mature
ABM system can be linked with other forms of information to
create a balanced, well-developed analysis of past, current, and
future performance.
91 While it is difficult to argue with the fact that full integration is a
desirable goal for the ABM system, this final stage still suffers its
own set of unique pitfalls, such as:
• no formal system exists for documenting suggestions for
improvement in the ABM system;
• there is no champion of the ABM system who uses ABM and
encourages others to use it;
• no one has taken ownership for the system in decision making;
• the ABM project is seen as another competing improvement
program, or worse, another management fad; and
• excessive emphasis is placed on cost reduction rather than
increasing profits or creating a sustainable competitive
advantage.

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92 An organization at the full integration stage of ABM
implementation is not looking at success or failure but rather the
payoff it will receive for the investment made in creating and
maintaining this new form of information. Since achieving a high
payback on every investment made is one of the determinants of
long-term profitability and success, reaching the integrated level
of performance is vitally important. Exhibit 5 details the role the
fully integrated ABM system plays at AT&T Paradyne.

Exhibit 5. ABM and the Strategic Management Process

Short & Long-Range Value Propositions &
Planning Business Model
Benchmark
alternatives

Close gaps Vision/Mission Strategy/
Strategy Objectives/ Operational Plan
Tactics
Identify/ ABM
analyze gaps Execution
Execution of Processes
strategy of strategy Objective/Tactics

Measurements: Process Dimensions ABM
QTCPS Baseline & SWOT
Deploy
Benchmark
Choose metrics Assessment

Implement
operational plan

Process Dimensions Legend
Technology Delivery SWOT: Strengths,
Quality Capacity weaknesses, opportunities &
Facilities Environmental threats
People Financial QTCPS: Quality, time, cost,
productivity & satisfaction
ABM: Activity-based
management

Source: Player and Keys, 1995: 155.

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93 What solutions can be used when pitfalls are plaguing a company
seeking full integration? Approaches include:
• integrating and linking ABM with existing performance
measurement systems, improvement initiatives, reward
systems, value-based management, strategic and operations
planning, training and education initiatives, management
control systems, and core competencies;
• ensuring that system design specifications take into account
techniques such as benchmarking and target costing;
• linking the ABM information system directly to compensation;
• transferring ownership of the system to line management;
• implementing and emphasizing continuous improvement;
• training managers on how to use the ABM information; and
• not defining the implementation as an accounting project.

94 To stop short of full integration of the ABM system is to leave the
organization open to downstream problems, including the gradual
erosion of confidence in the ABM system, its isolation from
mainstream operations, and the potential for disagreement between
the information generated by the ABM system and other
information sources in the organization. Careful analysis of the
existing management control process of the organization, its
culture, decision-making style, and related key factors can make it
easier to match the key features of the ABM system against existing
structures and practices.

95 Only full integration can ensure that everyone receives the same
clear, unambiguous information when exploring an area of
opportunity or managing existing processes. Keeping everyone
involved with the ABM system and its integrity, through rewards,
culture, and compensation, can guarantee the project evolves into
a sustained effort. People support what they create. An ABM system
that is alive, open to change, and improving through the input and
direction of the people who use it is a success.

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96 The pitfalls and solutions described here have been developed
through the experience of organizations across the globe that have
implemented ABM. Having laid out the path to this
accomplishment, what best practices have emerged? These lessons
from the field complete the picture of what does, and does not,
support the successful implementation and operationalization of
ABM.

VIII. BEST PRACTICES IN ABM
97 In 1997, the American Productivity and Quality Center (APQC)
and Arthur Andersen collaborated to conduct and publish a major
research project on ABM implementation. The areas of focus for
this project were systems, reporting, and transfer of ownership
best practices.

Systems Best Practices
• Companies are investing increasing amounts of resources in
systems integration and systems linkages.
• Data integrity is given high priority by best practice firms.
• Access to information is viewed as a key issue in the successful
use of ABM information systems.
• Timing and its multiple dimensions are central in systems
decisions.
• The information system resource commitments made by best
practice companies are appropriate to the decision applications.

98 ABM best-practice companies place significant emphasis on
installing systems, procedures, and methods to collect and report
activity-based information on an ongoing basis. Systems integration
and linkages are emphasized for several reasons. The first reason
is one of cost. ABM systems not integrated and linked to the existing
financial and operations systems of the company are difficult and
expensive to update and maintain. Another reason is one of
timeliness. Linkage and integration to existing systems ensures
that ABM reports are available at the same, or nearly the same,
time as other financial and operating reports.

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99 Systems integration can occur at different levels – across one
organization (by functions, regions, processes, or the enterprise as
a whole) or across multiple organizations. Efficient customer
response (ECR) is a good example of systems integration across
the value chain (suppliers, producers, distributors, retailers, etc.).

100 The Activity-Based Information System (ABIS) at BellSouth is a
large-scale, fully integrated system. The basic system architecture
is a database (Oracle/Visual Basic application running in a client/
server environment) linked to and integrated with source financial
(cost) transactions and operation information and transactions from
existing information and reporting systems.

Reporting Best Practices
• Customization of reports is viewed as an ongoing part of
systems development.
• There is greater recognition of the benefits of reports comparing
costs (and other variables) across multiple units.
• Reports at best-practice companies give high priority to revenue
enhancements and value creation.
• Innovative data display/user interface is viewed as a high
priority.

101 ABM information is communicated to the organization through
reports, reporting capability, and access to information contained
in databases. Organizations design and implement ABM reports
and reporting capability to provide cost and performance
information about key and significant activities, the cost of
products, services, customers, distribution channels, and other
organization-specific cost objectives. They also design reports and
reporting capability to track the resource and activity drivers used
to trace, assign, and allocate costs. Reports and reporting capability
highlight the costs for nonvalue-added activities and identify
opportunities and cost drivers.

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102 At best-practice companies, reports are designed so users can view
information from many perspectives, in differing formats, and in
relationship to other data. Many of the best-practice organizations
use flexible executive information systems (EIS) to generate reports
and information online to users. Graphical and other innovative
report displays are used to illustrate important aspects of reports.

103 The CIS reporting capability at Caterpillar provides both
summarized reports of product cost by prime vehicle and drill-
down capability to offer all the details of the component making
up the vehicle at the various inventoried levels. Roll-up reports of
prime product cost with supporting detail are available down to
the lowest nut-and-bolt level.

Transfer of Ownership Best Practices
• Linking ABM information to operational goals/objectives and
improvement initiatives is crucial for success.
• Successful pilot tests/efforts prove the value of ABM initiatives
through early wins.
• ABM implementations should be operationally funded and
operations driven.
• Linking ABM information systems to compensation encourages
operational and user ownership.

104 The real value and power of ABM come from the knowledge and
information leading to better decisions and improvement. If people
in the organization do not use the information (for whatever
reason), the only creations are the sunk cost of development and
implementation and the ongoing cost of maintaining the system
until it is retired. Nothing may be more important to a successful
ABM implementation than achieving ownership and accountability
by the people who use ABM information to make decisions and
effect changes in the organization. Likewise, nothing may be more
difficult.

105 Many of the ABM best practices developed in leading edge firms
reflect the lessons learned from managing the ABM project through

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its stages and their pitfalls. For each of these organizations, the
key has been to continue to strive for improvement in the quality,
relevance, and actionability of their ABM systems. Responding to
customer demands, and seeking out the criticisms and concerns
that can undermine the system, leads to best-practice performance
for adopting organizations. Achieving ABM best practice is a
journey, not a destination.

IX. CONCLUSION
106 After many years of experiments, successes, failures, and learning,
ABM systems are proving they are here to stay. Much more than
another form of accounting, ABM in best-practice firms lies at the
heart of the decision-support process. Integrating ABM within the
total information and management control system of the
organization can lead to quantum improvements as vital links
between operations and strategy, processes and customers, value
and cost are defined, measured, and understood.

107 Achieving these results requires an organization to understand and
address the common pitfalls and barriers to success at every stage
of implementation. Whether during planning, activity analysis,
costing, documentation, data gathering and analysis, development
of the data collection and reporting system, or achieving full
integration, the ABM system must include and draw on the insights
of the people who will use it. When the people using the system
take ownership, the implementation is a success.

108 Successful implementation of ABM will not look the same in every
organization or follow the same path. Tailored to the unique
strategy, structure, capabilities, and needs of the firm, ABM is a
universally useful concept and system that can take on a multitude
of shapes and uses. ABM data should meet the needs of the
company’s decision makers and support their efforts to create value
for all stakeholders. The final measure of ABM success, then, is its
use. ABM should drive change across the organization as new
opportunities and innovative solutions to problems are revealed.

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109 As best-practice firms have found, the ultimate payback for their
ABM investment comes when the system achieves full integration
with other information and management support systems.
Integration is not an end point, though. It is, rather, a significant
milestone in the ABM journey to create a dynamic and relevant
knowledge base on which to build and support a sustainable
competitive advantage. ABM is intricately linked to the growth
and long-term health of the organization.

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X. APPENDIX
Expanded CAM-I Based Management Model
Two expanded models for the depiction of ABC and ABM within
best-practice organizations have been developed by CAM-I. These
models provide a more realistic view of what actually takes place
in an organization adopting ABM than the earlier model depicted
in the Institute of Management Accountants’ SMA 4T. Depicted
in the expanded ABC model on the next page are the resource cost
assignment and activity cost assignment and their respective
databases of drivers. The concept of a “trigger,” the link between
the occurrence of a cost driver and the initiation of action in an
activity, is also illustrated in the expanded ABC model.

The next exhibit details the CAM-I expansion of the ABM model.
It depicts the key relationship between ABC and the management
analysis tools needed for an organization to reap the full benefits
of ABM. ABC is a methodology that can yield significant
information about cost drivers, activities, resources, and
performance measures, while ABM offers the organization the
opportunity to improve the value of its products and services to
stakeholders.

Checklist for Evaluating ABM Software Packages
Software selection can occur at either the beginning or the end of
the ABM implementation. Uniformity versus “customized fit” is
the criterion that should drive the timing of the software choice. If
made at the beginning, the software choice will shape the nature
of the ABM models and reports developed. In some organizations,
removing this ambiguity at the early stages of the project may be
desirable, especially if multisite implementations requiring
compatible downstream data are being undertaken. When
management is more concerned with capturing the essential nature
of the organization’s processes and costs, though, it may make
more sense to choose the software after the ABM system has been
designed.

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Expanded CAM-I ABC Model

COST ASSIGNMENT VIEW

Resource

Resource
cost Resource
assignment drivers

Cost Activity Performance
drivers trigger Activities measures

Activity cost Activity
assignment drivers

Cost objects
Source: CAM-I.

CAM-I ABM Model

COST ASSIGNMENT VIEW

Resource
Activity analysis

Cost Performance Cost driver
Activities
drivers measures analysis
Performance
analysis
Cost
objects

Source: CAM-I.

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A key issue for an organization seeking to evaluate and choose a
specific ABM software package is whether to implement the system
through a stand-alone (or networked) PC or to integrate the system
online with existing financial and operational systems. This stand-
alone approach often works best for an initial implementation,
providing a means to gain hands-on experience before attempting
to define the ABM system within the larger information architecture
of the firm.

Each of the major software programs for ABM accepts general
ledger cost and operations data and reformats and reports the cost
information in activity format based on the resource and activity
driver assumptions specified in the system. Some examples of
available software and vendors include:
• NetProphet II (Sapling Software);
• Easy ABC Plus/OROS (ABC Technologies);
• DaCapo Process Manager (ABM-I);
• CMS-PC (ICMS);
• CASSO (Automation Consulting);
• HyperABC (Armstrong Laing);
• TR/ACM (Deloitte & Touche);
• Activa (Price Waterhouse);
• Profit Manager Plus 3 (KPMG Peat Marwick); and
• ABCost Manager (Coopers and Lybrand).

Many of the enterprise resource planning systems (ERP) are also
developing or are incorporating ABC and ABM support modules.

Criteria to be considered in selecting a software package include
price, available features, product and user support, and ease of use
and user interfaces. If target costing, budgeting, or customer
profitability analysis is to play a central role in the ABM system’s
use, the support of these features must be a key choice criterion.
Finally, the track record of a software provider in terms of ongoing
expansions and updates can play an important part in choosing a
software provider.

41

The exhibit on the next page details a checklist for evaluating ABM
software applications. Five key areas of evaluation are captured:
vendor characteristics, general characteristics, documentation
provided, conversion costs, and cost of the new system. The
individual elements of this list may not apply to all settings. Relevant
criteria should be the focus. It is also useful to weight the features
based on perceived importance to the company, its strategic and
operational objectives, and the overall success of the ABM effort.
Finally, it is important to assess the vendor, seeking references and
insights from existing customers wherever possible.

The right ABM software decision and subsequent integration is
driven by four steps: (1) defining the business purposes the system
will serve (strategic, financial, operation); (2) determining the
implementation approach (stand-alone, one-time analysis, ongoing
or repetitive analysis, or an integrated system); (3) evaluating
software trade-offs; and (4) analyzing the cost benefit of selection.
Each implementation approach has its place, and each may suggest
different software solutions.

42

Checklist for Evaluating Software Packages

Vendor Characteristics Documentation Provided
Length of time in business System flowchart
Publicly or privately held Logic diagram
Dollar volume of software sales for Program listings
last financial period File layout(s)
D &B rating (if available) Input/output formats
Size of technical staff Operator manuals
Years of experience
Equipment capabilities Conversion Costs
Language proficiencies Additional programs needed
to convert/build files
General Characteristics Direct clerical effort
How many times it has been sold Management involvement
Price structure for package Education
What is included in the price
Restrictions on use/sale of package Cost of New System
Minimum equipment configuration Processing cost
required Equipment configuration
Language used changes
Estimated run times Additional peripheral
1. Program by program equipment
2. Total system Input preparation
Estimated life of package Output handling
Audit and control costs
Continuing education (at any
and all levels)
Program modification
Additional documentation

Source: Miller, 1996: 190.

43

XI. BIBLIOGRAPHY
American Productivity & Quality Center. Activity-Based Management
II: Best Practices for Dramatic Improvement. Houston, TX: APQC/
CAM-I, 1997.
_________________. Activity-Based Management. Houston, TX: APQC/
CAM-I, 1994.
Antos, John. “Activity-Based Management for Service, Not-for-Profit,
and Government Organizations.” Journal of Cost Management,
Summer 1992, pp. 13–23.
Berliner, Callie, and J. A. Brimson, eds. Cost Management for Today’s
Advanced Manufacturing: The CAM-I Conceptual Design. Boston:
Harvard Business School Press, 1988.
Beynon, Roger. “Change Management as a Platform for Activity-Based
Management.” Journal of Cost Management, Summer 1992, pp.
24–30.
Borden, James P. “Activity-Based Management Software.” Journal of
Cost Management, Winter 1994, pp. 39–49.
Brimson, James. Activity Accounting: An Activity-Based Cost Approach,
New York: John Wiley & Sons, 1991.
Cooper, Robin. “Cost Classification in Unit-Based and Activity-Based
Management Cost Systems.” Journal of Cost Management, Fall
1990, pp. 4–14.
Cooper, Robin, R. S. Kaplan, L. S. Maisel, E. Morrissey, and R. M.
Oehm, Implementing Activity-Based Cost Management: Moving
from Analysis to Action. Montvale, NJ: Institute of Management
Accountants, 1992.
Cooper, Robin, and R. S. Kaplan. “Measure Costs Right, Make the
Right Decisions.” Harvard Business Review, September-October
1988, pp. 96–103.
Hronec, Steven M. Vital Signs: Using Quality, Time, and Cost
Performance Measures to Chart Your Company’s Future. New
York: American Management Association, 1993.
Innes, J., and F. Mitchell. Activity-Based Cost Management: A Case
Study of Development and Implementation. London, England: The
Chartered Institute of Management Accountants, 1991.

45

Johnson, H. Thomas. “Activity-Based Management: Past, Present and
Future.” Engineering Economist, Spring, 1991, pp. 219–238.
______________, “Activity Management: Reviewing the Past and Future
of Cost Management.” Journal of Cost Management, Winter 1990,
pp. 4–7.
Johnson, H. Thomas, R. S. Player, and T. P. Vance. “Pitfalls in Using ABC
Cost-Driver Information to Manage Operating Costs.” Corporate
Controller, January/February 1991, pp. 26–32.
Johnson, H. Thomas, and R. S. Kaplan. Relevance Lost: The Rise and
Fall of Management Accounting. Boston: Harvard Business School
Press, 1986.
Kaplan, Robert S. “One Cost System Isn’t Enough.” Harvard Business
Review, January-February 1988, pp. 61–66.
Keys, David E. “Tracing Costs in the Three Stages of Activity-Based
Management,” Journal of Cost Management, Winter 1994, pp.
30–37.
Miller, John A. Implementing Activity-Based Management in Daily
Operations. New York: John Wiley & Sons, 1996.
O’Guin, Michael C. The Complete Guide to Activity-Based Costing.
Englewood Cliffs, NJ: Prentice-Hall, 1991.
Ostrenga, Michael R., T. R. Ozan, R. D. McIlhattan, and M. D.
Harwood. Ernst & Young’s Guide to Total Cost Management.
New York: John Wiley & Sons, 1992.
Player, Steve, and David Keys. Activity-Based Management: Arthur
Andersen’s Lessons from the ABM Battlefield. New York, Master
Media, Ltd., 1995.
Raffish, N., and P. Turney, eds. The CAM-I Glossary of Activity-Based
Management. Dallas, TX: CAM-I, 1991.

46

Management Accounting Committee
1997-98
Chair—Alfred M. King, CMA, CFM
Chairman of the Board, Valuation Research Corporation, Princeton, NJ

Sally A. Claybourn-Evans Darrell J. Oyer, CMA, CPA
VP and Controller Government Contract Specialist
Institute of Biology R&D Darrell J. Oyer & Co.
Irvine, CA Gaithersburg, MD
Dennis C. Daly, CMA Raymond H. Peterson
Chair—Dept. of Accounting Consultant
Metropolitan State University Petaluma, CA
Minneapolis, MN Grover L. Porter, CPA
Dale L. Flesher, CMA, CFM Professor of Accounting
Professor—School of Accountancy University of Alabama
University of Mississippi Huntsville, AL
Oxford, MS Barbara C. Reilly, CPA
Randolf Holst, CMA Regional Director, Mid-Atlantic
Knowledge Manager Region
Arthur Andersen LLP Defense Contract Audit Agency
Dallas, TX Philadelphia, PA
L. Hal Rogero, Jr., CPA
Edward J. McCracken, CPA
Assistant Corporate Controller
Manager—Group Accounting
Mead Corporation
Americas Polyurethanes Group
Dayton, OH
West Depford, NJ
James R. Young
Michael R. McGranaghan, CMA Manager, Business Development
VP—Finance & Information Mgmt. Finance
Ethicon Endo-Surgery Inc. General Electric Company
Cincinnati, OH Schenectady, NY
Philip T. Murphy, CPA Staff
Controller Terri L. Funk, CMA, CFM
Novartis Corp. Protection Inc. Director
Greensboro, NC Management Accounting Practices

Statements on Management Accounting in Print
Code Title
1A Definition of Management Accounting
1B Objectives of Management Accounting
1C Standards of Ethical Conduct for Practitioners of Management
Accounting and Financial Management
1D The Common Body of Knowledge for Management Accountants
1E Education for Careers in Management Accounting
2A Management Accounting Glossary
4A Cost of Capital
4B Allocation of Service and Administrative Costs
4C Definition and Measurement of Direct Labor Cost
4D Measuring Entity Performance
4E Definition and Measurement of Direct Material Cost
4F Allocation of Information Systems Costs
4G Accounting for Indirect Production Costs
4H Uses of the Cost of Capital
4I Cost Management for Freight Transportation
4J Accounting for Property, Plant, and Equipment
4K Cost Management for Warehousing
4L Control of Property, Plant, and Equipment
4M Understanding Financial Instruments
4N Management of Working Capital: Cash Resources
4O The Accounting Classification of Real Estate Occupancy Costs
4P Cost Management for Logistics
4Q Use and Control of Financial Instruments by Multinational Companies
4R Managing Quality Improvements
4S Internal Accounting and Classification of Risk Management Costs
4T Implementing Activity-Based Costing
4U Developing Comprehensive Performance Indicators
4V Effective Benchmarking
4W Implementing Corporate Environmental Strategies
4X Value Chain Analysis for Assessing Competitive Advantage
4Y Measuring the Cost of Capacity
4Z Tools and Techniques of Environmental Accounting for Business Decisions
4AA Measuring and Managing Shareholder Value Creation
4BB The Accounting Classification of Workpoint Costs
4CC Implementing Activity-Based Management: Avoiding the Pitfalls
4DD Tools and Techniques for Implementing Integrated Performance
Management Systems
5A Evaluating Controllership Effectiveness
5B Fundamentals of Reporting Information to Managers
5C Managing Cross-Functional Teams
5D Developing Comprehensive Competitive Intelligence
5E Redesigning the Finance Function

For information about prices and to order Statements on Management Accounting, contact the
Customer Order Department, Institute of Management Accountants, 10 Paragon Dr., Montvale,
NJ 07645-1760 (tel: 201/573-9000 x 278 or 1 800/638-4427 x 278; Fax 201/573-9507).

10 Paragon Drive • Montvale, NJ 07645-1760

ISBN 0-86641-268-9 SMA 4CC-5/98

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