Customers demand customized services across increasingly complex channels, making it difficult to accurately identify product and customer costs. With personnel expenses representing the largest single component in service institutions, it follows reason that the companies are searching for improved methods of cost assignments to products and customers. A detailed understanding about your organization’s costs provides a competitive advantage and empowers management with valuable information that can be used to implement process improvements throughout the organization.

 

Expanding on Activity Based Costing

An expansion of the traditional Activity Based Costing (ABC) approach imparts service organizations with the ability to provide improved unit cost information across their value chain. Activity Based Costing—as developed in the manufacturing sector—typically was based on a 3 stage cost assignment approach: resources, activities, and cost objects. This approach is still applicable to services organizations, but must be adapted carefully to accommodate the complexities in costing which will increase customized services. There are a number of differences between service and manufacturing costs and transaction structures, which require up-front model design, planning, stakeholder support, and careful consideration prior to implementation. With the right model design, an organization can construct a truly strategic cost model which aligns to process re-engineering practices, profitability measurement, staff deployment, and other strategic initiatives. In our experience, this Strategic Cost Modeling approach employs an advanced modeling methodology that is adapted to the unique requirements of an organization, which can provide true cost transparency across the enterprise. The desired outcome is a comprehensive and consistent enterprise cost model that provides actionable information to reduce costs by strategically aligning the following initiatives:

When combined with data warehousing, business intelligence technologies, and integrated with performance management and compensation, Strategic Cost Modeling becomes a powerful tool for navigating the company through economic change.

The Next Step

Have you ever found yourself asking “why,” “what,” or “how” when thinking about driving rapid cost takeout or continuous cost control? Contact the Armada Consulting Team to discuss the benefits that exist by engaging us in a Strategic Cost Management initiative.