This article explains the Activity Based Management (ABM) in a practical way. After reading you will understand the basics of this powerful financial management tool.
What is Activity Based Management?
All organizations want to perform optimally and avoid or reduce mistakes as much as possible. Activity Based Management (ABM) enables an organization to control its activities properly, as a result of which performance and customer-orientation are increased. In 1994, Activity Based Management was set out in more detail by James Brimson and John Antos.
Advantages of Activity Based Management
This management method has proved its value in reducing wastage, improving the (process) quality, shortening of lead times and introducing new products faster. ABM was initially mainly used in industrial enterprises. Nowadays, ABM can be applied to all types of enterprises and can be divided into a number of activities. These activities can be assessed on the basis of a cost-benefit analysis.
ABM establishes relationships between overhead costs and activities so that the costs of products, services or customer segments can be calculated more accurately. This method focuses on the management of activities that reduce costs and improve customer value. Through the management method all activities within an organization can be identified and evaluated. This is done by means of Activity Based Costing (ABC, Kaplan and Cooper) in which by using a Value Chain Analysis or Service Profit Chain the strategic and operational decisions within an organization can be improved.
Two types of areas
ABM can be divided into two areas:
Operational Activity Based Management
´Do things right´; this relates to the implementation of activities. All activities within an organization must lead to improved efficiency. Only activities that add value to a product can be improved. Without added value, such activities must be reduced for cost-saving purposes.
Strategic Activity Based Management
This relates to the decision of which products the organization will develop and what type of activities will be used to achieve this. It is also possible to analyse and calculate customer profitability in advance. This identifies the most profitable customers so that the organization can focus on them more.
A risk with this management method is that some activities have implicit values, so that they are not immediately identifiable as a financial added value. A pleasant workplace can help retain good staff but this cannot be qualified as an additional value in operational ABM. A customer who does not generate a profit could still open up new leads and prospects despite the fact that strategic ABM identifies him as a low value customer. Managers should recognize and interpret these implicit values and learn to use ABM as a neutral starting point. ABM gives managers an understanding of costs and helps teams to make certain decisions that benefit the whole organizations and not just their own activities.
It’s Your Turn
What do you think? Is Activity Based Management applicable in today’s modern economy and organizations? Do you recognize the practical explanation or do you have more suggestions? What are your success factors for good financial management?
Share your experience and knowledge in the comments box below.
- Armstrong, P. (2002). The costs of activity based management. Accounting, Organizations and Society, 27(1), 99-120.
- Bahnub, B.J. (2010). Activity-Based Management for Financial Institutions: Driving Bottom Line Results. John Wiley And Sons Ltd.
- Bradford, W. H., Johnson, T. L., Keefer, L. E., Mason, E. T., Morgan, J. J., Smith, P. A., & Wells, K. L. (1998). U.S. Patent No. 5,799,286. Washington, DC: U.S. Patent and Trademark Office.
- Baker, J. J. (1998). Activity-based costing and activity-based management for health care. Jones & Bartlett Learning.
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