Harvard Case - Activity-Based Management at Stream International
"Activity-Based Management at Stream International" Harvard business case study is written by Robert S. Kaplan, Norman Klein. It deals with the challenges in the field of Accounting. The case study is 25 page(s) long and it was first published on : Apr 1, 1996
At Fern Fort University, we recommend that Stream International implement a comprehensive Activity-Based Management (ABM) system to improve operational efficiency, enhance profitability, and drive strategic decision-making. This system should integrate Activity-Based Costing (ABC) with performance measurement and management control, enabling Stream to gain a deeper understanding of its cost structure and allocate resources more effectively.
2. Background
Stream International is a global provider of customer care and technical support services, operating in a highly competitive and cost-sensitive industry. The company faces challenges in accurately allocating costs to its diverse service offerings, leading to difficulties in pricing, profitability analysis, and resource allocation. The case study highlights the need for a more sophisticated cost accounting system to address these issues.
The main protagonists are:
- John Smith, the Chief Financial Officer, who is tasked with improving Stream's financial performance and implementing a more effective cost accounting system.
- The management team, who are responsible for making decisions about pricing, resource allocation, and service offerings.
- The employees, who are directly impacted by the cost accounting system and its implications for performance measurement and incentives.
3. Analysis of the Case Study
This case study can be analyzed through the lens of strategic cost management, emphasizing the importance of understanding cost drivers and their impact on profitability. Here are the key issues:
- Traditional Cost Accounting Limitations: Stream's current system relies on traditional cost allocation methods, which are unable to accurately capture the complexities of its service offerings and the diverse activities involved. This leads to distorted cost information, making it difficult to assess the profitability of individual services and allocate resources effectively.
- Lack of Cost Visibility: The absence of a robust cost accounting system hinders Stream's ability to identify cost drivers, understand the true cost of its services, and make informed decisions about pricing, service offerings, and resource allocation.
- Limited Performance Measurement: Without accurate cost information, Stream struggles to develop effective performance indicators and track the efficiency of its operations. This limits the company's ability to identify areas for improvement and measure the effectiveness of its cost management initiatives.
- Strategic Implications: The lack of a comprehensive cost accounting system hinders Stream's ability to make strategic decisions about pricing, service offerings, and market positioning. This can lead to missed opportunities for growth and profitability.
4. Recommendations
To address these issues, Stream International should implement an Activity-Based Management (ABM) system that integrates the following elements:
1. Activity-Based Costing (ABC):
- Identify and classify activities: Stream should identify and classify all activities involved in delivering its services, including customer service, technical support, billing, and administration.
- Assign cost drivers: For each activity, Stream should identify and quantify the cost drivers, such as the number of calls, the duration of calls, the complexity of issues, and the number of transactions.
- Allocate costs to activities: Stream should allocate costs to each activity based on the consumption of resources by the cost drivers.
- Develop cost pools: Stream should group similar activities into cost pools to simplify the analysis and reporting.
- Calculate activity-based costs: Stream should calculate the cost of each activity by dividing the total cost of the cost pool by the total activity level.
2. Performance Measurement and Management Control:
- Develop performance indicators: Stream should develop performance indicators that measure the efficiency and effectiveness of its activities, such as call handling time, first-call resolution rate, and customer satisfaction scores.
- Track performance against targets: Stream should track performance against established targets and identify areas for improvement.
- Implement management control mechanisms: Stream should implement management control mechanisms to ensure that activities are performed efficiently and effectively, such as performance reviews, incentive programs, and process improvement initiatives.
3. Strategic Decision-Making:
- Pricing strategy: Stream should use ABC to develop a more accurate pricing strategy that reflects the true cost of its services.
- Service offerings: Stream should use ABC to evaluate the profitability of its service offerings and identify opportunities for growth and expansion.
- Resource allocation: Stream should use ABC to allocate resources more effectively, focusing on activities that contribute most to profitability.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The ABM system aligns with Stream's mission to provide high-quality customer care and technical support services by enabling the company to understand its cost structure and allocate resources effectively.
- External customers and internal clients: The ABM system will improve Stream's ability to provide competitive pricing and high-quality services, enhancing customer satisfaction and loyalty. It will also provide internal clients with more accurate cost information, facilitating better decision-making.
- Competitors: The ABM system will allow Stream to benchmark its costs against competitors and identify opportunities for cost reduction and efficiency improvement.
- Attractiveness ' quantitative measures: The ABM system is expected to improve Stream's profitability by reducing costs, improving pricing accuracy, and driving more efficient resource allocation. The financial benefits can be quantified through cost analysis, variance analysis, and profitability analysis.
6. Conclusion
Implementing an Activity-Based Management system is crucial for Stream International to improve its financial performance, enhance profitability, and gain a competitive advantage. By integrating ABC with performance measurement and management control, Stream can gain a deeper understanding of its cost structure, allocate resources more effectively, and make informed strategic decisions.
7. Discussion
Other alternatives not selected include:
- Continuing with the current cost accounting system: This would maintain the status quo, but would continue to provide inaccurate cost information, hindering decision-making and profitability.
- Implementing a simplified cost accounting system: This would be less comprehensive than ABM, but could still provide some benefits. However, it would likely not be as effective in capturing the complexities of Stream's operations.
The key risks associated with implementing ABM include:
- Resistance to change: Employees may resist the implementation of a new cost accounting system, particularly if it leads to changes in performance measurement and incentives.
- Cost of implementation: Implementing ABM can be costly, requiring investments in software, training, and consulting services.
- Data accuracy: The accuracy of the cost information depends on the quality of data collected and the accuracy of cost driver assignments.
8. Next Steps
To implement the ABM system effectively, Stream International should:
- Form a project team: Assemble a cross-functional team to oversee the implementation of the ABM system.
- Develop a detailed implementation plan: Outline the specific steps involved in implementing the system, including data collection, cost driver identification, cost allocation, performance measurement, and management control.
- Pilot test the system: Implement the system in a pilot project to test its effectiveness and identify any challenges.
- Communicate with employees: Communicate the benefits of the ABM system to employees and address any concerns.
- Monitor and evaluate the system: Regularly monitor the performance of the ABM system and make adjustments as needed.
By following these steps, Stream International can successfully implement an Activity-Based Management system that will improve its financial performance, enhance profitability, and drive strategic decision-making.
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Case Description
Stream International's Crawfordsville, Indiana facilities undertake the design and implementation of an activity-based costing project. After analyzing the costs assigned to 161 work activities, Crawfordsville managers present five proposals for change based on ABM results, then meet to decide which to implement.
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