Corporate performance management (CPM) and activity-based costing (ABC) are vital for companies in developing countries which can no longer rely on gaining competitive advantage from a cheaper work force, and for whom wealth creation is in both their own, and the national, interest.
"From a national policy perspective, developing countries can no longer rely on a lower wage work force as a competitive advantage.
"Low wage workers cannot be a sustainable comparative advantage as standards of living in those countries rise. More importantly, it is in the interest of all organisations in developing countries to improve their profitability or, in the case of its government, to maximise its services to its citizens, communities, or governing bodies. All stakeholders, including employees and customers, benefit - not only business owners and investors," he says, adding that higher rates of return on invested capital fuels even more national wealth creation.
Activity based management (ABM) - acting on ABC data - powers a corporate performance management engine by providing it with high-octane information. ABC provides fact-based and accurate management accounting data for senior executives to better formulate decisions. It also helps managers as well as employee teams to understand their cost structure and make better decisions.
"The obvious benefit from ABM is that commercial companies truly understand where they are making or losing money - by product and by customer - and also why," says Cokins.
"With that intelligence, they can react in different ways, including rationalising which products and services to offer, at what prices, and to which type of customers."
For example, distributors can drop unprofitable customers that are too small to serve - or demand excessively high maintenance. Alternatively, they can unbundle their pricing to be menu-based, and increase the price per order transaction fee to alter customers' uneconomical purchasing behaviour.
"Where companies must optimise process costs rather than charge customers higher prices, they can link ABM data to their process-based improvement methodologies," says Cokins. "For example, some banks have identified processes that were not performing well, and were not a required core competency, as candidates for outsourcing."
According to Cokins, the benefits from CPM are broader than those of ABM. Strategy maps define strategic objectives, plus the manageable projects or initiatives needed to achieve them. In light of this clearer prioritisation, many existing projects can be newly judged and terminated, or postponed. The cost savings can be substantial.
"More importantly, the benefit of identifying and measuring key performance indicators (KPIs) to align employee work behaviour means everyone is more focused on the work needed to achieve the strategic objectives, so there is less waste," says Cokins. "Strategy becomes every employee's job. It makes employees behave as business owners."
From an information technology viewpoint, the benefits of CPM are immense. Organisations enlightened enough to recognise the importance and value of their data often have difficulty in actually realising that value. Their data is often disconnected, inconsistent and inaccessible. They have valuable, untapped data that is hidden in the reams of transactional data they collect daily. Information sharing among departments and functions is difficult.
Organisations have often constructed their IT systems with non-integrated single-point solutions. Some have built their IT systems on different platforms using combinations of tools, some non-standard, some with expired maintenance support, and some have pre-built in a tool purchased from a vendor no longer in business. Implementing quick-fix solutions inevitably has become a software maintenance quagmire. Software system purchases have often resulted in redundant tools, data inconsistencies, duplications of effort and ultimately high IT operating expenses.
"Unlocking the intelligence trapped in mountains of data, once a relatively difficult task, is effectively accomplished with CPM," says Cokins.
"Innovation in data storage technology is now significantly outpacing progress in computer processing power, heralding a new era where creating vast pools of digital data is becoming the preferred solution.
"As a result, software vendors with superior tools offer analytic applications and data models that enable organisations to tap into the virtual treasure trove of information they already possess. They enable effective corporate performance management on a scale broader than ever imagined. The tools provide easy access to corporate data and also convert that data into useful and actionable information that is consistent across the organisation - one version of the truth."
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