Creating Resilience – Part II Using Activity Value Management for Performance Management

Creating Resilience – Part II Using Activity Value Management for Performance Management

The following describes a new category of managerial cost accounting and performance management – Activity Value Management (AVM). AVM is a new way of thinking about cost and the ultimate use of financial and non-financial information to identify opportunities for both performance improvement as well as targeting areas for expansion and divestiture. AVM has its roots, not in accounting, but in the integration of process/activity analysis following the tenets of Value Engineering that incorporates stakeholder input withfinancial outcomes. As such, AVM extends beyond simply costing, but focuses on value creation necessary to improve performance while enhancing customer loyalty and employee engagement.The objectives of AVM® with regard to performance improvement and divestitures are to:

  • Improve LOB costing by eliminating the types of errors found in more conventional approaches, necessary to assess the potential financial benefits (if any) of a divestiture;
  • Uncover the most opportune targets for divestiture and/or performance improvement (if any);
  • Identify specific personnel and non-personnel resources that will, and will not, be affected by the divestiture;
  • Diagnose performance in terms of costs, profitability, customer loyalty, employee commitment, processes, and activities – identifying improvement opportunities that could alleviate the need for divestiture;
  • Focus on value creation and cost optimization rather than cost reduction;
  • Improve customer loyalty while improving employee engagement and satisfaction – identify any negative customer impact that could result from a divestiture;
  • Enhance resource utilization and productivity associated with the redeployment of resources affected by the divestiture.

These objectives are achieved by…

  1. Using a revolutionary costing approach that directly assigns all organizational cost and effort simultaneously to activities, products, and services without any intermediate cost aggregation, averaging, or indirect allocations characteristic of more outmoded techniques. All costs (including overhead and indirect – O&I – costs) are treatedas direct to improve accuracy and precision of costing and profitability assessment while preserving a bi-directional audit trail between all resource costs, activities, and cost targets. Since all unbundled costs, gleaned directly from both the GL and HR systems are directly assigned, the outcomes match GL costs, improve management confidence, and as such may be considered closely GAAP compliant.
  2. Delivering a business assessment system that improves financial and operational performance by seamlessly linking qualitative experiential stakeholder input with activities, costs, and cost targets, then applying a unique set of prescriptive analytical tools to identify breakthrough opportunities for both performance improvement and/or divestiture.

Creating Resilience – Part II Using Activity Value Management for Performance Management

Unlike most financially based quantitative methods described which are void of qualitative stakeholder input, AVM provides the connections between customer satisfaction, employee commitment, and organizational performance.

Is the way in which your organization computes product and service performance impact your ability to make informed decisions and/or selecting the most urgent and beneficial targets for improvement or divestiture?

The AVM initiative follows a comprehensive, yet comprehensible, straight-forward project plan that is time and resource efficient…

Step 1: Planning. During this step, organizational information is captured; processes and activities defined; the data-collection schedule is developed; and the project is introduced to all management personnel.

Step 2: Data Collection. Quantitative data collection is performed whereby a profile for each resource component is established, defining the cost and/or effort attributed to the activities performed for eachproduct/service target. Note, for employees both the cost and a measure of effort are used, permitting measurements such as staffing by activity or activity fragmentation (defined as the number of employees engaged in an activity as compared to the FTE equivalent). Qualitative experiential data is captured from stakeholders (e.g. employees, customers, customers of competitors, vendors, etc.) representing issues, concerns, roadblocks, and performance opportunities for which the information is assigned to processes, activities, and product/service targets.

Step 3: Synthesis. Various diagnostic reports are defined, produced, reviewed, and updated if necessary.

Step 4: Data Analysis. Diagnostic information is analyzed necessary to identify the most opportuneareas either requiring corrective and/or improvement actions that would negate or support divestiture.Normally, the most important 5 to 7 target areas are selected for specific solutions which are closely managed by the AVM Implementation team. The remaining opportunities are addressed on an on-going basis.

Step 5: Solutions. Specific solutions are developed including, but not limited to, financial analysis, resource requirements/responsibilities, milestone metrics, progress reporting, etc.

Once the financial performance of the lines of business have been correctly determined, as described previously, they can be arranged as shown in the example “whale curve” below.

Creating Resilience – Part II Using Activity Value Management for Performance Management

The purpose of the whale curve is to identify the potential for possible improvement in margin performance.However, once reliable costs and margins have been determined, there are several considerations that should be made before arriving at target for divestiture:

  • Maturity – newer product/service offerings that have not achieved full maturity that have promise forstrong performance in the future, may not be the best divestiture targets – those in the crosshairs should be those LOBs that have reached maturity and for which all efforts to improve margins have been exhausted.
  • Shared Resources – if the product/service contains a significant amount of shared resources (personnel and non-personnel) for which those resources cannot be reduced if they are also used in support of other business outputs, the potential for financial improvement may be diminished, otherthan creating additional capacity, necessary to support growth and for which the remaining LOBs would have to absorb the cost until the demand for the remaining LOBs increases. Also, if the line of business is not profitable, but maintains a positive operating margin, perhaps it might absorb some overhead that otherwise would have to be absorbed by the remaining LOBs.
  • Loss Leaders – some LOBs may be unprofitable but might exist as loss leaders for which more profitable products/services can be offered. That said, caution should be exercised before hoping that the creation of loss leaders will produce additional revenues – hope is not a strategy for success and there is nothing strategic about losing money nor is it critical to success! Case in point, a service organization used a loss leader to attract customers to more profitable service offerings yet discovered that customers where not drawn to this organization based on price, but on their excellent reputation. Also, while management believed that it was a rare occurrence that the loss leader would not produce additional revenues, research proved that over 60% of the sales of the loss leader did not lead to the sale of more profitable offerings. If a loss leader meets an unmet need or generates value for the customer, the organization has the obligation to sell it at a profit.

Read Part III

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