Frank Buytendijk Blog

Recently we introduced a new product, called Oracle Hyperion Profitability and Cost Management (HPCM). This is great news, as I think profitability management is crucial in todaya??s business. Margins are under pressure due to a variety of reasons and we cana??t take our eyes of the ball in our business operations. Over the last year I have had an incredibly interesting email exchange with an industry expert, called Mike Haley, and I would like to share a few points from the many pages of this email conversationa?|

Profitability management is the new Activity Based Costing
The biggest problem of ABC/ABM (activity based management) is that it is called like that. It is one of those examples where unfortunately the name of the application (I don't mean this in the technical sense but as in "how a concept is applied) is the same as the concept. And it's not. Profitability Management is actually the same as ABC, and so are many other exercises. For many, activity based costing is a loaded term. Many projects in the past failed. The difference today is that there is a much stronger business imperative.

Why so many projects failed in the past
Like with many projects, because of internal politics. In many cases, allocated costs were not seen as an instrument to optimize a value chain, but as a??funny moneya?? to shift around managing budgets. Thata??s disconnected from reality. These politics still exist ofcourse, but with the increased pressure organizations cana??t afford to fail because of internal politics.

Another reason for failure is a??going overboarda?? and looking for precision. Allocating costs and revenues is never a precise exercise. It is based on assumptions and discussion. The goal of profitability and cost management is not precision, but accuracy. The cost and revenue structure needs to reflect the cost and revenue drivers within the organization. Transparency of that process is far more important than creating a a??precise black boxa?? that no one understands.

Despite modern systems to track all kinds of data, the amount of indirect costs is increasing
Many organizations are introducing shared service centers, centralizing certain operations, either in the front or in the back office. The economies of scale outweigh the overhead of such centralized operations, but the overhead still needs to be allocated. On a more esoteric level, customers appreciate working with authentic organizations and it needs to be clear what they stand for. The importance of brand marketing is increasing. How can these efforts directly contribute to various transactions? By nature these are indirect operations that benefit all business units, products and services.

Dynamic product pricing and Service pricing is becoming more important
Most business models today have adopt mass customization principles. Customers can choose their own configurations and timelines for delivery. This is where profitability management is not a controlling activity in the back office anymore, but has become a pricing instrument to compete better in the front office. A radical way of making the old a??ABCa?? a strategic imperative today.

frank