Publications

Chartered Accountancy Ireland, December 2009

By Ciaran McGowan, CEO, StaffBalance™

The customer who earns you the highest revenue may not be profitable.  Your operational teams might be busy, but not operating to their maximum capacity.   Your cost reduction initiatives may improve your balance sheet in the short term, but may also negatively impact future profitability.  The problem is that you don’t have the systems software to tell you factually, whether these statements hold true or not.

Ciaran McGowan, Managing Director of StaffBalance™ explains how Time- Driven Activity Based Costing – a significant enhancement to Activity Based Costing (ABC) provides powerful information to help you drive the profitability of your company.

As concerns about economic stability continue to affect business in Ireland and across the globe, corporate executives are under pressure to take a much more sophisticated look at profitability and cost management. This has brought a renewed focus on eliminating duplication and waste, reducing costs, and gaining a clearer understanding of the profitability of your people, products, customers and channels.  Failure to deal with this results in loss of competitive edge and market share profitability.

Few traditional accounting and finance systems provide valuable forensic information for senior executives on how to reduce costs.  Activity Based Costing (ABC) has been around for some time, but it has its limitations.

While there are recognisable benefits in using ABC – cost and profit enhancement opportunities and the facility to improve process efficiency – it can be complicated to implement particularly in multi-faceted organisations.    ABC also requires a considerable commitment in terms of resources; it is not scaleable and the results can be either inaccurate or too simplistic.  There has to be a better way.

Time-Driven Activity Based Costing is a simplified and proven solution to the complexity of ABC.  Time-Driven Activity Based Costing differs from traditional ABC in that it takes the analysis down from the high level activity volume picture,  to a forensic understanding of costs, profitability and process efficiency – right to where the information is most valuable at the individual transactional level.

The newly enhanced methodology uses simulation modelling, which allows you to examine in detail how you can optimise your resources.  This system enables you to implement intelligent cost cutting and generate greater operational efficiency so that you can maximise your business potential.

Benefits of Time-Driven Activity Based Costing

A number of trends have led to the growing need for and widespread acceptance of Time-Driven Activity Based Costing cost and profitability management solutions.

This simulation model offers you a way to cut costs and it highlights inefficiencies.  Time-driven Activity Based Costing gives you a factual perspective on the following areas:

  • Elimination of duplication and waste
  • Cost reduction
  • Understanding the profitability of people, products, customers and channels

The simulation model is easy to implement and it both leverages and works alongside existing investments in people and technology.  Results are immediate and return on investment is typically achieved in less than twelve months.

The other great benefit of Time-Driven ABC is that it has full trace-back capability.  Feeds come from the General Ledger into the simulation model, and they can be traced back each month to ensure there are validated from the GL to the customer.

How Time-Driven Activity Based Costing works.

With the old ABC method, companies were forced to survey employees on how they spent their time – and compilation of the results – which tended to be flawed, took up a significant amount of time and resources.

Not so with Time Driven Activity Based Costing.  Instead of surveying employees, the average availability of staff to complete operational activities is calculated. That means that the practical capacity of the resources available is computed as a percentage of the theoretical capacity.

The methodology

The traditional ABC model surveyed employees to find out how their work was allocated on a day by day basis.  The new Time-Driven model begins by estimating the practical capacity of available resources as a percentage of the theoretical capacity.  From the start, therefore, you are creating a more realistic model of the resources available.

To illustrate how it works, we use an example adapted from Robert Kaplan and Stephen Anderson of the Harvard Business School. If you were to look at the practical capacity of a customer services team, stripping out annual leave, sick leave, maternity leave, and training, you might find that the practical capacity of the team is 80% of theoretical full capacity.  So if a person is theoretically available to work 40 hours per week, they are in practice available to work 32 hours per week.

A customer services department employs 28 people to do frontline work.  Each employee works 8 hours per day.  In theory each worker is available for 31,860 minutes per quarter.  Their practical capacity is 80% of that or about 25,000 minutes per quarter per employee.  This is a total of 700,000 minutes in total for the team.

1 employee

Working week (hrs)

1 employee

Per quarter (mins)

Team of 28

Per quarter (mins)

Theoretical capacity 40 hour week 31,860 892,080
Practical capacity

= 80%

32 hour week 25,000 700,000

The cost of supplying the capacity is €560,000 in overhead costs. That means that the cost per minute of supplying capacity is €0.80.

Calculate the time it takes to perform one unit of activity

Having calculated the cost per time unit of supplying resources to the business’s activities, the model next works out the time it takes to carry out each unit of activity. These numbers are obtained by interviewing or observing employees. No surveys required. Time Driven Activity Based Costing focuses on the length of time it takes to complete an individual task, rather than the percentage of time an employee spends doing it.

So in our example – employees spend:

  • 8 minutes processing orders
  • 44 minutes handling an enquiry
  • 50 minutes performing a credit check.

The cost driver rate can now be calculated by multiplying the cost per minute rate of €0.80 by the number of minutes it takes to perform each task. This means that the cost-driver rate for processing orders is €6.40; handling an enquiry €35.20; and performing a credit check €40.

Once you have calculated these cost driver rates, you can assign costs in real terms to individual customer transactions as they occur. This information alone is very powerful in negotiating with customers and in the pricing of new business.

Decision making based on activity cost

Time driven ABC enables managers to report their costs on an ongoing basis in a way that reveals both the cost of a business’s activities and as well as the time spent on them. You have information also on the difference between the capacity supplied and the capacity used.

This gives you the opportunity to review unused capacity, or to look at where there is not enough capacity to satisfy customer requirements.  By factoring in the real costs associated with each customer, you can make adjustments – both operational and financial – that will favourably impact your bottom line.

The simulation model also highlights resources gaps and spare capacity, and helps you to identify opportunities for resource management which will contribute most to business profitability.

The outstanding benefit of the simulation model is that the information is entirely made up of proven factual figures – so that any decisions you make are based on reality.  This means that you can be confident going to board level, that the resourcing capacity that you require is fully supported by accurate information; that you maximise profit per individual customer relationship and that you minimise costs.

Managers can easily update their simulation model to reflect changes in the operating environment and to measure improvement in efficiencies and costs.

About StaffBalance™

StaffBalance™ delivers an innovative cost and profitability management solution to financial services, insurance and utility companies helping them seize profit opportunities by reducing costs, balancing staff resources and maximising the profitability of customers, products, and channels:  all without disrupting mission-critical systems or people.

The company delivers an innovative profitability and cost management software solution.  This practical and effective decision making toolset helps companies quickly identify and build profitable revenue streams, manage staff resources more effectively and understand and control the underlying cost structure and profitability of customers, products and channels.

The StaffBalance™ client base includes: Bord Gais, KBC, and Zurich.  They have already saved their customers over €1m in costs.

Ciaran McGowan, Managing Director, StaffBalance™ can be contacted at: 087 051 9863.