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which it was, but for the inventory valuation function within financial reporting rather than as a
support tool for management decision making. They were focused on the dominant part of the
accounting profession, financial reporting. Large firms attempted to replace parts of their legacy
financial systems with ABC modules with disastrous results. Rather than poor application, ABC as an
overall business tool carried the brunt of the blame.
A large abrasives firm with a complex mix of offerings, from standard sandpaper to high-tech
grinding wheels, that installed an ABC system provides a telling example of this. The system as
designed had over 6,000 activity cost pools and almost that many drivers. Costs reports for product
managers ran multiple pages showing the allocations from the many pools, with drivers abbreviated to
three letters, most undecipherable. The consultants who designed and installed the system were long
gone, and the reports were so complex that even the internal personnel who worked on the project
could not explain them. As a result, the reports were ignored—managers favored no information (or
gut assumptions) over these reports. Over time, processes changed and new technology was
introduced, but no one was experienced enough to adapt the system. As a result, the system became
obsolete. Within three years, the large, multimillion-dollar project was scrapped. Any further mention
of ABC systems within the company was deemed “career limiting.”
At the same time, this firm was rebuilding its distribution channel infrastructure, moving away from
a predominantly direct method where its own salespeople sold all products in the mix to all customers
to a more indirect system. The top 100 key accounts were identified and assigned key account
managers, while the rest were designated for placement with outside third-party distributors and valueadded
resellers (VARs). An analysis showed that this change would save four to five percentage
points on the sales and marketing line of the financial report. Nine months into this, the targeted cost
had actually increased.
A consultant was brought in to analyze the situation and make recommendations for restructuring
the distribution system. The first step was a detailed mapping of the indirect channel architecture and
the resources that supported it. On a sampling basis, the consultant identified and studied both the
distributor and VAR relationships. The results were interesting.
First, the indirect channel third parties could be put into three classifications, or buckets. There were
those that were called one-stop shops. They sold everything from toilet paper to sandpaper. The
second sold only abrasives, carried the full line from low end to high end, and had extensive contacts
within the manufacturing sector. The third group were more focused players who had deep technical
knowledge of the high-end segment of the abrasives market. They often worked as consultants with
their manufacturing clients recommending which abrasive technologies would fit their needs.
In addition, the resources dedicated to these three buckets followed a Noah‟s Ark approach. When
approaching a new client or trying to expand the mix for an existing client, it was typical for a
technical field salesperson from the company to accompany the indirect partner. In many instances,
this two-by-two approach led to redundant resources focused on the client and additional non-valueadded
costs. Not only was the company paying the distributor its commission, but it was also incurring
the cost for the salesperson. But this did not happen in all instances. Often, the full-line distributor
from the second bucket did not have the expertise to present the higher-end technologies and needed
the technical support. Different circumstances dictated different approaches.
The final report from the consultant recommended the following five steps: