Why Activity Value Management®?
The short- and long-term success of any organization relies on the knowledge of its financial and senior management regarding costs, customers and competition. However, conventional financial systems that measure aggregated performance are completely inadequate for decision support.
- Do costs reliably reflect how resources are consumed by processes and activities?
- Are shared, indirect and overhead costs properly assigned to products and services?
- Does the cost information produced by the financial systems adequately reflect true costs?
- Are stakeholder experiences considered when making financially-based decisions?
- Are financial implications taken into account when making decisions that affect stakeholder loyalty?
- Are the financial systems the primary source for performance-based decisions and recognition?
A good decision-support system must provide both quantitative and qualitative intelligence coupled with analytical tools necessary to improve competitive performance at all levels within the organization — that is the purpose of AVM®.
Who Can Benefit From Activity Value Management®?
When any of the following occur, your organization will benefit from an AVM® review:
- Changes in the business environment due to economic downturns, loss of market share, product/service maturity, mergers and acquisitions, deregulation, etc., that affect performance.
- Growing costs without a similar growth in revenues.
- Increased demands for performance accompanied by budgetary constraints.
- Lack of knowledge regarding the true cost and profitability of products, services and market channels.
- Declines in employee commitment and/or customer loyalty affecting competitive performance.
- Overlap, duplication and non-mission critical effort expended on activities across functional boundaries, generating excessive and unnecessary costs.
- Challenges related to Sarbanes-Oxley with respect to identifying, measuring and establishing necessary controls pertaining to critical processes and activities (Sec. 404) as well as requirements to provide timely information related to financial and operational performance (Sec. 409).
- When you need to grow the business but cannot afford to do so.
What is AVM®?
The AVM® Advantage: AVM® provides added value over all other performance management methods because AVM® provides the following primary benefits not available with conventional approaches:
- Integration of stakeholder experiences which ensures that changes enhance customer loyalty and employee satisfaction, contributing to improved operational and financial performance.
- Preservation of a complete “bi-directional” audit trail linking all cost elements to both activities and lines of business — necessary for effective cost management, identification of misplaced effort/expense, and to validate process/activity controls with respect to regulatory compliance.
- Direct assignment of all expenses, without using pooled or averaged costs, are made to activities, products, and services improving line of business costing and profit measurement — all products and services are costed independently.
- Improved “time-to-benefit” since AVM® normally requires ¼ the time and ¼ the cost to implement.
National Recognition: AVM® has been nationally recognized through numerous independent articles and received “Best Practice” recognition from the American Productivity and Quality Center (APQC).
Activity Value Management® represents the next-generation of performance management that effectively integrates financial information with non-financial stakeholder experiences in ways never before achieved. AVM® responds to business needs by providing a unique perspective of financial and operational results not available through any other performance management approach. The focus of AVM® is to derive fact-based solutions to some of management’s most pressing issues. AVM® is implemented through a unique partnership to develop a specific set of organizational activities, across lines of business, to which employee and non-employee expenses are assigned and combined with information representing the views of the organization’s stakeholders. The objectives of AVM® are to:
- Determine the true cost and profitability of specific products and services — validate pricing while focusing on under-performing areas of the business.
- Identify and eliminate unnecessary and avoidable costs.
- Uncover opportunities to improve profits (expense management coupled with revenue growth), market share, and stakeholder loyalty — securing jobs while improving competitive performance.
- Create a mission-critical workforce by increasing concentration on those activities that directly impact the fundamental value of the organization.
- Implement change based upon an enhanced understanding of processes, activities, and core competencies.
- Provide knowledge transfer from the consultants to the client, eliminating reliance on external resources to continue and/or expand the improvement initiative — enabling clients to identify and remove barriers that prevent breakthrough performance.
Why is AVM® Costing So Much Better?
All contemporary costing methods utilize averaged costs, pooled costs, and/or allocations to assign costs to products and services. These methods distort costs and masquerade profitability. Important business decisions rely on product and service costs and if such costs are based upon faulty information, outcomes will suffer. AVM® does not use these outdated methods for costing. AVM® assigns all resource costs directly to processes, activities, and lines of business without using any averaging, pooling, or other methods that disguise true financial and operational performance. There are a number of advantages associated with AVM® costing:
- Costs and profitability can be directly validated because there is no pooling or averaging costs — a perfect audit trail exists that links resources directly with lines of business.
- The true financial impact of divestitures or discontinuances of lines of business can be measured identifying specific resources that will be affected by such decisions.
- Verifies that the right resources are applied to product and service offerings.
- Forecasting and budgeting are significantly improved due to a better understanding of resource consumption and behavior by process and activity across various lines of business.
Why are Stakeholder Experiences Included?
It has been proven that a key success factor is customer loyalty and a base of loyal customers can only be built upon a base of loyal employees. Understanding the attributes that drive loyalty is critical if the organization is to improve financial performance. Often, financially-based improvement initiatives are void of the qualitative information required for success. Making changes based solely on financial information may have a disastrous outcome. Likewise, changes based solely on qualitative information from customers and employees may also contribute to sub-optimization. What is required are decisions based on a balance of financial and non-financial measures of performance.
How is AVM® Success Achieved?
AVM® utilizes an exclusive set of proprietary tools that permit a unique perspective of the organization in terms of processes, activities, costs, lines of business, and stakeholder opinions of which only a select few are outlined below:
- True Line of Business Costing — AVM® links every cost element to processes, activities, and lines of business providing an unparalleled perspective of product/service cost and profitability. AVM® avoids using outdated allocation methods or reliance on averaged cost driver rates that distort product/service cost. AVM® produces a process-based income statement that identifies activities which do not contribute to product and service value.
- Mission-Critical Analysis — One of the most powerful tools in AVM’s arsenal is the ability to measure the impact that non-mission-related activities, or the lack of concentration on mission-related activities, have on achieving the organization’s goals and objectives. Identification of such activities and resulting redeployment of resources generate significant leverage of organizational competencies.
- Line of Business (LOB) Profitability Analysis — AVM® is a disciplined approach based upon an understanding of the true costs of products and services. LOB profitability analysis unveils the profit contribution of each product and/or service and highlights underperforming lines of business.
- Cost Factor Analysis — AVM® identifies the financial impact of negative cost factors that inhibit the optimum financial performance of the organization.
- Cross-Functional Evaluation — This tool identifies misplaced and duplicated activities performed throughout the organization. Reduction of overlap and duplication creates a more nimble organization with optimized resources while improving compliance with regulatory requirements.
- Organization Analysis — Small spans of control, organizational layering, and numerous remote locations all contribute to excessive and avoidable costs.
- Centralized vs Decentralized Processes — Greater economies of scale accompanied by improved performance can be achieved by evaluating the manner and location where processes and activities are performed.
- Activity Scoring — Each activity can be scored with respect to its contribution, or relevance, to the strategic goals and objectives of the organization. Performance is also scored so that activities which are highly relevant, yet poorly performed, can be identified for corrective action. Similarly, activities which are not relevant, yet high in cost, can be identified for cost improvement. An unlimited number of attributes can be used to assess the value of the processes and activities performed within the organization.
- Fragmentation — Fragmentation measures the number of employees “touching” an activity as compared to actual effort expended. Reduction in fragmentation can significantly improve performance by consolidating activities to be performed by fewer employees. Decreasing fragmentation improves ownership and responsiveness while lowering cost.
- Forward and Reverse Audit Trails — AVM® provides a complete bi-directional audit trail directly linking all resource costs, through activities, to products and services. This unique and proprietary feature is essential for effective performance management permitting a direct financial measurement of the impact of management decisions. AVM® is the only system that can identify the impact of product-mix decisions on specific resource costs.
How Does AVM® Coordinate With Other Improvement Initiatives?
AVM® helps to optimize investments in other improvement and regulatory initiatives such as:
- Balanced Scorecard, Sarbanes-Oxley, Malcolm Baldrige, ISO certification and other management frameworks that require an understanding and documentation of organizational processes.
- Stakeholder survey assessment by linking survey outcomes to bottom-line performance.
- Lean Management and Six-Sigma by identifying the processes and activities that can provide the best return on investment — seeking to optimize, rather than maximize, your investment.
How is AVM® Implemented?
Working in partnership with clients, AVM® consultants focus on fact-driven solutions with a bias towards action aimed at improving bottom-line performance that enhances the organization’s fundamental value. AVM® seeks to optimize employee’s first-hand knowledge about the business by engaging the entire workforce in the improvement process — developing employee-accepted results. This unique partnership is why AVM® works in every organization and generates an outstanding ROI for those who grasp the power of AVM®.
Can AVM® be applied on a limited scope?
Although the greatest benefits can be achieved when applied across an entire business unit or geographical span, AVM® can be applied within a functional group (e.g. Sales, IT, Human Resources, etc.) or on targeted lines of business (LOB) or service offerings.
What Results Can Be Expected?
Outcomes are typically client-unique and linked to specific study goals and objectives, but the following represents typical results and/or expectations:
- Reliable cost and profitability of lines of business, market channels, and/or customers which are used to:
- Remedy under-performing areas of the business
- Improve profitability through pricing strategies, product mix and cost improvement.
- Increased revenues by reducing the barriers to revenue growth.
- Lower costs through the reduction/elimination of unnecessary and avoidable costs caused by:
- Non-mission-related work
- Overlap and duplication of activities
- Non-value-added activities
- Ineffective organizational structures and responsibilities.
- Significant improvements in workforce utilization by focusing on mission-critical activities.
- Enhanced quality of products and services.
- Improved budgeting and planning through more reliable activity-based predictive forecasting.
- Improved customer loyalty due to concentration on the attributes that drive loyalty.
- Strategic and tactical solutions for some of management’s most pressing issues.
- Trained staff who can apply the tools — striving for continuous improvement.
- Historically, AVM® consistently identified financial improvements averaging over $6 million per 1,000 employees, equivalent to 5% to 10% of revenues — achieved while improving stakeholder satisfaction and loyalty.
- Results in only a few weeks rather than months or years.