They say there are only three places in the universe with ‘Outer’ in their name – Outer Space, Outer Mongolia and the Outer Hebrides, which is where my wife and I run a guesthouse at a life stage that others laughingly call ‘semi-retirement’. Believe me it’s not.
In our first season of trading last year, we were anxious to build up working capital and pay for some extra luxuries, so we took in all comers.
That quickly resulted in a full diary that kept us busy from dawn till dusk (and it is light here until 10.30 at night during the summer).
One of my responsibilities is laundry and it took me a good couple of hours every afternoon to iron the bed linen with most of that time spent battling to fill the water reservoir of a standard domestic steam iron through an annoying small hole with my wife shouting that if I spilt any more water over the iron I would surely electrocute myself. Only Radio Paradise banging out in the background kept me sane, but clearly we needed to do something.
A quick analysis showed that guests that stayed for single nights accounted for nearly 40% of booking but only 18% of revenue – and of course, most of my afternoon ironing. So armed with this rudimentary piece of activity based analysis, we had an off-site meeting to review strategy, (actually a quick chat over a beer in the nearest hotel eight miles down on the coast), to agree some actions that would change the make-up of our customer base, namely:
- Increase the standard tariff to deter single night stays, but offer generous discounts for stays of two nights and more.
- Configure our on-line booking system so that it only offers single night stays when solitary dates remain in the calendar sandwiched between other multi-night bookings.
With guest bookings well under way for the coming season, which kicks off like clockwork at Easter, I can report that although we have way more bookings than at this time last year, to date we do not have any single night stays. In fact since we changed strategy, the number of bookings is no longer a KPI for us; replaced by the average length of stay-over, which as has increased from 2.1 to 3.2 nights, and the number of booked, which are also way up on last year.
In addition to tweeking the commercial aspects of our modest little business, we’ve also changed some of the core processes by invested in a large capacity wash tub and a new iron for me. Actually, it’s a high-end ‘steam generator’ with a water reservoir sufficient for doing a complete washer load, which means I can get through my much reduced pile of ironing in no time at all. If we were accounting for our labor time, I guess the investment in the iron is going to pay for itself within the year and the cost of the activity ‘ironing’ is going to be substantially reduced.
And what’s the moral of the story? It shows that no matter how hard you try, you just cannot escape activity based costing – and even in this simple form it can bring profound benefits.
Since the first headlong rush of enthusiasm for ABC back in the 1980’s when proponents built over-complex models that were laborious to populate and tiresome to run, people have been shying away from it and trying to do cost and profitability reporting without the essential ingredient of the ‘activity’.
Well it just don’t work as without capturing the underlying causality that subsets of customers (such as our single night guests) consume activities (such as my ironing) and costs in different ways, the results will always be wrong. What’s more you will never gain the insight in what actions to take to improve profitability.
The modelling capabilities and data integration tools of solutions such as SAP Profitability and Cost Management that can be automatically populated directly from the SAP Business Suite, mean that it has never been easier to put ‘activities’ back at the heart of cost and profitability reporting where they rightly belong.