Activity Value Management (AVM) – A New Perspective on Costs and Performance Management

Consider the following questions…

1. Is the way you compute and measure product and service costs and profitability affecting your organization’s ability to make informed decisions?

2. Do you know exactly what employees are actually doing to create and improve value?

Activity Value Management® or AVM® represents a new way of thinking about managing diverse information related to both financial and operational performance. Unlike ABC and TDABC, AVM does not have its roots in accounting but in Value Engineering (VE), a technique for increasing the value of products, services, and functional outcomes rather than simply providing cost information (see Carlson, D.A. & Young, S.M. [1993]. “Activity-Based Total Quality Management at American Express.” The Journal of Cost Management, [Volume 7, Number 1, Spring 1993]. Research Institute of America, Inc. Warren Gorham Lamont Professional Publishing Division, Boston, Massachusetts.). As such, AVM goes much further than costing techniques to first diagnose performance then prescribe changes necessary to improve performance, enhance customer loyalty, and improve employee engagement.

AVM is a multi-dimensional performance management solution that delivers a profound impact on:

  • Line of business and channel performance
  • Mission-critical processes and activities
  • Customer loyalty and engagement
  • Revenue generation, and
  • Cost optimization.

The AVM methodology accomplishes these outcomes through a unique process that differs from other costing methods, especially in the way overhead and indirect costs are considered and the inclusion of qualitative experiential information provided by stakeholders.

The principal objectives of AVM are to:

- Diagnose performance while identifying true cost & profitability by…

  • Defining all organizational processes and activities.
  • Capturing and assigning all costs, both direct and indirect, to processes, activities, products, and services.
  • Determining financial performance levels (profitability) across delivery systems.
  • Capturing stakeholder experiential data necessary to create, validate, or modify the value proposition.

- Improve productivity, performance, profitability, and resource utilization by…

  • Identifying and implementing mission-critical operational improvements.
  • Acting to improve stakeholder loyalty, capacity, efficiency, asset utilization, and resource management.
  • Identifying and updating Key Performance Indicators (KPIs) and Key Risk Indicators (KRIs) as appropriate to improve performance while limiting risks.

while secondary objectives include:

  • Providing complete transparency linking resource components (both personnel and non-personnel) directly to activities and lines of business through a bi-directional audit trail that traces resources to cost objects and from cost objects to specific resource elements.
  • Costing objects independently of each other, so changes in some cost objects will not affect the costs and profitability of other objects.
  • Delivering a unique set of prescriptive analytic tools that uncover breakthrough opportunities to improve financial and operational improvement.
  • Engaging the entire workforce in the improvement effort necessary to gain acceptance of change proposals.

These objectives are accomplished by…

  1. Using a costing focus that directly assigns all costs and effort simultaneously to activities, products, and services without any intermediate cost aggregation, averaging, or indirect allocation –improving the accuracy and precision of costing and profitability assessment and…
  2. Delivering a business assessment system that improves financial and operational performance by linking qualitative experiential stakeholder input to those activities, costs, and LOBs, then applying a unique set of prescriptive analytic tools that identify breakthrough performance opportunities.

AVM Structure

AVM provides the connections between customer and employee experiential data and organization performance. Unlike ABC and TDABC, which are both typically a “bottoms-up” approach implemented using a project team working in isolation, AVM is a “tops-down” system applied by an internal cross-functional team of employees that engages a large portion of the employee population and they report to a committed executive Steering Committee that provides direct oversight and guidance – this structure ensures greater ownership and acceptance of change proposals. Also, this structure overcomes a number of common obstacles associated with Lean, Six-Sigma, Continuous Improvement, and many other improvement initiatives highlighted in a survey conducted by goleansixsigma.com (e.g., leadership, time, focus areas/project selection, and using the right data).

The project is frequently managed by a Certified AVM Specialist working in tandem with an Internal Facilitator (for knowledge transfer) as well as a cross-functional AVM Implementation Team, all reporting to a “C-Level” Oversite Committee. Once the diagnostic assessment is performed and target areas selected, the Implementation Team, along with the Internal Facilitator, will facilitate a number of project teams (Lean and Six-Sigma teams may be utilized for this purpose) responsible for developing/implementing solutions – all reviewed and approved by the Oversight Committee. The study follows a comprehensive and comprehensible project plan that is relatively straight-forward and time/resource efficient…

- Planning —During planning, organizational goals, objectives, and concerns are obtained from executive management that form the foundation for the hierarchical process map to which both cost and effort will be assigned.

- Data Collection— Data collection includes both quantitative and qualitative information. During this step, individual resource costs (unbundled from the G/L), efforts, and experiential inputs are assigned directly to object families and activities simultaneously. This method of direct costing – treating all costs as direct – overcomes the inaccuracies and traceability issues encountered with the costing techniques described previously.

Most financially-based and quantitative methods used for performance management are void of such stakeholder input, a necessary ingredient to identify value-improvement opportunities. Experiential input from customers, competitions’ customers, employees, vendors, distributors, and others affected by the organization’s performance is an important factor for effective performance management. AVM uses a number of data-collection techniques to capture stakeholder preferences including surveys, focus groups, and direct interviews. This information is critically important as loyal customers drive market and financial performance.

- Synthesis —Once the data has been collected, initial reports are generated that document the cost and effort of the activities supporting each LOB, financial performance, as well as the issues and opportunities identified by process, activity, and line of business. From this information, target opportunities requiring corrective action and/or improvement are identified. Initial observations are reviewed, approved, and prioritized for further analysis with the help and guidance of executive management. The goal in this step is to identify the top 5-7 major opportunities out of typically several dozen prospective areas of improvement.

- Data Analysis —AVM provides a host of prescriptive analytic tools to uncover specific areas for performance improvement. The following describes just a few of the tools for the development of performance-improvement opportunities:

- Solutions – This process step defines the efforts to document implementation plans for the selected and approved financial and operational recommendations. This step includes the establishment of responsibilities, timeframes, milestones, metrics, performance audits, etc. to ensure the successful implementation of study outcomes. The implementation plans are presented, reviewed, and approved by the Management Oversight Committee.

- Implementation & Follow-up – This step puts the implementation plans into operation. Following and agile approach projects are implemented with direct involvement of those most affected by the changes with frequent status communication made to the Management Oversight Committee necessary to keep implementation both on schedule and within approved budgets. Depending on the nature of the recommendations, both internal and external resources may be required.

AVM Outcomes

AVM removes the barriers that block performance improvement while focusing on generating increased revenues while optimizing operating expenditures. With AVM-based solutions, organizations can identify and act on solutions that lead to performance breakthroughs. AVM requires less time and expense than ABC and TDABC while providing more timely, relevant, and actionable information regarding organizational performance.

Stakeholder input provides a source of performance information that meets short-term financial improvement without sacrificing long-term viability.

AVM focuses on fact-driven solutions with a bias towards action. Some typical outcomes are:

  • Improved profitability through better pricing strategy, product mix, cost correction, and cost optimization;
  • Improved under-performing LOBs;
  • Increased revenues;
  • Lowered expenses through the reduction or elimination of unnecessary and avoidable costs;
  • Improved workforce effectiveness through greater focus on mission-critical activities;
  • Enhanced quality of products and services
  • Improved budgeting, forecasting, and planning;
  • Higher levels of customer loyalty and employee engagement.

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