Article from CXO Europe, 2006
Which customers and products are profitable? Sometimes companies just don't know.
Many businesses have invested large sums of money in ERP and business intelligence systems. Yet they still can't see which of their customers and products are the most, or least, profitable. The problem lies with conventional financial information. But there is a solution.
Too many companies still rely on traditional accounting to answer questions about which of their customers and products are profitable or not. Unfortunately, the answers they receive are often inaccurate or misleading.
The reason is that with traditional accounting it's not possible to allocate all relevant costs to the appropriate customer or product. Sometimes a customer appears to be profitable but is, in fact, unprofitable. And when margins are squeezed and competition is stiff, inaccurate or misleading information is a serious problem.
By supplementing their existing business system with an activity based costing (ABC) system, companies can get a more reliable basis for decisions. ABC provides detailed information about the true profitability and costs per product, customer, service or sales channel. What's more, it shows the root causes of the costs, which makes it possible to act on the information.
“When companies have ABC information they can take measures that lead to increased profitability,” says Fredrik Wastenson, CEO of software company Prodacapo.
“It's not uncommon for companies to report that they have increased their profitability by 5-15 percent and the first improvements are accomplished quickly, often within three to nine months.”
Increased use
There are many different views on ABC. The method has been around for some time and in the past some people have struggled with it. In order to be successful, it is important to apply ABC correctly and to have a good system support. Thankfully, it is now easier than ever to take advantage of ABC – and that is what more and more companies are doing.
Analysts view
An August 2005 report from leading research and analysis company Gartner notes that: “ABC provides the basics of corporate performance management” and evaluates the advantages of using ABC as ‘high'.
The report states that: “because of the broad relevance of activity-based costing, coupled with advances in technology and methodology, ABC will become an indispensable component of the overall corporate performance management in many organisations.”
“It's not a surprise that Gartner draws this conclusion, since few companies have the luxury of having sufficient margins, regardless of industry,” says Fredrik Wastenson. “Therefore, companies need to understand which customers and products are profitable and what causes losses. How can you otherwise improve total profitability?”
SCA improves customer profitability throughout Europe
One company that can attest to the benefits of ABC is SCA Hygiene Products' Away from Home (AFH) division. It is the European market leader in tissue products for corporate customers and public institutions and has operations in 21 European countries.
Up until 2002, the sales organisation within AFH had little direction about which customers and sales channels they should focus on.
The new CEO who arrived that year wanted to initiate a new go-to-market strategy focused on maximising profitability. Unfortunately, with its conventional financial system, AFH could only see gross profitability per client and they needed to know net profitability. So they introduced Prodacapo's solution for ABC.
“With Prodacapo's solution we can identify both the true costs for every customer and the underlying causes,” says Åsa Kalentun from the European headquarters of SCA Hygiene Products' AFH division. “We could thereby take the right measures to improve profitability.”
The first thing SCA did in 2002 was to analyse the true costs for selling and delivering to various clients. And many turned out to be directly unprofitable.
Based on this analysis, SCA decided to cease direct sales to some customers and serve them via distributors instead. This became a win-win situation: the distributors appreciated getting new clients and the clients got continued good service. SCA lost no volume as a result of the change. They made their sales organisation more effective and increased profitability by focusing on the right clients.
SCA has now linked Prodacapo's system to its SAP Business Warehouse, and information about costs and profitability is updated every quarter.
This information is used by the entire sales organisation to focus on the most profitable and most strategically important customers, and to reduce the costs of serving them. This makes it possible for them to maximise profitability in a way that would not have been possible without ABC.
|
