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Integrating ABC with BSC keeps the
spotlight on results. If people are responsible for performance
measures of cost and profitability, they will pay very close
attention to cost and profitability.
Activity-based management (ABM), activity-based costing (ABC)
and the balanced scorecard (BSC) are established management
methods. They are building blocks of performance management
systems.
ABC and ABM provide cost and other business intelligence about
key business elements including resources, activities, products,
services and customers. They enable managers to make decisions
that improve cost and profit performance. The BSC translates
strategic goals into a set of performance measures balanced
according to the important dimensions of performance. It helps
communicate and execute the strategic plan by defining success
in quantitative terms at each level of the organization.
ABC and BSC are often viewed as independent methods each with
its own purpose. However, they are complementary and offer
greater value when linked together. The benefits of integrating
include additional performance measures—measures for which ABC
is the only reliable source—and more comprehensive decision
support.
The BSC benefits from the inclusion of ABC performance measures.
These include the cost of activities and activity outputs which
are used in the internal business process dimension of the BSC
of public and private organizations. This activity information
covers support services as well as primary business processes.
For private organizations, ABC profit measures by customer,
market segment, market area and distribution channel are used in
the customer dimension of the BSC.
ABC can provide as much as 20-30% of the performance measures in
the BSC.
The users of the BSC benefit from the analytic capabilities
available in ABC. For example, a manager of a toll-road
operator may find that the actual cost of maintaining 1 km of
highway exceeds the target in the scorecard. ABC allows the
manager to access detailed information about the activities and
resources associated with maintaining the toll-road. A detailed
“drill down” and analysis of this information in ABC may reveal
the root cause of the problem and allow corrective action to be
taken. Decision support is particularly effective if ABC data
can be accessed from within the BSC.
Successfully linking ABC and the BSC requires a different type
of ABC model. The BSC relies on up-to-date ABC data on a
monthly or quarterly basis, so the ABC model must be up-dated
monthly or quarterly and data fed to the scorecards in the BSC.
This ABC enterprise reporting system is quite different from the
one-off desk-top models typical of early applications. Data
sources unique to ABC—such as employee time reporting--are
automated to reduce the cost and enhance the timeliness of data
capture. Data feeds from legacy systems or enterprise resource
planning systems are automated using extract, transform and load
(ETL) tools.
ABC’s role as an analytic decision support tool changes the
design of the ABC model and reporting system. The ABC model must
be forward-looking to support planning efforts as well as a
source of accurate historical performance data. A good reporting
system—such as a modern web-based tool—allows managers to
access, analyze and display ABC information on their desktop.
This reporting capability should allow a manager to follow the
trail of investigation from the targeted performance measure in
the scorecard to the underlying details in the ABC model.
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