After the slash and burn many companies have drastically cut costs to either stay competitive or stay afloat. However, as all economic indicators are beginning to see a sun rise on the horizon, many executives are focusing on how to better manage operations looking forward to a new year of potential growth and expansion. The basics of costing have not changed and there are no breakthroughs in accounting methods. There is however an increasing look back to the days of activity based costing. ABC costing was ahead of its time because the concept was correct however the tools were still basic and the technology not fully robust. In addition, marrying operational data with financial data was unheard of because operationally data was either non-existent or not available electronically. Even more difficult was combining data from multiple systems and company divisions. ABC fell into the bin of nice idea but impractical and soon faded away.

The concepts are very much in demand today, however the systems and technology to support the reporting, dashboards and on-demand performance metrics can be readily deployed.

The key to successful cost management starts with linking the overall strategy of the company and its key performance indicators to manageable reports and information. This information should also have the ability to drill down to divisions, lines, products, etc. to determine activity drivers and root cause of cost increases and trends. These methods are also effective in managing businesses with a high degree of variable costs. For example a North American Cable company operates field repair crew stations across the country. The stations are typically deployed for new customer installs and troubleshooting or single house repairs along with periodic line maintenance. The company’s largest expense is labor which can spike during periods of high electrical storms and other natural occurrences which may seem unpredictable. When these events occur they are noticed by high labor costs compared to budget due to overtime and late night crews and additional repair supplies. The issue becomes not forecasting the outages but comparing the actual costs to an “earned” cost rather than the budgeted line item. Earned costs are simply the actual activity driver multiplied by a standard cost which is then compared to the actual. This view gives a good indication as to how the repair station of that area best managed their crew during the period of several outages. This process also allows for multiple repair station sites across the country to compare productivity and twice a year hold virtual learning forums on internal best practices which can be spread through-out the organization to further improve performance. Upon implementing this approach the company has not only seen improved cost management, but increased service levels to customers in the form of responsiveness and reduced downtime. Contact Brandon Patrick at bpatrick@saginllc.com for more information.