Activity-based management (ABM) is a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization.
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Accounting practices
Activity-based costing establishes relationships between overhead costs and activities so that overhead costs can be more precisely allocated to products, services, or customer segments. Activity-based management focuses on managing activities to reduce costs and improve customer value. Kaplan and Cooper divide ABM into operational and strategic:
Risks
A risk with ABM is that some activities have an implicit value, not necessarily reflected in a financial value added to any product. For instance, a particularly pleasant workplace can help attract and retain the best staff, but may not be identified as adding value in operational ABM. A customer that represents a loss based on committed activities, but that opens up leads in a new market, may be identified as a low value customer by a strategic ABM process.
Managers should interpret these values and use ABM as a "common, yet neutral, ground … this provides the basis for negotiation". ABM can give middle managers an understanding of costs to other teams to help them make decisions that benefit the whole organization, not just their activities' bottom line.