Any organization would benefit from seeing how costs accumulate, better managing shared service-cost allocations, improving processes by identifying activities that don’t add value, and learning how and why unexpected events affect budgets.

Activity-based management, known as activity-based costing, is a methodology-based analytic software application that models business processes to determine revenues and expenses, drivers for those processes, and accurately assigns those revenues and costs to products, services, customers and distribution channels, thus presenting a true picture of product, customer and channel profitability. This type of software solution allows organizations to make informed decisions that streamline processes, deliver revenue growth and reduce costs across the organization. Without them, businesses are left with inaccurate, broad-brush application of overhead to products that significantly distorts the true profitability, resulting in suboptimal pricing, channel, service and outsourcing decisions. By providing process, cost and profitability insights, activity-based management software has been known to reveal how a small 20-30 percent subset of unprofitable products and customers may be destroying up to 400 percent of net profit – and to help organizations understand how to prevent and correct this.

Before selecting an activity-based management solution, Visa Inc., a global payments technology company, faced significant data limitation challenges. Excel’s restrictions on the number of rows of data as well as overall model-size constraints created challenges for Visa when allocating revenues and expenses within a product or client profitability model. Moreover, a lack of trace-back and drill-down capabilities made analytics difficult. However, a more robust activity-based profitability model provided Visa with increased ability to use data to make informed decisions around investments, pricing and resource allocation.

“We had built good models, but the maintenance was all manual – there was no automation,” said Glenn Snyder, Director of Profitability and Analysis at Visa. “We saw where our company was going and determined that Excel was not the right tool for us. We looked for a solution that could handle the volume, complexity and uniqueness of Visa’s organization and that would contain a powerful calculation engine and a flexible OLAP reporting cube.”

A veteran in the cost and profitability management space, Snyder had built a profitability team, structure and process from the ground up; incorporated client, product and merchant profitability reporting and analysis into management and executive decision-making processes; developed models and solutions to help determine product and customer pricing, investment and support decisions; designed and operated multiple allocation models for revenues and expenses across clients, products and merchants; and developed the allocation methodology for Visa Inc. total operating revenues and expenses to products, customers and processing services.

Snyder knew the key to insightful profitability analysis was building a model that accurately reflected the revenue and expense drivers of the organization. He wanted a workspace that let his team manage models, reports and OLAP views in one place. With Visa’s new solution, they brought in cost and profitability measurement, modeling, data integration, analysis and reporting. Now, its data is more effectively used to make business decisions that can improve innovation and boost Visa’s bottom line.

“After implementing activity-based management, we were able to give Visa managers reports that were much more robust and dynamic,” added Snyder. “These reports are helping Visa make decisions to improve efficiency, increase revenues and become more profitable. Sales, marketing, product management, strategy, finance and senior executives are big users of the intelligence this system delivers.”

Once managers began receiving these activity-based analytical reports, they wanted more – many saying they never knew they could get information this way.

Snyder wants to expand the profitability analysis into a truly global model. By focusing on which products, customers, channels and services can be leveraged for maximum value, Visa is taking its business to the next level. “There are so many projects that can use our data to make decisions. Building on our focus as a global company, we are looking into activity-based management for global analysis.”

SOURCE: Better Decisions through Profitability Analysis