ABC ENABLES BEST PRACTICE ANALYSIS
A case study of the work at A Major Financial Services Organization
A case study of the work at A Major Financial Services Organization
The financial services organization is one of the top 10 largest vehicle financing organization in North America. They provide financing for leasing and loans, for both new and used vehicles, to over 600,000 customers a year, with an active portfolio of over 1.5 million customers or over $20 billion. It has provided this financing through more than 2,000 dealers throughout America.
The company employs over 1,500 employees in 33 branches across the United States.
The automobile finance industry in the United States is very competitive. Commercial banks, savings and loan associations, credit unions, finance companies and other captive automobile finance companies provide retail financing and leasing for new and used vehicles. Commercial banks and captive automobile finance companies also provide wholesale competitive financing programs for all dealers. This company's strategy is to supplement, with competitive financing programs, the overall commitment of the parent organization to offer a complete package of services to dealers and their customers.
Business Issues
The very competitive market in which the company operates in, as well as an expectation from the corporate head office that the company not only support the sales organization, but also contribute to the overall profitability of the organization, has made them focus even more on the efficiency and profitability of their operations.
There is an expectation that the company remain a profitable entity. This has led them to examine the profitability of all their lines of business, as well as the profitability of their dealer channels through which their products are sold. By understanding which products and dealers contribute to profitability, the company can modify the ways they service their customers and sell their products so as to maximize profitability, while maintaining the necessary customer service and customer retention levels. By understanding why some dealers are more profitable than others, the levels of services to different dealers can be optimized to increase overall profitability.
At present, business is transacted through 33 branches located throughout the United States. These branches perform many of the same activities, yet the cost structure and efficiency of all the branches vary greatly. By analyzing the activities that occur within the branches, the total cost, unit cost, cycle time and full time equivalent employees involved in each activity, the ABC results will allow the best practice team to analyze the business, in a way that makes sense.
Understand that this diversity allows the best practice team to redefine which activities should occur where, and allows them to compare branches based on comparable data. The introduction of a centralized service center (call center) to handle most of the routine customer calls is one example of their attempt to optimize the efficiency of the operations.
In this competitive environment, it is not enough to simply do things better and cheaper – sometimes methods of work need to be drastically changed to meet and beat the competition. As all work is accomplished through processes, it is only through process improvement that action and outcomes are dramatically altered. The ABC analysis combined with process definition and analysis allows the company to address process improvement in a rational way, and with a full understanding of the cost and composition of each major process.
Approach
Focused Management Inc. was hired to assist the company in developing and implementing an Activity Based Costing decision-making system throughout the organization. The ABC analysis was to include all 2000 dealers and all the related products they sell, as well as all branches and the head office where activities were performed. Dealer and product profitability, branch efficiency, process costing and best practice analysis were the major expected outcomes of the project. The system was also set up to be repeatable and updateable on a periodic basis.
With the advice, training and facilitation assistance of Focused Management (FMI), a cross functional team of 8 company associates set out to design and build an ABC tool which accurately reflected the organization’s activities, costs and processes. The team used a combination of interviews and surveys to collect associate time by activity for all 1500 employees.
Following activity analysis, the team created a cost-flow diagram, representing all activities performed in the organization, and for whom it is performed, and began collecting operational and financial data.
Data was collected for all support activities, as well as all the unique activity to cost object drivers in a little over 3 months. In total, over 200,000 unique pieces of data were collected from operational data systems, Essbase data cubes and manual surveys.
Following data collection, the team validated the preliminary activity, process and dealer costs, as well as dealer and branch profitability. The results were all uploaded to an Essbase data cube, which gave the team the ability to slice and dice the data across multiple dimensions, and analyze the data, looking for key insights. Upon completion of the validation, the team set out to analyze the final results, decide on next steps and present their findings to senior management.
Results
The ABC analysis showed tremendous differences in the profitability of dealers. On a dealer level, product by dealer level and a geographical level activity costs and profitability significant variations were found. The profitability of some dealers within the same geographical region varied greatly. Viewed by region, the results were equally as stunning across all branches.
The view of dealer and product profitability by each individual dealer was a perspective that had never before been seen at the company in such detail.
It was found those activities such as “calling the collections list” and “insurance follow up” did have an ultimate impact on the profitability of each dealer. By optimizing the activities and the processes through which these activities occur, it was felt that significant improvements in profitability could be realized within a short time period. It was felt that energy should be concentrated on those most profitable dealers.
Process costs and through them, activity costs, differed greatly between all the branches. While you would expect activity costs and activity driver volumes to differ throughout the 33 branches, it was the differences in unit activity costs and activity costs per FTE, which were really significant. Since branches vary in size, as well as in the number of customers they service, the absolute cost of performing the activities within each branch vary with the volume of customers and the size of the branch territory. If all branches followed the same process and procedures, there should be little difference in the number of FTE’s (associates) performing each activity at a comparable volume level. This, unfortunately, was not the case. The number of equivalent associates required to perform the same volume of activity varied greatly amongst branches. These differences have focused the attentions of the best practices group, who are currently redesigning how work is accomplished in the branches, as well as setting expectations to branch managers regarding the efficiency and effectiveness of what they do.
The large cost of manual processes and steps involved in initiating and terminating leases and loans was of particular interest to the team. It is felt that through appropriate use of technology, these costs can be dramatically reduced. At present, Internet-based processing is being investigated, and an integrated call center in already in place and operating. Other proprietary technology enhancements are also being implemented currently.
Next Steps
Now that the original results have been accepted, and the results have been updated to reflect the current year’s data, the ABC champions are moving forward on several fronts. The first involves working closely with the best practices team. This involves standardizing activity and process definitions across the branches, and feeding cost and driver quantity information to the best practices team. The best practices team will then use the information in their ongoing process of redesign and measurement work. The ability to measure and monitor the progress of these improvements as they work towards their objectives will help ensure that resources are being directed in the most appropriate fashion.
The ABC data provides excellent information for many projects currently underway at the company. The Balanced Scorecard and EVA initiatives are two examples where the information contained in the ABC analysis can be used to improve the use and validity of the initiatives. The ABC data is also being fed into the profitability analysis data cube currently being implemented. One anticipated step is the integration of the ABC data with the budgeting process. By basing many of the budgeting discussions and formulations on ABC principles, it is hoped the budgeting process can be streamlined and made more visible. All of these initiatives should help the company serve and retain their customer base, while continuing to meet their financial targets.
Summary
By implementing an Activity Based Costing analysis tool, the company has been able to quantify the specific reasons for differences in dealer profitability. The ABC analysis has brought to light the importance of process management, where best practice analysis measures performance across all branches. The ability to benchmark branch activities in a consistent and accurate way has allowed them to begin to redesign processes, and improve the overall efficiency of their operations.
"Our initial ABC results were quite compelling, but in order for ABC to have a direct impact on the company and how we run our business, we must take ABC to a next level. I'm excited to say that we are close to approaching that level. By joining efforts with our Best Practices team, we finally have the platform for ABC to move beyond just getting results, but rather, we can now put the results into action. With the help of FMI to implement VBM, we have an opportunity to transform the company into a process-managed organization and completely change the way we make business decisions. It is definitely an exciting time for us."
The journey to integrating Activity Based Costing data into the management and decision-making process at the company has not been an easy or automatic route. A great deal of time has been spent training and educating associates on what ABC is, what the results mean, and how to use the information. The results to date have shown the value that Activity Based Costing can add to the decision making process. As decision makers become more comfortable with the results of the ABC analysis, the value of the data will continue to expand. The company has not yet fully ingrained the ABC work into their organization, but they are well on their way. The journey has begun..
For further information on the implementation work at this company, or further information on the services Focused Management provides, please contact Jim Gurowka at jgurowka@focusedmanagement.com.
Focused Management Inc. offers a variety of cost management implementation, training, and consulting services to companies throughout the world. FMI specializes in Activity Based Costing/ Management (ABC/M), Value Based Management (VBM), and Measurement Systems. Please visit www.focusedmanagement.com for further information.
Jim Gurowka
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