132 Understanding the Numbers
THE FIRST MEETING
Denise was very happy with the work they had done. She had reviewed the ma-
terials and asked a few questions. Within an hour all felt comfortable that she
understood ETN/ W in sufficient detail to aid them in preparing an answer for
the investment group. They then turned to this phase of the meeting.
Denise began.
The value system analysis you did is a map at an aggregate level of the many
firm-level value chains that together form this industry. It identifies all the
processes that create value for an end customer or set of end customers and
maps all the players and who adds what to the system. Our focus is on ETN/ W,
but we cannot lose sight of how it interacts with other members of the system.
The next step is to add another layer of detail—what are the process steps that
ETN/ W performs, and do their values exceed the costs to perform them?
Dave, Carol, and Eric did not understand what she meant and asked for
clarification.
“Simply stated,” Denise replied, “what is it that you do? Map the value-
producing processes you add to the system.”
Carol was quick to answer: “ We already told you—we process e-commerce
transactions.”
“Okay. So that is all you do? If I were to talk to any number of your peo-
ple spread throughout this building, they would say, ‘I process transactions’?”
Dave jumped in this time: “ Well, not really. While most of us are involved
in this in some form, we also have marketing and sales people.”
“ What do they do?”
This dialog went on for another hour, with Denise at a blackboard captur-
ing their discussion. After many edits the group arrived at the following. The
process map for ETN/ W had three sequential steps:
- Customer Capture.
- Customer Loadingonto the net work.
- Transaction Processing.
Denise then stated:The next phase of this analysis is critical. Although most accounting systems
capture costs by function—for example, manufacturing costs such as direct ma-
terial, labor, and overhead and operating costs such as sales, marketing, R&D,
and administrative—we can understand and forecast them only if we identify
their causes. This analysis is called activity-based costing, or ABC. Not every-
one believes the cost of ABC is worth the benefit, but higher cost is, I believe,
more often due to how it is implemented rather than to the approach itself. Too
many firms have limited it to manufacturing situations, yet it is appropriate also
for service companies such as yours. ABC is also often too narrowly applied—
some now argue that ABC begins too late and ends too soon in many companies.
We have to analyze costs across the value system since causal factors for one