There are so many ways to allocate costs and calculate operational profitability, including the use of standard costs gross profit, EVA and activity-based costing. It is not surprising that virtually every business in the world would claim that they are doing some sort of profit and cost analysis. Twenty years ago and more, it was a good excuse that due to lack of organizational data, the KISS (Keep It Simple Stupid) method was the way to go in calculating enterprise-wide profitability numbers. Given the explosion in enterprise data and the use of applications like SAP, Oracle and others, very few companies have the "lack of data" excuse any longer and if they do, calculating enterprise profitability is the least of their problems.

Our last blog discussed the merits of a holistic ABC model for analyzing your business. A holistic model provides more context, more actionability, it's easier to build, and easier to maintain. Given that most companies we've seen have traditional ABC models at best (many still use spreadsheets), it's important to note some of the additional capabilities of a holistic TDABC model and make some observations on what is possible.

The state of profitability and cost analysis in most complex businesses is rather alarming, given the amount of data that exists in most companies these days. You would think it easy to accurately calculate customer and product profitability for thousands, tens of thousands, and even millions of customers. But it's not. So complex companies, regardless of size, had to come up with what does work for them. Unfortunately, it's pretty limiting. Many of our clients' cost analysis includes scores of models (50+ in some cases) just to handle the complexity and scale of their business. One customer had over 500,000 products. The solution they purchased could only give them profitability for their top 1000 products. (Based on what? Revenue.) The other products were placed into product categories with hundreds of products each. We analyzed their least profitable category at the individual product level, and found fewer than 5 unprofitable products out of over 500. Here is just a sampling of the separate analyses that companies commonly perform: analysis for departments, functions (supply chain, HR, IT), cost type, operational dimensions (customer, product, channel, and segment).

In our last blog, we discussed companies' needs for greater transparency into what is driving cost and profit. The current economy has taken away the revenue lever and brought with it an urgent need to improve internal efficiencies. Given the situation many companies find themselves in, intelligent cost cutting must be done quickly.