Evaluate the adoption of ABM in companies

ABM (activity-based management) is the application of ABC to improve profitability. It includes:

**performing activities more efficiently,
**eliminating the need to perform non-value added activities,
**improving the design of products and
**developing better relationships with customers and suppliers.

The goal of ABM is to enable customer needs to be satisfied while making fewer demand on organizational resources.


Benefits

 It is intended to help deliver improved quality, lower costs and increase profitability. The cost drivers identified under ABC costing help management make decisions as they are aware of what actually drives activity and thus cost in the organization.
 It allows better control of resources: the activities driving costs are identified and the costs associated with activities can be controlled once they have been identified.


Drawbacks

 The process of identifying cost drivers can take time and is sometimes subjective as cost drivers may not be easily identified, for instance external audit.
 ABM also relies on information being available and so IT resources need to be capable of storing and processing the data on activities effectively.
 It take time and money to collect the data and it may not be useful in smaller or more stable organizations with a low level of overhead costs.


The risks attaching to the use of ABM

1. An activity may have implicit value not necessarily reflected in the financial value added to any service or product. The company might decide to cut back on the level of expenditure involved in servicing customers. This may lead to a poorer perceived value by customers of the service provided with a consequent fall in demand.

2. There are risks attaching to the use of ABM insofar as ABM can give the wrong signals. For example a particularly pleasant work environment can help attract and retain the best staff, but may not be identified as adding value in operational ABM.

3. By the same token, a customer that represents a loss based on committed activities, but that opens up leads in a new market, may be identified as a low value customer by a strategic ABM process.





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