ABB: The ABACUS System Assignment

Q1. What is the role of ABACUS in ABB? What aspects of the system do you like and what would you like to change? ABACUS is a simple but very effective internal financial controlling system developed by ABB that helped the company to make individual performance transparent. The role of ABACUS can be defined as: Fast and secure transmission and processing of data Decentralized collection and verification of data High level of flexibility for report generation and their immediate availability of reports

The aspects of the system which I liked are: ABACUS is capable of providing information on real time basis. ABACUS has given the company formed from a merger, a homogeneous system that is easy to understand. It helps in decision making and effective resource allocation. Helps in monitoring performance. It forces technical oriented people to think in profit and loss terms.

The aspects of the system which can be changed are: The systems focus is internal information without taken into account external factors. The focus on financial information is on the quantitative aspects of the business. The qualitative aspects (like employee training, learning & development, employee motivation) seem to be ignored. As it is internally focused there is no competitor information available.

Q2 Do you agree with the accounting and control policies used at ABB including Full Cost calculation of operating profits Inclusion of calculated interest Replacement value accounting

The accounting policies followed by ABB are standardized for meaningful comparison of different cost centers. However, what has been seen is that the individual ABB companies have different product market mix. As a result, having standardized accounting policies may not be able to reflect the true performance. Similarly, standardization of currency to dollars may cause currency fluctuations to distort the information presented. The Profit measure which seems to include all costs (ex. 2% of corporate R&D) allocating all overheads means that the allocation basis makes sense as ABB uses the ABC method to account for this. Profit centers can evaluate how much corporate services are helping them and if the costs are worth their services. This conscious evaluation of corporate costs also motivates corporate services to be efficient and to serve the line people. Managers would consider the management of their assets even if they are called profit centers as the corporate costs would include the cost of capital. The replacement costs would eliminate feeling of the profit centre managers to use obsolete assets to increase ROCE. It is possible that the managers would turn risk averse and conservative as they may not want to introduce new products if the risk associated with them is too high. The use of market interest rate increases the attractiveness of risky projects and the company may reject projects that are profitable. The short term focus of control system may result in managers non willingness in taking early losses to get a new customer. Lowering prices would not be considered by managers even if business demands it. Full cost requires estimates that are very unlikely to be accurate to the 1% level, a number in the range of profit margin the company is using. This may force manager to reject profitable business. At the same time Full cost is a very restrictive policy and severely restricts the freedom that an independent manager would have.