Capturing Process Knowledge and Measuring Systems' Cost Savings Through Business Activity Modeling and Activity‐Based Costing

• Published date: 01 October 2015
• Author: John Pendley,William Flather,James Baker,Richard Orwig
• Date: 01 October 2015
• DOI: http://doi.org/10.1002/kpm.1493

■Research Article

Capturing Process Knowledge and

Measuring Systems’Cost Savings

Through Business Activity Modeling

and Activity-Based Costing

Richard Orwig

1

*, John Pendley

2

, James Baker

3

and William Flather

3

1

Department of Management, Susquehanna University, Selinsgrove, Pennsylvania, USA

2

Department of Accounting, Susquehanna University, Selinsgrove, Pennsylvania, USA

3

Information Technologies Group, SEDA-COG, Lewisburg, Pennsylvania, USA

The motivation for business change is to either improve the quality of products or services or decrease the costs of

current operations that create those products or services. Because implementation of an information system causes

business change, that implementation should demonstrate some explicit value in improvement of quality or

decreased costs (or both). Quantifying the value provides justification for information systems implementation.

Through a case study of four real-world examples, this paper shows how time-based activity costing determines costs

associated with a set of business activities prior to a business change and then again after the implemented system.

Four separate municipal organizations’business activity models were built prior to implementation of web-based

electronic payment systems and then after the implementation. Activity-based costing analysis demonstrated benefits

of reduced costs in a range from 15% to 28% in three cases. However, costs actually increased by 7% in a fourth case.

In this fourth case, quality improvements were difficult to quantify, but workers felt that the increased costs were

worth the changes in business activities. Copyright © 2015 John Wiley & Sons, Ltd.

INTRODUCTION

Dynamic business environments and competitive

forces pressure businesses to focus on possible

changes that improve their positions in that envi-

ronment. We interpret change to imply altering the

business activities currently existing within an orga-

nization to make the output of those activities better

or streamlining the activities to reduce operating

costs (or both). Better output might expand market

size or increase market share. This increases reve-

nue. Reducing costs make operations more efficient

(Total Quality Management, Business Process Im-

provement, etc.) and make the organization more

competitive. Thus, to exist in a dynamic and com-

petitive business environment, organizations must

constantly plan to change with an objective to im-

prove market size or share as well as keep costs of

operations as low as possible.

In order for a business to justify change, it must

understand its current set of business activities in a

manner that can be used to demonstrate how a

planned change in those activities will benefit that

business. An As-Is model of current business

activities can be compared with a To-Be model of

post-change activities to estimate the degree to

which output will be improved or costs reduced.

Change does not always involve technology. How-

ever, more and more often, information systems

technology is a critical aspect of change manage-

ment. Thus, there is a need for methods to help busi-

ness leaders analyze As-Is and To-Be models.

Analysis of those models should help determine

the benefits of change in order to justify them on a

product or service improvement and/or cost-

reduction basis. Comparing the total benefits or

total costs of a set of As-Is activities with the To-Be

activities should determine the ultimate benefitof

change to that organization. This could be consid-

ered the return on investment of a project that

implements a change from the current set of busi-

ness activities to the new set of activities.

*Correspondence to: Richard Orwig, Susquehanna University,

Selinsgrove, PA, USA.

E-mail: orwig@susqu.edu

Knowledge and Process Management

Volume 22 Number 4 pp 297–304 (2015)

Published online in Wiley Online Library

(www.wileyonlinelibrary.com) DOI: 10.1002/kpm.1493

Copyright © 2015 John Wiley & Sons, Ltd.