In the article, Roy H. Williams recalls a recent speech to a small auditorium full of business school grad students at the University of Texas in which he explains what activity-based accounting is and how Walmart and Best Buy are using the practice (and underlying business intelligence/inventory management software applications) to gain a significant competitive advantage in retail.

Here’s an excerpt of the article:

As the years have passed, I’ve seen countless real-life examples of Activity-Based Accounting in action. I just always assumed it was common knowledge.

In a nutshell, Activity-Based Accounting is highly sensitive to trends in customer behavior. It sees the people behind the numbers.

Traditional cost-based accounting reduces customers and their behaviors to an “average” or a “percentage.”

If a hole is 12 inches deep, how deep is half a hole? Cost-based accounting will answer “6 inches.” Activity-Based Accounting will answer, “There’s no such thing as half a hole.”

Have you ever met the family with 2.3 children?

Analysts who study Wal-Mart will tell you that the secret to their success is inventory management. Dig a little deeper and you’ll find that Wal-Mart’s inventory management is highly responsive to the activities of the customer.

Wal-Mart has a men’s clothing department. So does K-Mart. Let’s assume they sell exactly the same clothing. K-Mart can tell you that the month started strong, then slowed down, so they pulled out their little stainless steel cart and the store manager got on the intercom and announced “a flashing blue light special.”

Wal-Mart, on the other hand, knows it sold 5 Dave Hogan sport shirts within the first 8 hours they were on display and that all of them were blue. The red ones aren’t selling. The next day they sell 4 more blue ones and only 2 red. Wal-Mart’s sales aren’t going to slow down like K-Mart’s, because Wal-Mart is going to make sure they don’t run out of blue, Dave Hogan sport shirts.

K-Mart went bankrupt. Wal-Mart became the most successful retailer in the history of the world. That’s the power of Activity-Based Accounting.

Likewise, Best Buy CEO Brad Anderson implemented a decision-making technique back in 2004 that I immediately recognized as Activity-Based Accounting. One year later the success of his endeavor was trumpeted in the Wall Street Journal. Four years after that, rival Circuit City was driven into liquidation because they never quite caught on to what Best Buy was doing.

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http://uk.reuters.com/article/marketsNewsUS/idUKN2335219120090224

In an environment where many companies are fighting just to keep revenues flat, trimming your customer base may seem to be somewhat of an odd move but it’s really a great example of how a company can use business intelligence to proactively reduce its exposure to risk by:

1. Monitoring external or macro market conditions to better assess risk to business fundamentals; keeping a close eye on unemployment and default statistics in this instance.

2. Identifying pockets of risk by profiling and segmenting customers who are carrying high balances, slow on payments and starting to fall behind on other debt obligations as indicated by external credit reports.

3. Deploying strategies to reduce risk. In this case, offering customers with high risk profiles a $300 gift card incentive in exchange for paying off their balance by a certain date.

Related posts:

1. Learn How Capitalia Gruppo Bancario Improved Their Risk Management
2. Webinar: Business Objects Business Intelligence for Oracle, PeopleSoft and JD Edwards Environments
3. Webinar: Information Management 101 – Building A Solid Foundation For Business Intelligence

On February 4th, Marc blogged about his frustration in business with organizations who continue to do things just because that’s the way they’ve always be done:

Probably one of the most annoying things I have to deal with in business is that people never question the status quo. It doesn’t matter what business it is. I doesn’t even matter if its something that applies to how I do things, that I have become set in my ways on. It is rare when people just ask questions or apply some critical analysis to the things right in front of them.

The NBA is the perfect example. So many things are the way they are, because thats the way they always have been. I guess it was the old adage, “if it’s not broke, don’t not fix it”. But not being broken, doesn’t mean its optimal. Yet, just the smallest bit of critical analysis can lead to changes. Fortunately, the NBA is evolving into an organization that will change. There is a new management style that has evolved over the past few years, which has lead to valid changes initiated by me and others which I think have benefited the league and our fans.

Hear, hear!

In this day and age, it’s really important that companies have a culture that not only accepts but encourages change. As Marc says in his post:

Even the most fully engrained rules or processes should have critical analysis applied to them. Just because something isn’t broken doesn’t mean a business can’t benefit by looking to do something different. Strong organizations encourage the change and great employees always are looking to find ways to take even the basics and make them better.

Head his advice. Don’t wait for a triggering event like a missed quarterly earnings call or a downturn in the economy to take a critical review of your business processes. Quite often you’ll find that even small changes can have a big impact, multi-million dollar impact on the bottom line.

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