Change Your Business Model –Roger V. Dickeson

Why Service Stinks,” is the cover story of BusinessWeek magazine for October 23, 2000. Don’t be misled by that negative title. If you haven’t read it, by all means do so. Businesses and industry are recognizing that their best customers have been subsidizing the cost of servicing marginal customers. It’s an awakening provoked by activity-based cost analysis that penalizes the high service cost/low yield customers and passes benefits to the top clients. The implications of this rapidly growing service business model change can be profound for printing.

Why is it happening? Managerial accounting is shifting to a new medium, a revised platform. It’s a method that measures the process. “Traditional accounting is at best useless and, at worst, dysfunctional and misleading,” noted Professor John H. Shank, of Dartmouth College, at the Institute of Management Accountants’ 75th Conference in New York City in 1994.

“Traditional cost accounting, first developed by General Motors 70 years ago, postulates that total manufacturing cost is the sum of the costs of individual operations. Yet the cost that matters for competitiveness and profitability is the cost of the total process, and that is what the new ‘activity-based costing’ records and makes manageable. Its basic premise is that business is an integrated process that starts when supplies, materials and parts arrive at the plant’s loading dock and continues even after the finished product reaches the end user. Service is still a cost of the product, and so is installation, even if the customer pays.”

Hobbled by Legacies
“Traditional cost accounting measures what it costs to do something, for example, to cut a screw thread. Activity-based costing also measures the cost of ‘not doing,’ such as the cost of machine downtime, the cost of waiting for a needed part or tool, the cost of inventory waiting to be shipped and the cost of reworking or scrapping a defective part. The ‘costs of not doing,’ which traditional cost accounting cannot and does not record, often equal and sometimes even exceed the cost of doing. Activity-based costing therefore gives not only much better cost control, it gives ‘result control,’ ” reported Peter Drucker in “Management Challenges for the 21st Century” (1999), page 111.

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