The Hindu Business Line : `Optimal use of resources must for a co's survival'

DO you know how much that inconclusive inter-departmental head meeting that your company held cost it? Do companies have an idea of just how much it costs them to have a supplier's bill passed from the accounting department? What are the hidden costs in a company's operations that drag it down without anyone from the top to the bottom, perhaps, not even having an idea where the drain is happening?

Companies don't need expensive global consulting firms to tell them just what is going wrong or what can be corrected to make them the lean, effective and profitable organisations that are a prerequisite for survival in today's global market place says Mr Madhav Kshirsagar, CEO and Managing Director of Kirtane Pandit Consulting, part of the Kirtane Pandit group of which the KPIT-Cummins is now flagship company.

The Pune-based company is advising a veritable list of the country's best-known corporate names, such as Merck India, Wockhardt, Jindal Steel, Syngenta and the Kirloskar group on how to optimise the organisation's resources using activity based cost management and balanced score card - smart new techniques that are being used elsewhere around the world with proven results. Excerpts from the interview:

What is activity based cost management (ABCM)?

ABCM ensures that costs are taken to the right services and right products and Peter does not subsidise Paul, be it a service, product or transaction. ABCM is a performance monitoring and enhancing culture that allows companies to exit from unprofitable transactions, products, geographies and customers. It is important to do an ABCM for effective strategic decision-making. Simply put, it addresses and focuses on the indirect cost and overheads of a company and helps it work their way around or eliminate these to plump up the bottomline.

Why are companies not aware of it or not implementing this technique?

Awareness is the key issue here. Top management often has a blind spot when it comes to recognising and taking critical decisions on operations. For example, post-manufacturing expenses and outbound supply chain are known to make perfectly good products unviable. Viable and unviable products get costs apportioned to them with non-acceptable drivers such as sales, number of people and area. It is funny how we methodically break down the functions of a housemaid before we pay her but refuse to do the same for a Rs 500-crore company. This is basically because parasites go piggyback on performers. Smart companies realise that costs need to be taken to the correct pocket. You may otherwise end up focusing on, or kill the wrong product or service! The global trend is the movement of fixed overheads to variable overheads that go up and down with volumes so that the company stays ahead in the race. This has led to the recent outsourcing wave.

What are the areas in which ABCM can be applied? Can Indian companies benefit by adopting these techniques?

Of course, Indian companies can and are benefiting from these techniques. Typically, savings of a company going in for restructuring of fixed overheads can be 10 per cent or more of the fixed overheads, by just an appreciation of the cost of their transactions.

For instance, how much does it cost a company every time it holds an inter-departmental head meeting, that more often than not, is inconclusive? The cost is not just the travel and accommodation bills of those who attended. The hidden cost is that of not having the people in the meeting available in the marketplace where their skills are needed to give the company a competitive edge.

When the CEO/MD of a company conducts interviews for recruitment which is a non-core activity for him, does the company think of the cost of his time for that function? No. And it is pertinent to point out that this time is often hugely expensive and can be better spent on more mission critical functions.

ABCM can be applied to the entire spectrum of industry from engineering, manufacturing to services. The beauty of ABCM is that once we train the organisation in the basics of the process, it can be practiced by them without any hitch and extra expenses.

While companies might find a restructuring decision difficult to implement on their own, the ABCM approach helps them do this effectively by virtue of the fact that it involves every departmental head in the process, thus making it apolitical.

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