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ABC PRACTICES DISPEL DIRECT MODEL MYTHS
By Steven Raymund Chairman and Chief Executive Officer – Tech Data Corporation
Do you know where your business costs lie? Do you know where you can eliminate or outsource activities that will lower your costs and drive profitability? Many businesses - in the IT arena and otherwise - don't. They often pursue paths that appear to offer cost savings without all the facts, without having spent the time to perform the analyses needed to make the best business decisions they can make. And, as a result, they are not driving their profitability as successfully as they could be.
IT vendors, in particular, are at risk for lowering their own profitability when they perceive a direct relationship with their customers to be less expensive than a two-tiered route to market, which in many cases, can be much more cost effective overall. Analyzing the real costs involved in any go-to-market strategy is the key to making the right decision.
That’s why, today more than ever, it’s so important to understand the advantages of activity-based costing (ABC). The premise is relatively simple: Activities consume resources that drive costs; understanding this connection and the actual costs involved – by product, by customer, by business channel – can reveal a dramatically different reality than more arbitrary traditional cost allocation methods.
ABC illustrates bottom-line value beyond volume and basic overhead calculations. It delineates total costs-to-serve including many hidden or unrealized expenses. ABC uncovers where you’re making money and losing it, irrespective of the prestige that may be associated with the account name. In today’s environment, we’ve learned that the big names can quickly become costly liabilities, and the less conspicuous customers may emerge as blockbuster winners.
In these uncertain times, activity-based costing practices may be at the bottom of the priority list. But if ABC gets the attention it deserves in the IT vendor community, our industry will take a huge step forward. Some vendors understand and embrace ABC, and have already derived many of the rewards. Others are mulling it over while a few companies are basically unwilling to look at their world in this manner despite having nothing to lose and everything to gain.
ABC may not work magic, but it’s unquestionably a proven means to successful financial management in good and troubled times alike.
A Powerful Force
ABC isn’t really a new concept. It’s been around since the 1970s, but it’s gaining new momentum these days. Few companies in the IT industry today can afford not to seriously apply ABC methodologies when considering what is at stake. As a recent article in CFO magazine observed, “ABC is excellent at helping separate profitable customers from money-losers. In addition, ABC can help companies figure out ways to raise profits without raising prices – crucial in a period of low-inflation.”
ABC knowledge becomes a powerful competitive advantage for those that develop and employ it. By establishing a detailed set of metrics that capture every conceivable cost, both internally and externally, a true profit picture emerges. Whether evaluating supplier relationships, outsourcing partnerships or end-customer business, ABC can literally transform an enterprise. With ABC data, tough decisions can become much easier and more logical based on the common denominator relevant to all for-profit operations: the actual profit.
Although defining and assessing cost drivers may differ from company to company, and the answers aren’t always black and white, ABC practices done right can, in many cases, mean the difference between black and red ink. For companies already performing well, ABC may further boost net income while yielding better insight into costs throughout the organization.
Supply-chain analyses seldom commence with the thorough perspective that ABC provides. Consequently, some important facts about distributors may go unheeded in the eyes of vendor leadership as economic or shareholder pressures mount. Distributors are occasionally regarded in these instances as added cost burdens rather than the actual low-cost infrastructure and value-added selling machines that we represent to vendors.
Without distributors, vendors must fend for themselves and attempt to replicate the services that we have refined over many years specifically for the tens of thousands of value-added resellers we support worldwide. Services like extensive credit programs, which also offset significant direct-selling risks for vendors; convenient one-stop access to multi-vendor solutions; logistics management to ensure all products are deployed on time to the right locations; independent, yet highly qualified technical support including complete network design and configuration assistance; education and training tailored to specialized market segments; our vast e-business capabilities; and many other offerings that are reinforced via targeted sales and marketing programs for specific reseller segments.
More Science Than Magic
Developing and maintaining these kinds of capabilities requires more than specially trained people and substantial systems investments to keep pace with constantly changing requirements. It entails entirely different business models to reach the economies of scale and customer satisfaction levels that the IT distribution industry has achieved. You can’t just wave a magic wand and internally absorb such costs or mystically conjure up these comprehensive high-quality services.
Distribution isn’t just about moving product from point A to B; it’s about core competencies that meet diverse customer needs in the most cost-effective and efficient ways possible. When ABC is correctly applied with all factors fully understood and incorporated into the equation, that reality is easy to see and justify.
While such vision within vendor circles contributes to the overall health of this industry, even in the absence of such pragmatism, IT distribution will remain a vital, evolving force for many years to come. Like an epic adventure with ongoing twists and turns, the players may change to some degree, but the outcome is essentially the same. Distribution will prevail against any and all odds.