How to Make Activities Measure Up

By Regina Kwon  |  Posted 2002-10-01 Print this article Print

Not all tasks—or customers—are created equal.

How much did the marketing department spend on technology products and services last year? If you can't answer this question, you can be sure of two things: You are not alone, and your budget is wrong.

PDF DownloadMost technology departments have set up systems of charging other business units for the products and services provided. Few, however, calculate fees in a way that's meaningful to them—or to the groups being charged.

"Tech hands a bill to the business group but can't explain what the fees mean," says Paul Pilao, a manager at KPMG Consulting (now BearingPoint). "What's missing is the assignment of charges to line items that are understandable and actionable."

Enter activity-based costing (ABC), a financial management method that emerged in the manufacturing industry as a way to separate profitable customers from the unprofitable.

ABC divides a company's operations into three tiers: resources, or what can be consumed; activities, which consume resources; and cost objects—also known as customers—which cause activities to take place. Drivers, or the reasons the rate at which a resource is being used or an activity is taking place, link each tier. For example, a networked server provides a resource, storage space. The resource driver, or the amount of space being used, is created by the activity of posting documents to the server. Documents are posted because of an activity driver—the number of reports created. The marketing department cost object has created those reports.

Companies typically purchase ABC software, create templates or models that represent the activities being tracked, then import or begin collecting the data to fill those models. The information, viewed historically, helps managers decide what changes to make to meet cost or profitability goals.

The hardest part of most ABC projects is in creating accurate models. "It's not difficult the way a new ERP system is, where you're bringing in cots because you have to live at the office for a few weeks," says David Feinstein, CFO of Klein Steel of Rochester, N.Y., who oversaw his company's installation of ABC software from Acorn Systems. "But it is a lot of pain up front."

Collecting the right data is another worry; transportation company Roadway, for example, had to install bar-code systems and win over employees to new processes (see story, p. 32).

Although technology executives have yet to flood the phone lines of ABC software vendors, interest is growing, says KPMG's Pilao. "We're getting a lot of questions about understanding I.T. spending and drivers," he says. "This is one of the big gray areas for companies in terms of analyzing profitability and justifying costs."

As Statistics Editor of Baseline magazine, Regina creates interactive tools, worksheets and project guides for technology managers. Before joining Ziff Davis, she worked as a technical program manager for a database company, where her projects included data management applications in XML, Java, Visual Basic and ASP. Her other experience includes running the new media department at Christie's Inc. and writing and editing for Internet World and PC Magazine. Regina received a B.A. from Yale.

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