Activity Based Costing: Below-the-Line becomes top of mind for cost improvement

Activity Based Costing: Below-the-Line becomes top of mind for cost improvement

TechnologyCostsCompanies interested in improving overall margins are now focusing on below-the-line cost efficiency as a means for cost improvement. Also referred to as shared services or overhead costs, these “allocated” costs represent a growing share of the overall expense base. For years, the process of simply allocating these costs to the revenue generating functions of the business has been ignored as an uncontrollable cost of doing business. Companies are now realizing benefits of conducting cost studies on back office functions and billing internal organizations based on these services.

IT Cost Recovery leads the way
Trends in aggressive cost management of back office functions began with the rising costs of IT departments. The proliferation of technology throughout the enterprise resulted in rising costs with minimal transparency into the causal drivers of IT expenditures. Traditional allocations provided no capabilities for management to gain insights and take the necessary actions to reduce consumption of IT resources. Success in developing more sophisticated chargeback processes based on usage brought managers from across the enterprise into a more productive, even collaborative dialog around IT cost control. Now, the methodology is gaining momentum across all shared services and back office operations departments, providing a Profit and Loss (P&L) reporting view to managing non-revenue generating business units.

Activity Based Costing is key
These efforts can be complex and the corporate politics involved can be treacherous. Few finance functions are as contentious as the assignment of costs to managers that do not directly control the budget. Successful adoption requires a fair and consistent methodology that provides credible and actionable information. Activity based costing provides the best approach to accurately provide cost transparency to management. Activity based costing lost ground in the ‘90s as a methodology, due to manually intensive data collection and implementation complexity. The emergence of big data, improved technology, and increased demand for cost analytics have given new life to the method. Implementations are taking weeks instead of months and providing immediate cost savings, often self-funding the project investment.

Costs are the most controllable part of the profit equation
Today, companies are able to leverage advanced cost modeling systems to provide detailed cost analytics that not only provide insights into the drivers of profitability in their business, but also identify and eliminate unnecessary costs. With increased regulations, competitive markets, and economic uncertainty decreasing top line revenue growth, below the line cost improvements can drive much needed bottom line results.

If you are interested in learning more about Cost Modeling or Strategic Cost Management, contact Armada Consulting here.

Armada Consulting Announces Cost Management Benchmark Survey Findings

Armada Consulting Announces Cost Management Benchmark Survey Findings

Armada Consulting Announces Cost Management Benchmark Survey Findings

DOC-150x150Armada Consulting is pleased to announce the completion of the inaugural Cost Management Benchmark survey for Financial Services companies.  The survey achieved the objective of providing current information on the state of cost management in Financial Services companies representing a cross section of participants including commercial banks, community banks and credit unions.

Participants ranged in size from well over a Trillion in assets to under $300 million.  Regardless of asset size, respondents were fairly advanced in cost analytics with the vast majority rating their capabilities as intermediate or advanced. Despite the respondents being fairly advanced, the vast majority at best had only doubled their investment to date in cost analytics.

We believe Strategic Cost Management is one of the most controllable components of the profitability equation for many industries and survey results suggest many Financial Services companies are challenged to deliver an effective return on investment for their efforts. The survey also confirmed that a successful Cost Analytics framework is one that drives business value and is highly correlated with unit cost methodology, capacity analysis and a standard management reporting approach.  The integration of cost management information into the reporting and planning process was also a strong contributing factor to the success of the overall performance management effort.

The survey confirmed our belief that a successful Cost Analytics framework is not correlated to size of cost analytics investment, use of a dedicated system or asset size of the institution.  Shared Services and IT chargeback mechanisms also contributed to a successful Cost Analytics framework for the majority of companies surveyed.

Many industry contacts and a majority of the respondents indicated an interest in more detailed cost management benchmarking efforts leveraging a standardized approach. Branch economics were the most desired topic for potential further benchmarking efforts along with IT cost transparency and shared services.  Armada Consulting will continue our effort to be a premier provider of Strategic Cost Management solutions by expanding our Financial Services research and potentially leveraging our experience across other service oriented industries.

If you have any questions or if you are interested in participating in current or future survey efforts please contact me at Brad.Anderson@Armadaconsulting.com.