ABC-ABM at Hewlett-Packard Europe for customer support

CASE STUDY : Hewlett Packard

France FONDACCI

Léa MONTANARI

Tarik OKTAN

Damien VALTIER

Yao WU

Hewlett Packard is an American group specialized into the computing sector and the communication market. Hewlett Packard is organized by product into several Business Units. The traditional accounting system gave information on costs per department. Even if there are worldwide accounting system rules, each manager of a business unit can implement new accounting system.

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Using the data in Tables 1.4 to 1.11:

Calculates the cost of the activities for France

Calculate the unit cost of the delivery processes for France and the unit cost of the delivery process "HP On-sit" by activities for France

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Compare and comment on the costs of the delivery process "HP On-Site for all European countries.

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Describe all possible uses of ABC for decision-making and compare them with HP needs and possibilities

The ABC method is the more used to allocate costs.

It uses drivers such as resources and activities to allocate cost according to a cause-and-effect consumption relationship.

This method is very heavy to set up but (as we can see in HP's case) seems sometimes to be necessary to have a precise and accurate cost allocation method.

1. The ABC method makes managers have a precise view on each activity.

As cost pools are activities, the ABC method enables firms to know precisely the cost of each activity.

So managers can allocate an appropriate budget to each activity, related with its cost and the means it needs to be efficient.

They can also establish ratios to control the activity and follow its evolution like for example:

- Profit resulting from the activity / cost of the activity

- Evolution of the productivity / cost evolution

- Cost of the activity / Cost of the firm

Managers can see the evolution of costs per activities. It is an efficient tool to build the firm's strategy and to elaborate the budget of the following year.

The ABC method requires a cost per activity classification. As it appears in Table 1.11, managers from Germany, Italy and the UK can see that the most expensive activity is "On-site HP CE" and the less expensive is "rops".

In table 1.6, "subcontracting costs" are 3,000 thousand € for the French Q3 08. But with the actual economic context (externalization of activities abroad), managers can also forecast that the cost of this activity will rise.

2. The ABC method gives a basis to schedule and measure performance

As managers know well their activities (and especially the costs it needs) they can give realistic performances to achieve to activities' managers.

3. The ABC method is useful for both internal and external benchmarking and can lead to externalization.

Knowing the precise cost of each activity enable managers to make comparisons by activities with its competitors and with other-countries subsidiaries.

For an international firm, it requires a multi-currency system to have on the one hand a worldwide accounting system in an international currency (mainly € or $) and on the other hand a local currency system to allow firms to compare results with the local markets.

Then managers have to look which activities can be treated by another firm or in another subsidiary, assess the cost of this modification and make a decision about the externalisation.

Lots of facts must be taken into account to take such a decision like average wage, working laws of the country, economical context, and economy of scale that could be done…

For activities that cannot be externalized, the ABC method gives precise figures for each activity. Then executives can see how efficient they are compared with the same activity executed in another firm.

Here is a summary of "cost per repair and per activity" for Germany, Italy and UK from HP figures (Table 1.8 and 1.11):

The ABC system permitted to answer German manager's request to subdivide the activity "Call Receipt". Then they were able to know the exact cost of each sub-activity.

A market analysis revealed that some other firms would charge a lower price for the same activity. According to Table 1.4, "Call Receipt» is 60% less expensive in Italy than in Germany and 33% less expensive in the United Kingdom.

So in HP's case, it would be interesting to treat all the activity "Call receipt" in Italy. A less expensive solution could also be to externalize this activity to countries were workforce is cheaper such as African ones.

"Call qualification" from Germany could also be treated in Italy or in UK.

Managers can also wonder why there are so high differences of costs between those three countries, like for "freight» or "call qualification". Here may be the beginning of an investigation to reduce costs and raise profitability.

4. The ABC method is a tool to set up prices

As this method provides the precise cost of each activity and allows benchmarking, (marketing or sales) managers have an accurate basis to set up the price of their products or services.

Pricing a product is often easy but in HP's case, it is a service that must be priced. Setting up the price of the whole service requires knowing the cost of each activities made by HP for the customer. Then taking into account competitors prices, HP's brand reputation … price can be set up.

In addition, managers need to know where the profit comes from (from which activity).

Interests and disadvantages of the non-integration of ABC in the cost accounting information system.

First of all it is essential to mention the objectives and the purpose why HP considered to implement ABC and probably to integrate it in the cost accounting information system.

As the traditional accounting system was not appropriate to calculate the costs of delivering a service to customers. Neither the contribution could be evaluated. The only big advantage was to use the traditional cost system for budgeting.

The objectives were set because of the increasing competition and the increasing amount of the services to customers and therefore the competitive pricing. In order to remind the objectives: - measure the efficiency of the activities - find the link between departments and activities; - measure profit per repair.

Interests in non-integrated ABC in the cost accounting information system:

Traditional cost accounting system, which is set up by HP for a worldwide usage by all business units, is a complex system and it is very difficult to change

ABC is concerned to one business unit and it was considered as unwise to change the whole system just because of this one business unit

The codification had to be changed, if the ABC would have been integrated in the traditional cost accounting system; especially a new codification would be necessary

The complexity of setting up and integrating in to the traditional cost system is too high; and in addition to that some countries would have had the detailed list of activities, whereas the aggregated one doesn't show a detailed description of the activities

Each Country can save a lot of time, which can be used for spending it on analyzing the ABC results. Even money can be saved, because some countries would have dedicated somebody to extract the data

After having been published the results, each country has the possibility to change again the results, if failures had been occurred.

As the subsidiaries have control of the level of detail of activities used, and to make the correction, it is possible to use the information for decision making at the central level and ant the local level.

Disadvantages of a non-integrated ABC in the cost accounting information system:

it is complicated to use two separate information systems, because both of them have different codification, which could cause errors in extracting the data

To use two separate systems leads to inefficiency in time and money (opportunity costs)

In either way you have to train your employees for using, extracting and reading the results /data for both systems

For long-term it is essential to integrate ABC in to the traditional cost accounting systems because of the efficiency. In both ways all the data collections represent opportunity costs. For example in USA the employees, who are charged to extract the data for all countries and calculate the results could be employed somewhere else, while providing just one systems for both results, could save time and money

The traditional system itself had the power to increase the competition feeling between the countries. And now it is ABC which increases it more, of course it should be countries which are comparable with each other.

Identify the difficulties HP could have in implementing ABC in an international environment with a lot of subsidiaries.

The implementation of a new system firstly demands a training of large scale for employees concerned. This training should be finished by different subsidiaries in almost the same time. And the training may meet different problems in different subsidiaries.

In the international environment, one obvious problem is the different cultures in different nation. Implementing ABC system means more communications among different departments, among regions and countries. But when implementing ABC system, the company must be organized in a certain degree by activity (ABM), because the budgeting, operating and controlling these activities need more cooperation among departments, and the performance measurement will be based on activities. This change challenges the old organization system. But in some nations, the company is strictly hierarchical, especially in Asian countries, such as Japan. In this case, the ABC system demands more coordination among the managers and employees of different department, even reorganization of subsidiary.

And the coordination and cooperation between different subsidiaries should be more important, because one activity may concern more than one subsidiary.

If the ABC system is used in the international environment, HP needs an international communal activity-list. But the situation differs in different nations. HP would probably meet divergences in deciding activities.

Briefly, the implementation of ABC would meet organizational, cultural and technical problems.