A friend who is an engineer just told me that his company has decided to implement activity-based costing across all departments—including engineering. I didn't know whether to congratulate him or send him a sympathy card.
In case you're unfamiliar with the concept, activity-based costing (ABC) is an accounting method whereby 100 percent of labor hours are assigned to a particular activity. Call it "billable hours" for the non-legal community. The idea, of course, is to eliminate those bloated, non-specific "overhead" or "special projects" categories associated with traditional accounting methods, and to be able to identify which projects and activities are truly profitable, and which ones are not.
Sounds great, at least in theory. But having had some experience in this area in my first job as an industrial engineer for a major HMO, I can tell you that precisely because it promises better accuracy in the numbers, activity-based costing can lead to a false sense of security that the numbers are accurate.
Looking to create higher efficiency at this HMO, we asked employees working in the doctors' benefits department to keep track of every minute of their time for two weeks.
When we met with them afterward, we confirmed one thing that we did expect, which was that people spent a lot of time on activities that were not in their job descriptions. In some cases the work was essential to accomplishing their overall goals, in other cases it was simply inappropriate ("called mother," for example.). But we also discovered something that we did not expect, which was that people could not account for their time completely. Being the honest Midwesterners that they were, they felt compelled to tell us they "made up" for the time by padding out the time for the activities they could account for.
The upshot? We realized that all the answers weren't embedded within the numbers—that in fact they were just a starting point for us to begin a whole set of discussions about the organization of the department, its mission, workload issues, etc.
I suspect that my friend's company is going to run into many of the same issues. And they should. If the bean counters are smart, they will use the numbers not as some sort of definitive gauge of profitability versus non-profitability, but to gain insight into the nature of the work itself.
That's probably going be a pain in the you-know-what because my friend is going to be questioned on the fact that he spent an hour surfing the net or reading this magazine. But hopefully if the more senior management really understands what it is engineers do and what it takes to do it, the better appreciation they will have for what the true costs are.
Oops, gotta run. I just spent an hour on this activity and any more time will impact its profitability!