136 Understanding the Numbers
travel to the show, but the cost is budgeted. As a result, the cost per lead de-
creases as we become more successful in generating leads. We have already
talked about ways of being more effective in this regard.”
“Exactly,” said Denise. “ We will no doubt go more deeply into proper
identification of drivers for fixed and variable cost pools. What you should un-
derstand, though, is that ABC is just a first stage in a long journey. Most people,
as you did, move quickly into ABM—activity-based management. Once you
make your cost system transparent, you then naturally seek to optimize it as
you are doing with customer identification. So, our end objective of this ‘long
journey’ is simply that, transparency of the cost system. And the final piece?”
Eric had this one.
This was my responsibility and it was a lot more difficult than Carol’s piece.
The final activity, customer sale, also has subactivities. We review the consul-
tant reports and identify those we want to pursue. Of the 1,200, we identified
eighty as “high potential” and tried to sell to them. Although all the effort did
not fall neatly into the 12-month window, essentially we went through the full
process to a signed contract for the equivalent of 10 customers. The process in-
cluded phone conversations and site visits. In total, we spent $410,000 to bring
to contract these 10—many of the others went through part of the process be-
fore either they or we lost interest. As with the other two activities, the costs
that loaded into this pool came from across the company. Often we had to f ly
out technicians to explain how the system works as well as salespeople. For
larger clients, they expected a visit from a corporate officer for the formal sign-
ing. So in the end it cost us about $41,000 each to sign them to contracts.”Denise asked only one question: “ Would you say this is a variable- or a
fixed-cost pool?”
After a lengthy discussion, the consensus was that it clearly was both a vari-
able and a fixed cost since more high-potential leads meant more resources ded-
icated to pursuing them. But it was not a pure variable cost since once you hire
someone to do this work, they can handle a certain number of leads rather than
just one. At the end, they agreed on the following: Unlike setting a budget for a
year, this cost was a step function. Within certain steps, defined as the number
of high potentials a sales person could pursue—say, eight at a time—the cost was
fixed. In essence, the cost was step fixed in units of eight. They also agreed that
this thinking should also be applied to the customer-identification cost analysis,
but left that for later.
Denise then asked, “Is the $41,000 roughly the same for each potential
customer sale?”
Eric was quick to respond, “Absolutely not. Some require a lot more work
than others.”
They were at the end of the agreed meeting time but Denise thought one
more lesson would not hurt.
When this happens, it is an indication that you have improperly identified the
driver for the pool. You must drill down to a more detailed driver definition. As