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activity-based management (ABM)

Contributor(s): Matthew Haughn

Activity-based management (ABM) is a management strategy in which business processes are evaluated and adjusted for their cost efficiency using activity-based costing.

ABM is used to evaluate business processes. If a business process loses the company money, it is examined to see if its efficiency can be increased or if the process can be eliminated. While it is most common in the enterprise, ABM is also used in non-profits, schools, government and non-government organizations (NGOs) as well.

ABM can be strategic or operational. Strategic ABM concerns itself with whether a company’s planned direction is right for efficiency. Operational ABM concerns itself with how the company processes operate.

All costs associated with a business process are first assessed in AMB. The costs assessed might include staffing, equipment, materials and distribution overhead. Once an accurate picture of costs is created, ABM considers how each cost might be reduced. For example, considerations may include if a task could be completed efficiently with fewer workers or if materials could be acquired for a lower price. When applied well and judiciously, ABM can not only improve business efficiency but also make budgeting more accurate.

One danger associated with ABM is the possibility of eliminating expenditures that affect efficiency but where effects are not directly measurable. Improvements in worker conditions, for example, have a measurable cost but, less directly, a measurable increase in productivity. In ABM, such costs may be eliminated and sometimes result in unexpected reductions in overall efficiency.

This was last updated in September 2017

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