NJB Vol. 67 , No.

1 (Spring 2018) Customer Profitability Analysis Using Time-Driven Activity-Based Costing

Customer Profitability
Analysis Using Time-
Driven Activity-
Based Costing: Three
Interventionist Case
Studies
Janne Järvinen and Kim Väätäjä

Acknowledgements :
Data of this study was gathered during a project funded by TEKES. The authors also thank Dr. Tiina
Henttu-Aho for her constructive comments.

Abstract
Time-driven activity-based costing (TDABC) is a potential solution for customer profitability analysis
(CPA), especially in industries with high overhead costs and a high number of logistical and/or sales
transactions. Accordingly, this study draws on the typology provided by Lind and Strömsten (2006) to
investigate how companies with different customer interfaces make use of time-driven activity-based
costing in their customer profitability analyses. We build our investigation primarily on the interventionist
method and participant observation. Our findings highlight the potential benefit for firms when modern
costing connects with customer-focused operations. However, challenges include a lack of process time
information as well as functioning information systems and the ability to develop strong service delivery
capabilities. We contribute to the scarce knowledge on the implementation and use of sophisticated
costing methods in SMEs from a customer-oriented perspective.

Key words:
Time-driven activity-based costing, customer profitability analysis, customer interface

Janne Järvinen is a PhD, Professor University of Oulu, Oulu Business School

Kim Väätäjä is a MSc. (Econ.&Bus.Adm.), CEO, weVision Oy

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NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

1. Introduction ers are transformed into an equivalent time

Activity-based costing (ABC) systems were measure, a standard process time (Gervais et
originally developed to challenge the use al., 2010).
of traditional absorption costing methods, Thus, the emergence of TDABC intro-
which rely on simplistic product inventory duces a partially simplified ABC model that
valuation calculations as a basis for profit- produces detailed reports the breakdown of
ability analysis. The emphasis of early ABC profitability per single customer, and report-
studies was markedly on product costing, ing the cost of excess capacity at the customer
which is apparent in the way it was contrasted level. While the origins of ABC were mostly
with earlier methods. For instance, Johnson production-related (Jones and Dugdale,
and Kaplan’s (1987) account of the history of 2002), TDABC reflects a ‘post-productionist’
managerial accounting indicates clearly that response to delivering an increasingly wide
the demand for modern costing arose from and customised range of products and ser-
the growing importance of manufacturing vices to a diverse clientele. Kaplan and Ander-
overheads and increasing product diversity. son (2004) argue that implementing TDABC
Likewise, early empirical studies such as in such surroundings is relatively simple and
Shields (1995) found ABC useful, especially cost efficient, since only two parameters are
in costing products and production-related needed per resource: the unit cost of resource
processes. However, later studies such as consumption and the time needed to perform
Al-Omiri and Drury (2007) have presented an activity. However, given the high number
a broader view concerning the purposes of of products, services and processes, such a
activity-based methods. calculation requires strong information pro-
Time-driven activity-based costing cessing capabilities (Väätäjä et al., 2013).
(TDABC) systems have been motivated by In addition to product profitability anal-
arguments that, despite ABC systems having yses, ABC was used from very early on to
become common in especially industrial en- provide insights for customer profitability
terprises, the method has some drawbacks. analysis (CPA), which involves identifying the
First, due to the complexity of the activities revenues, costs and profitability of an indi-
performed within organisations, the imple- vidual customer or a customer group (Noone
mentation of ABC may take too long (Kaplan and Griffin 1997). Also, the reporting of ex-
and Anderson, 2004). Second, when activities cess capacity re-emerged into management
that contain more than one subtask with dif- accounting practices during the rise of ABC
ferent cost drivers are intensified, ignoring systems (Cooper and Kaplan, 1992), especially
the increasing complexity may result in the in relation to activity-based management
misallocation of the costs. Third, since the (Gosselin, 1997). In TDABC models, the link
ABC system needs to be updated regularly, between activities and resource consumption
it becomes too costly to re-interview and is reflected in time equations that are formed
re-survey people engaged in the activities. according to process models. This way,
Proponents of TDABC argue that it removes TDABC simplifies cost driver measurement by
time-consuming and costly interviews and adopting a standard costing-type approach,
surveys, which have been a major barrier to yet it allows accounting for highly individual-
the implementation of traditional ABC sys- ised processes and transactions and customer
tems, as well as allowing cost driver rates to costing at an individual customer level (Ever-
be calculated based on the practical capacity aert and Bruggeman, 2007).
of the resources supplied (Kaplan and Ander- However, few studies have discussed why
son, 2007b). In practice, the activity cost driv- and in what circumstances companies should

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NJB Vol. 67 , No. 1 (Spring 2018) Customer Profitability Analysis Using Time-Driven Activity-Based Costing

be calculating and reporting customer prof- edge of how its adoption is enabled by new
itability and whether this should be done accounting technologies. In contrast to exist-
at the customer group level or at the level ing literature, we found that even when the
of an individual customer. Relating to the customer interface is transactional and the
prior issue, in their seminal work, Lind and customer’s share of total revenue is small,
Strömsten (2006) study different customer the company may benefit from reporting the
relationships categorised by technical and or- cost of individual customers. We explain this
ganisational customer interface. Their results by the disaggregated nature of TDABC cost
suggest that formal CPA techniques, whether allocations and the potential of advanced
focusing on the profitability of an individual information technologies to support such
customer or a customer segment, are usually extremely detailed calculations. Accordingly,
associated with a low degree of technical in- the central contribution of the paper is to
terconnectedness with customers. In transac- show the potential of TDABC in support of
tional customer relationships, each customer both individual customer- and customer seg-
makes a minor contribution to total revenue, ment-based profitability analyses.
and customers are monitored as a group or a The remainder of this paper is structured
customer segment. In facilitative customer re- as follows. Section 2 presents the relevant
lationships, products are rather standardised prior literature for this study, and Section 3
and rarely involve long-term investments, describes the data and the method we em-
but are commercially significant enough to ployed. The empirical findings are presented
monitor on a single customer basis (Lind and in Section 4. Finally, concluding remarks are
Strömsten, 2006). Likewise, while the propo- presented in Section 5.
nents of reporting the cost of excess capacity
have argued that such practice provides use- 2. Literature review
ful information for decision-makers (Cooper In this section, we first review the customer
and Kaplan, 1992), research on why this is cost analysis, specifically focusing on TDABC.
the case has been scarce. However, Buchheit Finally, before summing up and synthesising
(2003) argues that explicit capacity reporting the literature, we address the role of informa-
can improve decision-making, but is cautious tion systems in implementing sophisticated
about the use of such reports when demand costing systems.
is increasing, even if reporting formats are
detailed. Customer profitability analysis (CPA)
Based on the setting outlined above, this Generally, companies that understand which
study examines the relationship between cus- customers are more profitable and which
tomer profitability analysis and sophisticated ones are producing losses are equipped
costing methods; a topic largely overlooked with valuable information that is necessary
in previous literature. The study is also moti- to increase their performance. Authors such
vated by the fact that while methods such as as Cooper and Kaplan (1998) also suggest
TDABC enable CPA both at the level of an in- that understanding how current customer
dividual customer and in customer segments, relationships differ in terms of profitability
we still have limited information about under enables managers to make better managerial
what circumstances companies will adopt decisions. Likewise, Van Raaij (2005) and Van
customer profitability analyses and find them Raaij et al. (2003) discuss how the outcomes
informative. of such calculations can help planners make
Our paper adds to the scarce accounting better decisions, to increase the magnitude of
literature on CPA by extending our knowl- cash flows from customers, and/or reduce the

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NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

volatility and vulnerability of such cash flows. tinuous updating of cost drivers will prove
According to Lind and Strömsten (2006), expensive and time-consuming (Kaplan and
CPA has four principle areas: individual cus- Andersson, 2004; 2007). Likewise, Allain and
tomer profitability analysis, customer group Gervais (2014) study TDABC in an insurance
profitability analysis, customer lifetime value organisation and conclude that an accept-
analysis and customer value analysis. Here, able cost-benefit trade-off was very difficult
the first two, customer and customer group to argue for within their case organisation.
profitability analyses, rely most on cost ac- Thus it seems that a cost-benefit argument
counting practices. In addition, Guilding and lies at the heart of the choice about when to
McManus (2002) as well as McManus and account for the profitability of an individual
Guilding (2008) recognise various customer customer. For instance, if the number of com-
profitability concepts, both historically and pany’s transactions is high, it will probably be
future-oriented ones, where the former rely cost efficient to aggregate several activities to
on systematic, often cost accounting-based a single cost driver with relatively little loss
profitability analyses. Lind and Strömsten’s of information. In TDABC, sophistication is
(2006) analysis departs from the viewpoint achieved by time equations, not the number
that the nature of CPA is determined by rela- of cost drivers as such (Eveaert et al., 2008;
tional and technical interfaces that the firm Gervais et al., 2010), which makes updating
has with its customers. When selling a stand- the model more cost efficient, assuming there
ardised product with multiple transactions, is available data from information systems
the firm is likely to benefit from customer (Wouters and Stecher, 2017).
segment profitability analysis. If there are In information-intensive environments,
only a relatively small number of deals which TDABC can be used to calculate the profit-
make up the majority of the firm’s business, ability of individual transactions and sales
the firm will benefit from calculating the events, and analyse the information so
profitability of an individual customer. obtained according to services, processes
Activity-based costing systems have been and customers as well as customer groups
advocated for use in both customer-oriented (Balakrishnan et al., 2012b). Once estab-
and customer segment-oriented CPA. The lished, updating the model will generally be
former approach seeks to identify the poten- less costly than it would be, especially in the
tial small group of customers who demand case of those ‘traditional’ ABC models. This
a disproportionate amount of ‘free’ support is because the standard time to perform an
resources such as after-sales service, custom- activity (just like the cost driver in an ABC
ised products or shipping, and credit terms model that accounts for capacity utilisation)
and order small volume and/or low margin can be updated individually without the need
products (Anderson et al., 2007). The latter to update the entire model. This implies that
approach highlights the importance of un- the cost-benefit ratio of TDABC may be more
derstanding customer profitability in man- suitable to situations where capacity utilisa-
aging the customer portfolio (Dalci et al., tion, processes and cost structure changes
2010) and of keeping a small number of key (Everaert and Bruggeman 2007, Balakrishnan
customers a part of that portfolio, especially et al., 2012b.). Accordingly, this implies that
in rapidly evolving markets (see e.g. Tai et al., sophisticated information technology allows
2015). for disaggregated customer cost modelling
However, obtaining accurate information where the aggregate reports on customer
about customer profitability necessitates the groups or segments can be prepared at virtu-
use of an appropriate costing system. Con- ally no extra cost.

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NJB Vol. 67 , No. 1 (Spring 2018) Customer Profitability Analysis Using Time-Driven Activity-Based Costing

Information systems as enablers of Specifically, the existence of an ERP system

disaggregated costing systems is seen to lower the costs of running a cost
IT systems are typically at the core of the de- accounting system via e.g. single data entry
velopment of sophisticated costing systems, (Chang, 2006) and efficient data collection
as significant amounts of cost driver data processes (Rom and Rohde, 2007). In fact,
has to be accessed at low cost. For instance, Kanellou and Spathis (2013) suggest that ERPs
the original arguments by Kaplan and An- lower the costs of accounting in many ways,
derson (2007a; 2007b) drew heavily on the e.g. faster reporting cycles but not necessarily
possibilities of ERP systems providing trans- the number of accounting personnel. Related
action-based information on business pro- to this, Hyvönen et al. (2006; 2008) illustrate
cesses. Likewise, Somapa et al. (2012) see the how the paper manufacturing industry’s SAP
lack of transaction data as the most impor- paved the way for corporation-wide ABC im-
tant obstacle for costing system development plementation. Regarding TDABC, Wouters and
in SMEs. In mid-size and large companies, Stecher (2017) view costing system develop-
Al-Omiry and Drury (2007) argue that the re- ment as a process of data discovery more than
duced ICT costs in recent years have resulted anything else. They stress that IT infrastructure
in its widespread availability and adoption and the sources for costing data are often
by all types of companies. Thus, the quality of heterogeneous; data that is somehow useful
information technology may no longer be a is dispersed across different information sys-
barrier to implementing more sophisticated tems that have typically been developed for
costing systems. In fact, it can be argued that other purposes. Likewise, they illustrate how
the development of management accounting data collection can be time consuming, as
methods has originated from the utilisation relevant data could potentially be ‘anywhere’
of advances in information technology. Ac- outside the accounting department.
cordingly, Dechow et al. (2006) illustrate the To sum up, companies with transactional
development of specific information system customer relationships appear to benefit from
technologies, such as data warehousing and customer profitability analyses. Such analyses
analytical tools, which have provided new require sophisticated cost accounting tools,
opportunities for sophisticated multi-dimen- but gathering data can be costly and time-con-
sional financial and non-financial analysis. suming. However, prior literature suggests
Early on, access to information about activ- that there are contradictory ideas about the
ity and process data was identified as a major role of accounting for such reporting. Gener-
enabler or hindrance of activity-based costing ally, the financial significance of individual
implementation (see e.g. Anderson, 1995 in customer relationships is weighed against the
the automotive industry). In SMEs, the survey cost of acquiring customer profitability data
by Jänkälä and Silvola (2012) indicated a wide to determine whether CPA reporting should be
interest in activity-based methods in SMEs but at the customer, customer group or segment
highlighted the fact that sophisticated costing level. However, some companies have been
methods are a long-term investment for SMEs able to utilise the data in their ERP systems
that may not lead to positive financial conse- and have implemented TDABC systems to pro-
quences in the short run. Regarding CPA and duce the cost information for their CPA. This
information systems, Krumwiede and Charles implies that cost information is collected at a
(2014) find that ABC impacts performance disaggregated transactional level, which can
for companies using low price strategies, be then summed up to produce CPA for both
especially when ABC is used together with individual customers and customer segments
high-quality information systems. simultaneously. Hence, we argue that we lack

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NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

a deeper understanding about the role of so- ventionist position, for excessive emphasis
phisticated cost accounting in how companies on the practical problem-solving perspective.
make use of CPA in information-intensive They find several potentially coexisting forms
environments. Accordingly, in this paper, the of relevance and speculate on the potentially
research question we specifically examine is: multi-layered nature of the ‘battlefield’ of
RQ: How companies with different cus- relevance perspectives (Suomala et al., 2010),
tomer relationships make use of time-driven both in terms of value and legitimacy.
activity-based costing in their customer prof- Relating to the above-mentioned points
itability analyses. on interventionism, the idea is to pursue the
To answer this question, we investigate drawing of theoretical conclusions based
three case studies with companies that have on empirical work. Thus, we first attempt to
a variety of customer interfaces (Lind and locate interesting questions and data in the
Strömsten, 2006) and have implemented field by revealing items that are otherwise
TDABC systems; 1) a company with a transac- invisible to researchers or even the managers
tional customer interface (a bank); 2) a com- involved. Then, the interventionist approach
pany with a facilitative customer interface (a is used to examine theoretically motivated
packaging manufacturer); and 3) a company ideas, such as the organisational effects
that has a facilitative customer interface in of highly sophisticated cost information.
one market segment and a integrative cus- Since one of the authors was involved in the
tomer relationship in the other (a materials hands-on construction of the accounting
wholesale company). When addressing these systems while the other author had the view
aspects, we focus on how the nature of the of an outsider more, we argue that both emic
customer interface interacts with the design and etic perspectives were employed in this
of the profitability reporting system. case study (Lukka & Modell 2010), and we
believe that the key advantage of the inter-
3. Research method ventionist position in this study was that it
The interventionist research (IR) approach, allowed for the collection of a richer data set
which is used in this paper, allows for the about the rationale, design and use of costing
researcher’s active, participative cooperation models than many other methods.
with the actors in the field. Jönsson and Lukka Thus, the main data collection method in
(2007, p. 375) argue that the key advantage this study was participation, with Author 2
of IR is the potential to collect subtler and being active in the construction of the costing
more significant data than would be possible models. He was present at the three sites for a
through more traditional research methods. total of 31 days. A list of his activities can be
They also argue that IR approaches offer found in Appendix 1. The model construction
the researcher the opportunity to acquire process in all three companies followed a pat-
an emic (insider) understanding of what tern where the authors began by developing
is going on in the case organisation. IR has an understanding of the company’s business
attracted renewed interest as a methodol- (the strategy and business analysis phase).
ogy in accounting and management (Baard Then, the TDABC model was constructed (the
2010). While the aims of IR are on one level model development and validation phase).
pragmatic, i.e. ‘what works is good’, such re- Here, Performance Analyzer 5G software
search also aims at theoretical contribution. from Acorn Systems was used a practical tool.
For instance, Rautiainen et al. (2016) have Finally, the results were reported and dis-
criticised the constructionist tradition, which cussed, and recommendations for improving
could be characterised as an extreme inter- profitability were made (the value identifi-

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NJB Vol. 67 , No. 1 (Spring 2018) Customer Profitability Analysis Using Time-Driven Activity-Based Costing

Figure 1: Phases of TDABC model development

cation and capture phase). These phases are consensus on time measurement and to pro-
illustrated in Figure 1. vide a feeling of commitment (see Hozee and
During the participation, Author 2 made Bruggeman, 2010). This also made it possible
extensive notes that were used by both to use accounting concepts in a way that con-
authors ex-post during the article writing nected with the informant’s prior experiences
phase. Because of the participation, the au- (Campanele et al., 2014).
thors had also access to all costing systems
and the related project documentation. In 4. Constructing the TDABC models
order to assess the service delivery process, Originally, TDABC was proposed as a solution
participants were interviewed in the case for activity-based costing users in cases where
companies about their tasks, time consumed the model had become too cumbersome to
in processes, and the things that participants update, and gathering the cost driver infor-
assumed to influence the time spent. Mostly, mation would prove too costly, especially
the interviews were not recorded, but they if the purpose was to enable the cost calcu-
were used as a basis for developing the pro- lation of disaggregated, transaction-based
cess models and times. The role of Author activities. Departing from a cost-benefit view-
1 was also to provide a more distanced, out- point, Kaplan and Anderson (2007b) suggest
sider view on cost system development, in that model construction should be started
order to counter the potential bias arising from what are viewed as potentially the cost-
from very close involvement with the case liest services, and to restrain from gathering
companies. However, Author 1 did conduct a information from other sources than existing
group interview with senior management in IT systems. For cost efficacy, it was deemed
each of the three companies. The group inter- necessary to construct a tool that could pre-
views were conducted after obtaining results dict whether the TDABC model could be feasi-
from the new costing system and focusing on bly implemented at low cost with reasonable
the managerial benefits of TDABC cost infor- accuracy.
mation. These interviews were recorded and
transcribed verbatim. After visualising the Transactional customer relationships –
order delivery processes, they were discussed a bank subsidiary
with company representatives to verify their The company selected for this case study is
validity. This way, we intended to develop a a commercial bank operating in the Nordic

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NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

Figure 2. Credit decision

department’s TDABC model

countries. Providing credit, especially leasing time-driven activity-based costing could

agreements, has the characteristics of a trans- provide. The business controller of the bank
actional customer relationship (Lind and took responsibility for leading the project
Strömsten, 2006). The relationship consists internally and working externally with one
of highly standardised products which are of the co-authors. He cited a lack of transpar-
sold to end customers via different delivery ency, especially with regard to process-based
channels, such as car dealers and copying information in ABC cost allocations, as one of
machine vendors. The bank is generally not the major reasons for taking on this project.
in close contact with the end customers, but The company was lacking information about
has access to their credit ratings and financial how credit applications were received (e.g. by
histories. phone or by extranet), and how such differ-
By co-working with the business con- ences in customer processes were reflected in
troller we identified one department, Credit costs. The aims of the TDABC project included
Decisions, to be modelled with time-driven accessing numerical information about dif-
activity-based costing methodology, in order ferences in customer processes, and trans-
to test the differences it would bring about to forming these to the average costs of different
their current activity-based costing system. types of credit applications.
McManus and Guilding (2002) predict that Since the credit department is part of a
the banking industry could benefit especially larger organisation, the first task was to de-
from customer segment profitability anal- termine the amount of total costs to be allo-
yses, although the temporal aspect of loans cated, i.e. which part of the managerial over-
can imply that customer lifetime profitability heads would be included. After determining
analyses would also be viable. As the case or- the capacity utilisation for each activity, a
ganisation had lengthy experience of using calculated cost per minute allowed the time-
traditional ABC accounting methodology for based allocation of costs to activities. The
cost allocations, a pilot study was conducted credit decision department’s TDABC model is
in spring 2012 to visualise the benefits that outlined in Figure 2.

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NJB Vol. 67 , No. 1 (Spring 2018) Customer Profitability Analysis Using Time-Driven Activity-Based Costing

Figure 3 Credit decision process

After this, a process model and corre- TDABC could capture variations in resource
sponding time equations were constructed, consumption inside the product groups as
which allowed activity costs to be allocated. well as individual products, and trace these
The credit decision process model is illus- to individual customers. The cost of a sin-
trated in Figure 3. Then the costs of individual gle customer could vary due to variances in
transactions were aggregated to cost objects the behaviour of partners, time-consuming
that included partner, delivery channel and properties of different delivery channels, and
product (and product category). (The min- capacity utilisation in different product lines.
utes have been altered so as not to reveal con- In particular, the analyses concerning how
fidential business information.) the resource consumption of the credit deci-
Interestingly, the main difference to the sion process differed by delivery channels was
traditional ABC model in this case was the deemed informative. Even though the cost
ability to drill down to the information about information could be obtained at the level
time cycles of individual processes. Thus, of an individual product or transaction, the
the TDABC model was able to pinpoint what business controller highlighted the relevance
caused the cost of the same product (e.g. a of analysing the profitability of customers.
certain type of credit or leasing agreement) to When asked about the future of cost allocat-
vary significantly by customer, depending on ing systems in the bank, he stated:
what delivery channel was used to reach that ‘We don’t know the answer yet, but somehow
particular customer, and what the handling the TDABC transaction-based “big data” has
procedure of the decision was (manual, auto- the potential to show us information that we
mated). Whereas the ABC model in place allo- haven’t seen before. We need partner- and
cated costs for product groups and reported customer-related profitability and process
the average cost per product group, the new information, because the daily decision-mak-

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NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

Figure 4. Packaging manufacturer’s multi-level cost object structure

Customer Category

Order Product

Production
Line item

ing is only rarely at the product level. We Facilitative customer relationships:

don’t think that should we go on with this a packaging manufacturer
product or not, we think how we can do better The packaging manufacturer was a fami-
business with this partner or customer.’ ly-owned company with 50 employees in the
One key lesson learnt from this case was that pilot site. The company operated a complex
it highlighted the difference of finding the in- manufacturing system with several produc-
put for time equations in the ERP systems ver- tion lines, offering a range of 1,200 different
sus the manual calculation of standard times products to ca. 350 industrial customers. In
spent per activity (and process step). This re- recent years, demand had declined and the
lates to standardising information gathering company was facing intense competition
in a production environment where various from overseas manufacturers. As a result,
units can be heterogeneous, and not every- net profits had turned to slight losses, which,
one’s local-level needs can automatically be alongside increasing product complexity,
taken into account (Gattiker and Goodhue, motivated the company’s attempts to identify
2004). Likewise, a viable tactic for the model unprofitable products and customers and to
developer is to decide on a reasonable level of examine the potential for a focusing strategy.
accuracy that is sought and concentrate on The TDABC model started out with
the big issues first. This way, we did not en- roughly 3,000 transactions (order lines), to
counter a significant ‘human factor’ problem which costs were allocated individually via
(see Allain and Gervais, 2014) in determining time equations. These were then aggregated
the time equations. to form the individual costs of the 1,500
In retrospect, many of the difficulties the orders and 1,200 products. Thus the aggre-
project experienced were determined in the gation conceives of each cost object such
first phase of the project by overemphasising as a product or a customer as having a ‘bill
the requirements of detailed process informa- of activities’ much like a ‘bill of materials’
tion and the disaggregation of calculations. (Balakrishnan et al., 2012a), which specifies
This is in line with Al-Omiri and Drury (2007), the number of transactions of each type of
who found that the financial sector is more activity and can be reported and visualised at
likely to adopt ABC, and that their costing various levels of aggregation. The multi-level
systems exhibit more cost pools and more dif- cost object structure that allows such aggre-
ferent types of cost drivers. Likewise, Nielsen gations is presented in Figure 4.
et al., (2000) emphasise empowerment and The resulting cost analysis, ‘whale curves’,
decentralisation in achieving customer focus, identified that the packaging manufacturer
which often comes into tension with a central- was heavily reliant on a handful of profitable
ised management accounting function. customers, most being at the break-even level

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Figure 5. Whale curve showing reliance on only a few customers

or producing losses. As ‘big losers’ were iden- tivities and benchmark these across produc-
tified, the packing manufacturer began to tion lines. Any differences in production lead
develop a game plan for developing the prof- times and their impact on profitability would
itability of the loss accounts, leaving open be monitored more closely.
the possibility of eliminating them if all else Relating to information technology,
failed. The reliance on a few customers gives TDABC modelling also highlighted the dif-
the whale curve in Figure 5 its shape. ferences in information recording across
In this case, the company was located in production sites. While in some production
Lind and Strömsten’s (2006) terms at the fa- sites the ERP data could easily be used to
cilitative customer interface, which allowed come up with time equations, at others the
for customer profitability analyses with persons responsible for the model construc-
financially important customers that neces- tion would have put considerable effort into
sitate the measurement of customer profita- producing comparable numbers, especially
bility individually. In such circumstances it is with regard to automated vs. labour-inten-
important to make these relationships profit- sive processes. Such increased complexity in
able annually because there is only relatively manufacturing environments has previously
little need to invest in the maintenance of been reported by Barros and Ferreira (2017).
long-term relationships. However, the company did eventually put
Among the immediate measures was the effort into harmonising the data recording
implementation of more customer-specific processes. This way, finding out how to access
pricing policies, minimum order sizes for cer- process time information in the production
tain products, and establishing service fees sites and ensuring that the time figures were
for introducing new product variants. These comparable amounted to what Wouters and
trade terms were embedded in customer Stecher (2017) call data discovery. In the long
groupings/classifications and were moni- run, data harmonisation is likely to improve
tored regularly. As long-term objectives, the the efficiency of information systems, but it
company set out to analyse its high cost ac- may be problematic if some organisational

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NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

Figure 6. Whale curve for customer profitability analysis (facilitative customer interface)

units have markedly different production the process and to provide and explanation
processes (Gattiker and Goodhue, 2004). to estimate how resources are deployed and
what the rate of capacity utilisation was for
Facilitative and integrative customer the customer processes, and ultimately, its
relationships: a wholesale company impact on customers’ cost-to-serve metrics.
Our third case is a distributor and fabricator Basically, the process-based time infor-
of metal products for the manufacturing in- mation was connected to information from
dustry. It provides a broad base of metals and the company’s ERP (general ledger, customer
metal services for machine and equipment and product masters, order line information)
construction and manufacturing industries. to allocate overhead costs per line item. The
Its production could be characterised as di- calculated resource consumption is then
verse in an SME context, as the total number aggregated and reported by various busi-
of customers was 1,500 while the number ness dimensions, which included individual
of different products and services was over orders, customers and products. Notably,
3,000. The service production includes value while the annual number of sales transac-
adding customisation, i.e. welding, cutting, tions exceeded 85,000, the individual costs
drilling, etc. to meet customer orders. In of each and every transaction was estimated
2012 the company employed more than 130 by the time equations. In line with Eveaert et
people. The existing profitability analyses in al. (2008), TDABC analysis was found to be es-
the company were based on variable costing pecially useful in analysing situations where
measures. different customers and customer groups
At the start, the TDABC project team set warranted separate sales approaches and had
out to leverage Acorn’s Performance Analyzer different seasonally-dependent sales. As Gyl-
5G software to build a set of process models ling et al. (2015) demonstrate, demand fluc-
to simulate daily activity at the company’s tuations, when compared with other factors,
two production sites. Then, the process mod- create challenges for profitability analyses
els were used to measure the time spent on that can potentially influence strategic deci-

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NJB Vol. 67 , No. 1 (Spring 2018) Customer Profitability Analysis Using Time-Driven Activity-Based Costing

sions. ing use of cost information to make better use

The resulting TDABC cost analysis found of the firm’s customer base. Suggested meas-
out that, in addition to the overcapacity ures included implementing minimum order
related to certain product lines of the inte- policies and/or tiered pricing to improve
grative customer interface, the company’s efficiency, and redesign of sales bonuses for
facilitative customer interface included some loss-making customer relationships and new
highly problematic and grossly unprofita- pricing policies.
ble cases. On the one hand, a small number Gervais et al. (2010) note that the main
of large customers were producing heavy managerial use of TDABC appears to be prof-
losses, while on the other hand, the company itability management, in spite of the meth-
seemed to be quite uncompetitive in deliv- od’s potential for analysing the cost of idle
ering small order quantities. The calculation capacity. However, for the materials whole-
indicated that approximately 25% of the facil- saler this seemed dependent on the nature
itative customers were unprofitable. Figure 6 of the customer relationship and the future
illustrates the whale curve, or a cumulative expectations regarding capacity utilisation.
profit graph of the facilitative customer base Given the recent decrease in sales it was esti-
(euro amounts have been altered so as not to mated that the company had an overcapacity
reveal confidential business information). of almost 20%, especially in the integrative
Likewise, regarding the customer profit- customer segment. The company decided
ability analyses, prior research has indicated that the costs of excess capacity would not
that different companies benefit from it dif- be allocated to the individual order/prod-
ferently (Cooper et al., 1992). For instance, uct/customer level, but left unallocated
Lind and Strömsten (2006) found that cus- and shown as a separate report. The excess
tomer profitability analysis was found to be capacity report is illustrated in Table 1 (the
a suitable technique in what they call facilita- numbers have been altered so as not to reveal
tive customer relationships, where products confidential business information).
are standardised and production facilities The reports highlighted how the inte-
are rarely adapted to a specific customer. This grative customer relationships, which were
was the bulk business of the wholesale com- served by the product line offering customi-
pany. sation services, proved to be one key source
Lately the customer interface had ex- of the company’s losses. This product line
panded significantly as the company was had high excess capacity and its customers
gradually building customer relationships consumed a higher-than-average share of
characterised by long-term investments. the company’s engineering and sales-related
However, as the product line investments overheads. As suggested by Buchheit (2003),
coincided with the general economic down- reporting the cost of excess capacity was
turn, excess capacity related to the integrative found to be particularly useful in a situation
customer relationships could not be avoided. where demand was expected to decline.
Thus, the company management debated
on whether to view customer profitability as 6. Synthesis
a short-term issue or whether the company This section discusses the findings of the
should engage in customer lifetime profita- three case studies in terms of how adopting
bility evaluations (see McManus and Guild- sophisticated costing systems such as TDABC
ing, 2002). This tension became evident in to support customer profitability analyses
debates concerning whether the case compa- is influenced by the nature of the customer
ny’s profitability could be improved by mak- interface. After that we summarise our ob-

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NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

Table 1. Reporting excess capacity in the materials wholesaler case (integrative customer relationship)
€1000 Capacity Amount Capacity Uti sation Unused Capacity Cost Tota Amount
Operations €9500 80% €2370 €11870
Production €2000 75% €667 €2667
Purchasing €300 80% €75 €375
Outside sales €2900 82% €637 €3537
Credit check €300 78% €85 €385
Office services €500 85% €88 €588
Receiving €800 70% €343 €1143
Picking €1750 88% €239 €1989
Loading €950 80% €238 €1188

servation on how qualities of underlying Thus, complexity was a main driver of cost ac-
ERP systems, alongside standardised, IT-sup- counting change (Barros and Ferreira, 2017).
ported processes enable cost-efficient cost As the packaging manufacturer was provid-
allocations. ing made-to-order products, the CPA turned
In our first case organisation, the bank out to be a rather classic case of overhead
subsidiary, the customer relationships were costs related to the complexity of operations.
markedly transactional. The bank already In cases where customer demands led to the
had an ABC system typical to the financial sec- introduction of new product variants that
tor, not unlike that which has been reported were produced in small batches, resource
by e.g. Billings and Capie (2004), which was consumption would rise disproportionately.
able to create reports on the costs of cus- Often, unforeseen changes in product de-
tomer groups and segments. Implementing sign, batch size and delivery requirements,
the TDABC system shifted the focus of prof- etc. would turn out to be the critical areas
itability analysis from customer segments to of CPA. In traditional costing as well as ABC
the individual customer level, although the approaches, the differences in resources re-
decisions related to the delivery channel and quired by different shipping arrangements
its degree of automation remained impor- would have led to a significant expansion
tant. The main driver of this seemed to be the of the model’s complexity (Kaplan and An-
dynamic environment (see Hoozée, 2013), i.e. derson 2004). Eventually the case company
allocation systems struggling to be cost effi- sought to implement a policy of actively
cient when the product mix is changing and trying to provide solutions from the existing
the firm’s customers are adopting new activ- product portfolio before engaging in costly
ities. Thus, our case study findings contrast customisation processes.
with McManus and Guilding’s (2002) in the Finally, the materials wholesaler case
sense that the focus of individual customer illustrates CPA in both facilitative and in-
profitability accounting was not related to tegrative customer relationships. In facil-
lifetime profitability analyses as such, but itative relationships, reporting individual
rather to customer choice of delivery channel. customer profitability was important for the
The second case organisation, the pack- case organisation, while reporting capacity
aging manufacturer, was characterised by utilisation was important in the integrative
facilitative customer relationships. There, relationship. In the facilitative customer in-
TDABC allowed the analysis of customer terface, customer profitability was mainly
profitability in circumstances where tailored driven by logistical complexity. This supports
products, special delivery arrangements and Somapa et al. (2012), who stress the inade-
customer specific pricing policies prevailed. quacy of traditional ABC models in capturing

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NJB Vol. 67 , No. 1 (Spring 2018) Customer Profitability Analysis Using Time-Driven Activity-Based Costing

the complexity of real-life logistics opera- evant information may be recorded in a firm’s
tions. Thus, instead of assuming a constant information systems. Thus, assessing the im-
cost per order shipped, it makes sense for the pact of losing customers, even unprofitable
shipper to recognise the cost differences for ones, requires great care. For instance, it may
full- vs. half-loaded trucks, overnight express not be easy to adjust capacity or reallocate
vs. commercial carrier, and so on. personnel resources to get more revenue. The
In integrative customer relationships, the toolkit for managing customer profitability
material wholesaler’s managerial attention ranges from measures to increase produc-
was drawn to capacity utilisation in conjunc- tion efficiency to pricing policies. The latter
tion with customer profitability analyses, is especially the case in business-to-business
which can be informative under declining markets where prices are negotiated individ-
demand (Buchheit, 2003). Here, a combina- ually (van Raaij et al., 2003; Holm et al., 2012).
tion of high investment in manufacturing Of course, the decision to abandon customers
capacity combined with mixed seasonal is a highly strategic one, as cost accounting
demand created a situation that was highly systems can only report the impact of a cus-
demanding for cost allocation, not unlike tomer on the firm’s overall profitability in a
the one illustrated by Gylling et al. (2015). given measurement period. Long-term ef-
Our interpretation is that this is related to the fects would require customer lifetime analy-
different objectives that the firm may have re- ses (McManus and Guilding, 2002; Lind and
garding customer profitability analyses (Lind Strömsten, 2006), which would require the
and Strömsten, 2006). In the case where the quantification of the temporal aspect relat-
maintenance of customer relationships re- ing to customer relationships.
quires long-term investment, it is important Regarding information system integra-
to understand how capacity-related costs can tion, the bank subsidiary’s credit decision
be attributed to particular clients. process model in particular illustrates the im-
As with Gervais et al. (2010), the main portance of being able to access information
managerial use of TDABC in our case studies that is already contained in the information
appeared to be profitability management, in system. By nature, transaction-based TDABC
spite of the method’s potential for analysing cost allocations are more detailed than ABC,
the cost of idle capacity and supporting lean which allocates activity costs to cost objects
management approaches (see also Kaplan by using non-volume cost drivers (see Figures
and Anderson, 2007b). Often, the TDABC 3 and 4 for examples of disaggregated process
method is used to draw up and analyse whale and cost object structures). This results in the
curves (Figures 5 and 6) with the intention of TDABC system being rather detailed. This
refocusing activities by reducing the number disaggregation was originally justified by the
of customers and products deemed to be un- heterogeneity of processes.
profitable and renegotiating the terms of sale Similarly, both the packaging manu-
with respect to order sizes, etc. Such aspects facturer and the materials wholesaler cases
of customer profitability analyses arise when revealed that the underlying quality of data
the reports focus on unprofitable customers was critical in keeping the cost of measure-
and the potential implications of giving up ment at a reasonable level. One key idea in
customer relationships. process modelling was to avoid elaborations,
Unprofitable customers are also the case which would mean that time measurements
where the quality and credibility of informa- would have to be done manually. This way,
tion inputs (process times, etc.) to the costing TDABC simplifies cost driver measurement by
model are most often challenged. Not all rel- adopting a standard costing approach, yet it

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NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

allows accounting for highly individualised of studying two aspects that relate to CPA,
processes and transactions (Everaert and namely the nature of customer relationships
Bruggeman 2007). Much of the work in get- and the information system interface. In
ting the time equations to work involved ac- terms of the latter, we have investigated the
cessing the ERP system and making sure the availability of standardised information in
data was relevant and comparable, amount- our case companies’ information systems,
ing to a process of data discovery (Wouters and how this influences the way sophisti-
and Stecher, 2017). cated costing systems can be put to use in
making decisions on the basis of customer
Conclusions profitability (Everaert and Bruggeman 2007;
This study departed from Lind and Ström- Gattiker and Goodhue, 2004; Wouters and
sten’s (2006) notions, according to which Stecher, 2017). Our first case, the bank sub-
the nature of a firm’s customer relationships sidiary case, benefited from the fact that
influence the way customer profitability anal- credit decision processes were easy to docu-
ysis (CPA) is carried out. The purpose of this ment in great detail. In some instances, how-
study was to investigate how TDABC models ever, information systems were not fully able
can be implemented in companies with dif- to gather information about the processes,
ferent customer relationships. Our research and problems not unlike the ones docu-
question was: how do companies with different mented by Allain and Gervais (2014) were
customer relationships make use of time-driven encountered. The main driver of this seemed
activity-based costing in their customer profit- to be the dynamic environment (see Hoozée,
ability analyses? Furthermore, as our study 2013), i.e. allocation systems struggling to be
progressed, we made observations as to how cost efficient when the product mix is chang-
the underlying ERP systems either facilitated ing and a firm’s transactional customers are
or hindered the cost allocation processes re- adopting new activities. This would have led
quired for CPA. to the use of simplified drivers and manual
To achieve these goals, we gathered data measurements, unless investments to renew
from three TDABC projects: a bank, a packag- information systems were implemented. As
ing manufacture and a materials wholesaler. our study ended, IT investments were un-
These were characterised by different cus- der review and the project team was able to
tomer interfaces: transactional, facilitative submit requirements for future information
and integrative. The role of one of the authors systems.
was to factually construct the models using The packaging manufacturer case illus-
Acorn software, while the other mainly ob- trated the problems of facilitative customer
served the process, analysed documents and relationships, where products were in-
interviewed informants. Thus, our position creasingly customised and operations were
was interventionist, which we argue, along tailored to customer needs. In such circum-
the lines of Lukka (2005), to be effective in il- stances, where sophisticated information
lustrating the inner structures and processes systems in place were not used properly and
of the object of research. We believe that the data entry errors were not corrected system-
IR approach allows us to connect our prior atically, a laborious manual intervention and
theoretical understanding on cost system maintenance of the cost model resulted. Here,
implementation to practitioner knowledge facilitative customer relationship complexity
on how to design and implement a TDABC was a main driver of cost accounting change
model. (Barros and Ferreira, 2017). As in Somapa et al.
Our findings depart from the viewpoint (2012), the case illustrates the inadequacy of

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NJB Vol. 67 , No. 1 (Spring 2018) Customer Profitability Analysis Using Time-Driven Activity-Based Costing

traditional ABC models in capturing the com- 2014; Wouters and Stecher, 2017), complexity
plexity of heterogeneous operations. and heterogeneity of processes (Barros and
The wholesaler case illustrates the di- Ferreira, 2017; Somapa et al., 2012) and atten-
lemma of creating customer profitability tion to capacity utilisation (Buchheit, 2003)
analyses when the bulk of the customers do are all issues to be taken into account when
business in facilitative relationships, but the designing a TDABC model for CPA purposes.
firm simultaneously invests in developing fu- All in all, our case findings emphasise
ture integrative customer relationships. The the need for firms to strengthen their man-
case study illustrates how a firm can seek ben- ufacturing and service delivery capabilities
efits from paying increased attention to cus- when making an investment to implement
tomer profitability (Krumwiede and Charles, sophisticated costing systems. A system such
2014) as well as the reporting of capacity utili- as TDABC is unlikely to result in improved
sation. The latter point particularly concerns performance by itself, but the firm must build
the situation where the expected growth of its capability to improve profitability by un-
the company is negative (Buchheit, 2003). derstanding its drivers. Likewise, if new infor-
Generally, our findings lend support to mation does not influence decision-making,
Krumwiede and Charles (2014), who found no benefits should be expected. Of course,
that firms benefit from activity-based costing, our analysis is limited to three costing mod-
especially in relation to customer-focused els in diverse industries. As the development
strategies. Our study supports this finding by of information systems is advancing rapidly
connecting to different customer interfaces and is linked to advances in technologies of
and a particular costing method (TDABC). manufacturing and service delivery, we won-
Thus, we contribute to the discussion about der if companies could eventually reap sig-
customer profitability (McManus and Guild- nificant benefits by combining sophisticated
ing, 2002; Holm et al., 2012) and time-driven costing systems with the deployment of both
activity-based costing (Dalci et al., 2010; Van functioning ERP solutions and advanced
Raaij et al., 2003) by connecting Lind and manufacturing practices. In addition, further
Strömsten’s (2006) notions of different cus- research is needed to clarify how software
tomer interfaces with profitability calcula- embeddedness and data availability and in-
tions. Furthermore, we illustrate how a lack formation integrity interact with long-term
of process information (Allain and Gervais, use of sophisticated costing systems.

43
NJB Vol. 67 , No. 1 (Spring 2018) Järvinen and Väätäjä

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Appendix 1. Participant days

A) STRATEGY
B) MODEL C) VALUE
AND TOTAL DAYS
COMPANY DATE DEVELOPMENT AND IDENTIFICATION
BUSINESS AT SITE
VALIDATION & CAPTURE
ANALYSIS
Case 1 5.6.2012 1 1
Case 1 12.9.2012 1 1
Case 1 10.10.2012 1 1
Case 1 11.10.2012 1 1
Case 1 12.10.2012 1 1
Case 1 3.12.2012 1 1
Case 1 4.12.2012 1 1
Case 1 5.3.2013 1 1
Case 1 6.3.2013 1 1
Case 2 6.6.2012 1 1
Case 2 17.9.2012 1 1
Case 2 31.10.2012 1 1
Case 2 1.11.2012 1 1
Case 2 2.11.2012 1 1
Case 2 7.11.2012 0,5 0,5
Case 2 8.11.2012 1 1
Case 2 9.11.2012 1 1
Case 2 21.11.2012 1 1
Case 2 22.11.2012 1 1
Case 2 7.4.2013 1 1
Case 2 8.4.2013 1 1
Case 3 7.11.2012 0,5 0,5
Case 3 29.5.2013 1 1
Case 3 30.5.2013 1 1
Case 3 31.5.2013 1 1
Case 3 19.6.2013 1 1
Case 3 13.8.2013 1 1
Case 3 14.8.2013 1 1
Case 3 24.9.2013 1 1
Case 3 25.9.2013 1 1
Case 3 26.9.2013 1 1
Total 7,5 14,5 8 30

47