Activity Based Costing software is crucial in the implementation of Activity Based Costing (ABC) and Activity Based Management.  It is the tool that calculates the results and produces the data.  While ABC is not about implementing a new software product, but about implementing an improved management decision making tool, the software must be implemented and used.  Therefore, the choice of the right ABC software for your ABC initiative is important.  Activity Based Costing (ABC) software, like every other type of computer software, continually evolves and changes to reflect user requirements and new technology.  In the case of ABC software, it looks like the evolution may have to be nothing short of a complete metamorphosis, if the current vendors hope to survive the onslaught of new competition.

The demands being placed on ABC software have forced the vendors to dramatically improve and change their products if they wish to retain their market share.  No longer are leading edge organizations content to develop their ABC  systems using a pilot study on a standalone PC solutions, struggle to integrate it with the rest of their decision making framework and then roll it out to the rest of the organization.  Organizations are demanding a system that will be powerful enough to handle their entire organization including all products, customers, distribution channels as well as all cost centres and activities within the complete organization.  Furthermore, they also need the ABC analysis to be one piece of a larger decision management system.  This means that the ABC results must be easily portable to other applications and/or the ABC software must have many decision-making features embedded within the core software.

This is a huge challenge for ABC software firms, as they cope with increasing demands on the features of their software, as well as the oncoming threat to their market from competitors in the ERP, simulation and OLAP tools market.  They must decide whether to compete with the new competitors, affiliate with them or withdraw from the competitive market and find a new niche.  For the ABC software developers, these are not easy times.

For all of you who currently use one of the major commercial PC-based ABC products - all is not lost.  Many of the software companies have shown themselves to be very adaptable and have significantly improved their software to meet user needs.

Integration with Measurement and Management Systems

While the ABC software companies struggle to recreate their software and add more features to the software they will soon realize, if they haven’t already, that ABC results and data are just one small part of an overall measurement and management decision-making system.

By itself, ABC information accomplishes little!  Only through the application of the information into a proper decision-making framework will the data be of use to senior management and other key decision-makers.  Central to this decision-making framework is a performance measurement and management system.  Integrating the ABC data into a proper IPMS (Integrated Performance Measurement System) or VBM (Value Based Management) framework allows organizations to do everything they have always wanted to do with ABC information, but never had the tools with which to do it.

An integrated performance measurement and management system, which is focused on providing value to key stakeholders of the organization, draws on many different decision making tools.  First and foremost, key stakeholders must be defined and what they value from the organization must be examined and articulated.  This requires the analysis of stakeholder needs, the formulation of a strategic plan and identification of critical success factors.

Next, the organization’s business model and core processes need to be focused on providing this value to stakeholders.  This requires process mapping and, potentially, process redesign and organization redesign.  All of this needs to be put in a measurement framework with measures, goals and responsibilities at all three levels – organization, process, individual.  This often requires the use of best practice analysis and measures development.  Lastly, all the new information and measures need to be communicated to users of the information in a meaningful and useful way, through the use of information portals and/or scorecards and a proper IT infrastructure.

The good news for the ABC software companies is that the information underlying many of these tools is activity-based information.  Process mapping and redesign requires an understanding of which activities map to which processes.  Performance measures must rely on a great deal of the ABC cost, driver quantity, cycle time and profitability results coming out of an ABC model.  And, ongoing management of the organization, tying all three levels together, requires proper activity-based budgeting and activity-based management concepts.  For a complete understanding of value-based management, please refer to Paul Sharman’s articles on the subject at www.focusedmanagement.com.

Improve, Improve, Improve – Examples of Changes from Leading Software Vendors

Armstrong-Laing has rewritten their ABC software at least 3 times as new technology has emerged.  This proactive approach as allowed them to create a software product that is easy to use and meets many of the user requirements.  A partnership with JD Edwards and a link to Cognos Powerplay and Arbor Essbase has further enhanced the flexibility of their software.  Their latest product, Metify ABM, has a team addition of the software, which is accessible via the Internet and allows for multiple access via the Internet.  This Internet access can potentially be a great benefit to teams building an ABC model, as well as allowing for easy access to the software from any computer.

They have enhanced the link to Excel and have improved the flexibility of the software, to make it easier to model and quicker to build complex models.  A much cleaner user interface, which resembles Microsoft Outlook, makes it easy to navigate within the software.  The incorporation of Crystal Reports as their reporting tool inside the software, as well as the ability to easily drag and drop (cut and paste) results from the software to any other Microsoft compliant tool, has made reporting a much easier and efficient affair.

Armstrong-Laing has also added a trace back feature, which allows the user to quickly and easily trace the flow of each unique resource through activities and to end cost objects.  This allows users to see exactly which resources from which departments are involved in producing each cost object cost.  This data can also be painlessly exported to Excel via copy and paste commands.

ABC Technologies also continues to rewrite their ABC software (Oros ABC) to keep up with user requirements, and have just announced the release of a new version of their software.  The new version allows for multiple user concurrent access, and includes a balanced scorecard tool, which can be used as a standalone tool or can integrate with your current scorecard tool.  The link to Microsoft Excel, as well as the links to Cognos Powerplay and Arbor Essbase, have been substantially improved and allow for easy access to the data in any of these tools.

The link to Excel has been extensively upgraded, and it is now much easier to get information out of the Oros tool and into Excel for manipulation and reporting.  The other really nice feature of the Excel tool is the ability to directly load data from Excel right into your model.  This bi-directional link can save a considerable amount of time updating your model.  Other important new features include an integrated reporting package, which allows you to create charts and graphs directly in the software and the ability to have concurrent access for multiple users.

Perhaps the greatest improvement ABC Technologies has made to their Oros ABC software is the link to SAP called the SAP Bridge.  SAP is the market leader in ERP systems.  The link from Oros to SAP enables organizations to use Oros to build and update ABC models, and then transfer the data to SAP to be used in operational reporting and part of the SAP SCM module.  Information from SAP, including G/L data, data structures and any operational in SAP can be easily transferred to Oros.  The new SAP Bridge effectively gives current SAP users thinking about implementing ABC a clear choice in which software to consider first (Oros).  The link to Oros finally gives SAP a genuine and credible ABC program that allows organizations to model their organization structure and run simulations, including activity based budgeting using Oros, and then transfer the information easily back into SAP for reporting and use in other SAP modules.  SAP bridge is clearly a benefit for organizations that have SAP and also an ABC analysis or wish to implement ABC.  This link to SAP has opened up a new market for both ABC Technologies and ABC in general.

For further information on the SAP Bridge, please refer to the article in this edition of Focus by Emily Brodeur entitled "Integrating ABC & ERP Systems"

ABC Technologies has enhanced their core Oros product, so that it is a full-functioning, comprehensive ABC modeling and reporting tool.  The next major improvement needed is full web access to build and report the ABC results.  I am sure that will come soon.

These are just two examples of ABC software companies that have changed with the times.  Most of the other major ABC software companies are also changing and improving their software to meet their user needs.

Build It and They Will Come

So, the trick for the ABC software companies is to design their ABC tools to be robust and all encompassing for some users.  Yet it must be open and flexible enough for other users, so that the data is easily transferred from the software and into decision making tools.  It also means that the ABC software must be capable of supporting an enterprise-wide ABC implementation.  If the ABC results are going to be the cornerstone of the management decision-making framework, then the software must be able to model the entire organization at a very detailed level and be very efficient at this task.  This means the software must be scaleable, adaptable, and powerful, have an open architecture, and be integrated with the rest of the client applications and easy to use.  If not, users will explore other options, because getting it right the first time is very important in an ABC implementation.

We have already seen organizations evaluate ABC software, decide nothing commercially available is powerful enough to meet their needs and attempt to create their own version of ABC software in house.  For many reasons, including time, cost, resource constraints, maintenance of the system and validity of the results, I think this is the wrong approach and should be avoided if at all possible.  Nevertheless, some organizations do take this approach.

We have also seen organizations evaluate all the ABC software packages on the market and decide that although the ERP companies’ (SAP, PeopleSoft, JD Edwards, Lawson, Oracle, …) ABC applications do not have all the features compared to commercial standalone ABC software packages, the trade-off associated with building a standalone, non-integrated ABC solution to run parallel (or perpendicular?) to their ERP system is not worth the trouble.  They have been willing  to give up the some of the advantages of a standalone ABC system, for ease of use and integration with the rest of their systems.   The strong push from the ERP vendors to use their built-in ABC module can be quite compelling for many organizations.   This trend will continue, especially as the ERP ABC modules become better and better.

While the ABC software market is being actively pursued by the ERP vendors, other business application software companies are also trying to steal their customers.  Some of the process mapping, business simulation, flowcharting and OLAP tools claim to be able to do “activity costing” within their tools.  While these applications are generally inferior at doing ABC analysis compared with specialized ABC software products, they have been able to effectively argue that they do a “good enough” job of activity costing to allow you to achieve your ultimate goal of making better decisions.

Perhaps the biggest threat or opportunity to all the vendors is Microsoft.  The introduction of their digital dashboard and SQL 7.0 gives Microsoft the ability to change the market.  The ability of the digital dashboard to act as the “portal” for all of the organization’s information via one easy Outlook application, and the ability of SQL 7.0 to analyze and calculate large volumes of data at an affordable cost, give Microsoft users a powerful new tool.  As Microsoft gets more and more into the data mining and analysis arena, they are more and more likely to develop a powerful ABC type-costing engine.

Does all this competition and encroachment into their home market spell doom for the traditional ABC software companies?  For some ABC software companies the answer is yes.  For others, they must adapt quickly.  The market for the small one off pilot projects, high level ABC analysis in a small part of an organization, is fading away.  ABC software companies must be able to make their products scaleable, so that they will work for a small 200-person organization, as well as a 20,000-person organization with multiple product lines and thousands of customer groups.  If the ABC software cannot handle large size models quickly and efficiently, and cannot easily export the results to other decision-making tools, then users will look towards product, which can provide the features they are looking for.

The ability to seamlessly integrate the ABC results with large-scale enterprise decision-making tools within an ERP or VBM framework is the key to survival for the ABC software companies.  The excellent integration of ABC Technologies Oros with SAP has shown the way of the future.  These two products allow for seamless transfer of data between the two products, and produce a convincing argument of which way to go for those in the market for ERP and ABC tools.  While there is always a risk that the much larger ERP companies will learn from the ABC companies how to do ABC correctly, and incorporate their technology into their ABC modules, the ABC companies really have no choice but to take that chance if they wish to grow.

Choose Carefully

What does this all mean to the end user of ABC software?  It means that the  ABC software needs to be purchased with care, and if you already have an ABC software package, it means you need to continually monitor the market, and make sure the software you are using meets your needs, now and into the future.  Switching software packages is not that difficult of a process.  Be sure to carefully evaluate all the software options available, and choose the software which best fit your business needs and has all the features and capabilities you are looking for.  At the same time, investigate the software company.  Look at their track record of updates and upgrades, how often they add new features and if those new features are actually used, and which ERP company they are aligned with, and what is the nature of that relationship.  ABC Technologies is aligned with SAP, Armstrong-Liang is aligned with J.D. Edwards and Hyperion has purchased Sapling.  Also look at how many users of the software there are, as opposed to simply how many boxes they have sold (a look at the attendance at their user group conferences may give you some indication), and talk to users of the software.

Summary

Within the next 5 years, the landscape of ABC software vendors will look much different then it does today.  Many of the current vendors will no longer be around.  Those who can adapt to the rapidly changing marketplace and give their users what they want – ABC results that can be used in a larger decision-making VBM framework, should be able to grow and thrive.  Those who are content to sell small-scale “high level” ABC applications will not survive.  The price must also be affordable for most users, while still offering all the benefits necessary.

The current ABC software vendors have an advantage, in that they do have an established user base with demonstrated results, and a proven implementation methodology.  The vendors must make their software fully Internet-enabled, scaleable to very large, as well as small organizations, and have the ability to integrate with other decision-making and reporting tools in a seamless fashion.   ABC data is one part of an integrated decision making system.  It is a very important part of any organization’s decision-making framework, but unless the benefits of using the ABC information outweigh the costs of collecting and using the data, organizations will choose not to embrace ABC concepts and applications.

Yes, there is a future for ABC software, but only as part of a larger measurement and management framework.  For ABC software vendors, this means adapt and integrate or die.

For further information on  ABC software and ABM please feel free to contact Jim Gurowka at jgurowka@focusedmanagement.com. 

Focused Management Information, 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.

Selected ABC Software Vendors

ABC Technologies www.abctech.com	ICMS www.icms.net
Armstrong-Laing www.armstronglaing.com	Lead Software www.leadsoftware.com
Decimal Technologies www.decimal.ca	QPR Software www.qprsoftware.com
Hyperion (Sapling) www.hyperion.com	People Soft www.peoplesoft.com
JD Edwards www.jdedwards.com	SAP www.sap.com
Oracle (Activa ABM) www.oracle.com