Summary

7M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y S P R I N G 2 0 0 8 , V O L . 9 , N O . 3

T he key purpose of the Bank of China’s strate-

gic plan is to generate, process, track, and

close its leads in the Chinese financial mar-

ket. As part of the plan, the bank aimed to

introduce an activity-based costing (ABC)

system across all of its regions in order to reduce costs

and increase management control. The implementation

failed, however, and the traditional costing system is

still employed. We investigated factors that blocked the

implementation of activity-based costing and manage-

ment (ABC/M) in one provisional bank branch, the

name and location of which are not disclosed for confi-

dentiality reasons.

Our interviews with 18 of the branch employees

revealed six factors that blocked the implementation of

ABC. These are:

◆ Lack of a clear business purpose about the

implementation,

◆ Lack of education about ABC,

◆ Poor ABC model design,

◆ Lack of participants,

◆ Individual and organizational resistance to change,

and

◆ Few outsourcers available.

Although some or all of these factors have been men-

tioned in previous studies, our work is new in terms of

its application to the bank sector in China, which allows

us to contribute to the knowledge of ABC in practice.

Today, Chinese banks are facing strong competition,

especially from foreign banks that have entered the

Why Did ABC Fail at the Bank of China?

UNLESS TOP MANAGEMENT LENDS ITS SUPPORT, EMPLOYEES UNDERSTAND THE PURPOSE

OF USING ABC, MODELS ARE TESTED, AND COSTS/BENEFITS ARE DETERMINED, ABC

IMPLEMENTATIONS COULD FAIL.

B Y A B E D A L - N A S S E R A B D A L L A H , P H . D . , A N D W E I L I

EXECUTIVE SUMMARY Few authors have explored the implementation of activity-based costing (ABC) in East

Asian companies. This study investigates factors that led to the failure of an ABC implementation at a major Chinese

financial institution—the Bank of China. Interviews with 18 employees at one branch revealed six factors that blocked

the implementation: the lack of clear business purpose, a lack of education about ABC, poor model design, a lack of

participants, individual and organizational resistance to change, and the fact that few outsourcers were available. The

study represents a real example of why ABC implementation might fail in an organization.

8M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y S P R I N G 2 0 0 8 , V O L . 9 , N O . 3

Chinese financial market. Those foreign banks, which

had opened in Shanghai earlier, have started to expand

their business into Jiangsu and Zhejiang provinces.

They grabbed a large number of giant clients from their

Chinese counterparts, causing a decrease in bank loans

in the provinces, according to a 2002 press release by

the People’s Bank of China, Nanjing Branch, in eastern

Jiangsu province.

To eradicate such problems and prevent the situation

from getting worse, Chinese banks needed to apply

more effective management methods and technologies

to improve their competitive advantage. Furthermore,

the government of the People’s Republic of China

decided to turn state-owned banks into publicly listed

ones to enhance the banks’ self-controllability and flexi-

bility that help them react to market conditions in a

timely and effective manner.

As one of the big four state-owned banks, Bank of

China Ltd. had started to restructure itself and tried to

implement management accounting in order to manage

its costs. The implementation of such management

accounting techniques in China is difficult, however,

because of the varied economic, institutional, and cul-

tural settings.

An interview with the general manager of the branch

revealed that it tried to implement ABC three years

ago, but the effort was unsuccessful. The failure to

implement ABC cost the organization money, and there

is a need to reduce these costs by identifying and ana-

lyzing factors that blocked the ABC implementation. If

those barriers cannot be resolved, this may continue to

obstruct the application of new management accounting

techniques and further influence the organization’s

capabilities.

Although most of the existing literature extols the

benefits of ABC and, in particular, the benefits of

ABC/M, few authors have explored its implementation

in East Asian companies, especially financial

institutions.

ABC V S . T R A D I T I O N A L CO S T I N G SYS T E M S

Before we describe the results of our study, let’s look at

the conflicting views about ABC. Ronald W. Hilton,

among others, defined ABC as a two-stage model.1 In

the first stage, overhead costs are allocated into differ-

ent activity-based cost pools with respect to their classi-

fications. In the second stage, using a series of cost-

driver-based rates, the pooled costs are allocated to

product lines. Gary Cokins argued that, compared to

the two-stage model, a traditional costing system is like

a “checkbook” where one can read the total amount

spent but can never know the purpose and results of

each check.2

Traditional cost systems are always employee payroll

related, which hinders a manager’s ability to judge and

improve employees’ activities and performance. Fur-

thermore, the payroll-related costs do not indicate the

interaction and relationships between one activity and

others or products and customer services. Managers will

not be able to identify which events cause activity costs

to vary. Based on managers’ views, however, an organi-

zation’s activity costs could be the most controllable

part that managers can influence. Nonetheless, without

knowing the costs’ drivers, managers are virtually

unable to organize a company’s production costs

efficiently.

In contrast, ABC concentrates on activities involved

in the work process that help managers operate a busi-

ness or an organization. “ABC/M is work-centric, where-

as the general ledger (traditional costing system) is

transaction-centric.”3 Nonetheless, both systems have

their points: The traditional cost system is easy and

inexpensive to implement, but the information obtained

could be too raw to be analyzed. ABC solves that prob-

lem but is expensive and very time-consuming.

ABC I N P R AC T I C E

A.L. Friedman and Stephen R. Lyne gave a number of

reasons explaining why ABC has become so popular

despite its cost.4 First, they argued that manufacturing

overhead costs increased sharply during the 1980s,

mainly due to the rapid growth in implementing

advanced manufacturing technologies. Traditional cost

management became less and less efficient in providing

accurate information to the manufacturers. Second, the

development of information technology offered a great

opportunity for ABC, which requires complex processes

to record its data; this can now be done by the more

advanced information systems. Therefore, ABC attract-

ed more attention, and manufacturers started to give up

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the simpler but less accurate traditional costing systems.

Third, the increasing complexity of financial reporting

requirements, such as the accounting standards in the

United Kingdom and United States, forced companies

to choose a more complex, but accurate method to cal-

culate their overhead. Fourth, the authors said that the

growth of management accounting since the 1950s ben-

efitted a large number of people who later became

accountants or high-level managers and who understood

the importance of implementing a new costing system

rather than a traditional costing system. Finally, Robert

S. Kaplan argued that a traditional costing system pro-

vides inaccurate information that distorts product costs

and has little value to short-term operational control.5

Having said that, and according to Friedman and Lyne,

it is obvious that the traditional cost systems do not

work in today’s competitive environment.6 This is due

to many reasons that completely changed the rules of

the marketplace, such as global competition, rapid

increases in technology, the development of informa-

tion systems, and the growth of management

accounting.

Many researchers have explored the implementation

of ABC techniques, finding that they proved to be

applicable to both the service and manufacturing sec-

tors. John Innes, Falconer Mitchell, and Donald Sinclair

discussed ABC in practice by comparing their 1994 and

1999 surveys of the U.K.’s largest companies.7 In 1994,

there were 352 out of 544 companies using ABC,

whereas between 1994 and 1999 there were 177 ABC

users out of 348 companies. The researchers found that

adoption has stayed significantly higher among large

firms and financial institutions. Despite the fact that

there was no significant increase in ABC adoption

between 1994 and 1999, the researchers reported that

companies that implemented ABC found it a valuable

investment. Their results also revealed that the overall

success of ABC is associated with budgeting, cost mod-

eling, cost reduction, cost management, activity perfor-

mance measurement and improvement, customer

profitability analysis, product price and design, and

stock valuation. Some of this was also emphasized in

Mohan Nair’s 2000 Management Accounting Quarterly arti-

cle, “Activity-Based Costing: Who’s Using It and

Why?” which analyzed the survey of Market Trends

Inc., of Seattle, Wash.8 Nair concluded that the demand

for ABC/M was growing since it assists managers in

planning, budgeting, and performance evaluation.

FAC TO R S L E A D I N G TO T H E S U C C E S S

O R FA I L U R E TO I M P L E M E N T ABC

Despite its growing popularity, a number of companies

started to experience difficulties with ABC implemen-

tation that blocked them from taking it further.9 A

series of factors has been found to be related to the suc-

cess and/or failure of addressing ABC. Michael Shields

identified six “behavioral and organizational” factors

that make ABC successful.10 They are:

1. The support of top management;

2. Integration between ABC and competitive strate-

gies such as total quality management (TQM) and

Just-in-Time (JIT);

3. ABC’s relation to performance evaluations and

managers’ compensation;

4. Adequate training during design, implementation,

and use;

5. “Nonaccounting ownership”; and

6. The availability of adequate resources.

Annie S. McGowan and Thomas P. Klammer, as well

as George Foster and Dan G. Swenson, confirmed fac-

tors 1, 3, 4, and 6.11 According to Innes, Mitchell, and

Sinclair, this is consistent with the findings of U.S. stud-

ies of ABC in practice.12 Based on the results of their

1994 and 1999 surveys, however, they found that the

support of top management is strongly associated with

the success of ABC. On the other hand, Ian Cobb, John

Innes, and Falconer Mitchell suggested that the lack of

adequate internal resources, particularly staff time and

computer resources, are major factors.13 Furthermore,

Chris Argyris and Bob Kaplan explained ABC failure by

providing a “behavioral model of why and how employ-

ees resist ABC.”14 The origin of this model came from

Argyris, who pointed out that “barriers to change arise

from the defensive routines that participants trigger to

protect themselves from experiencing embarrassment

and threat from the new ideas.”15 Robin Cooper, Bob

Kaplan, Lawrence Maisel, Eileen Morrissey, Ronald

Oehm, and M. Lynne Markus further argued that resis-

tance to new information systems can be understood in

terms of organizational power and politics.16

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Different researchers see different factors that strong-

ly affect ABC implementation. All in all, Anthony

Atkinson, Rajiv Banker, Bob Kaplan, and S. Mark

Young discussed them in terms of five factors:

1. Lack of clear business purpose,

2. Lack of senior management commitment,

3. Delegating the project to consultants,

4. Individual and organizational resistance to change,

and

5. Poor ABC model design.17

O U R R E S E A R C H M E T H O D

We relied on interviews as our research tool in order to

gather information about why our provisional branch of

Bank of China failed to implement ABC. We chose this

bank based on the following factors: First, Bank of Chi-

na once tried to implement ABC but failed, and the

case perfectly matched our research task. Second, Bank

of China is one of the top four banks in China and rep-

resents the flagship of Chinese high-performance finan-

cial institutions. Studying the difficulties of ABC

implementation in the Bank of China can offer insights

about similar problems that may exist in other institu-

tions (see Table 1).

Interviews were conducted with 18 current employ-

ees and followed a strict process order. Two accountants

Table 1: Interview Questions General Information

Sex:________________________ Age: ____________________

Job Title:____________________ Department:______________

Interview Time:_______________ Interview Day:____________

1. How long have you been working in this branch?

2. Why did you decide to work in this branch?

Part 1: Type of Costing Systems

3. What kind of costing system is this branch currently using?

4. Why do you think it is good/bad?

5. Have you heard about ABC before?

If YES, to what depth do you understand this system?

Part 2: Implementation of ABC

6. What were the key factors you thought might influence the implementation of ABC at that time?

● Did you have a clear purpose about the implementation?

● Have you had any education about ABC?

● Which ABC model was used to introduce ABC?

● Who you think is in charge of ABC implementation?

● Have you had any support from colleagues/managers?

7. Do you like the current costing system?

8. Did you like facing the challenge of implementing ABC?

9. What are your recommendations regarding the branch’s costing system in the near future?

11M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y S P R I N G 2 0 0 8 , V O L . 9 , N O . 3

were interviewed first, then employees from the corpo-

rate banking department, and finally two managers.

The order was set for a logical reason. According to the

existing literature, in a case of a failed implementation,

regular employees usually have different views about

ABC than managers do. Interviewing accountants first

offered us more objective information and data about

the implementation failure. Then, by comparing the

data collected from the corporate banking department

and managers, differences and conflicts could unfold

and be highlighted, thus providing us the base for this

research analysis.

Each interview lasted about 30-40 minutes. Most of

them were conducted via telephone because of the dis-

tance and time limits. We conducted the interviews

over three weeks. We did three or four interviews per

week and then spent several days analyzing the results.

We strongly believe that the data we obtained from

the interviews is reliable. Each group had at least two

respondents who provided similar results and data. For

example, both accountants gave details that were quite

consistent and that had no big differences. Furthermore,

different observers provided parallel answers to some

crucial questions. For example, all of the respondents

believed that lack of education was an important factor

that led to the failure of the ABC implementation.

BA N K O F C H I N A

Bank of China is one of the biggest financial institu-

tions in China. Founded in 1912, it has operated for 96

years and has served as a core bank for Chinese eco-

nomic and social progress. Its major business mission is

to attract foreign investors and develop the Chinese for-

eign market. In the domestic area, the Bank has more

than 1,000 branches.

The branch we explored has an existing costing sys-

tem, the mechanism of which is quite simple and easy

to understand. The Bank sets a limit for costs for every

department at the beginning of the year, and the desig-

nated amount is tightly linked with the previous year’s

profit of each department. For example, the corporate

banking department’s profit was recorded as RMB9.8

million ($1.404 million) in 2003. Therefore, the maxi-

mum limit of the department spending for 2004 was

nearly 39% of RMB9.8 million ($1.404 million), or

about RMB3.822 million ($547,000).

Thirty-nine percent is the standard ratio that the

branch uses to calculate costing amounts. This ratio was

prescribed by the Bank of China head office, and it has

not been changed for the last five years. The general

manager of the branch believes that such a ratio was set

based on the bank’s operating experience. Thirty-nine

percent is a large proportion, but this amount allows

each department to have sufficient expenses. If the

ratio were to be reduced, some of the bank’s depart-

ments might not maintain their current profit-expense

balances, thus leading to a diminution of profitability.

ABC I M P L E M E N TAT I O N

Bank of China is always looking for effective costing

systems. About three years ago, the head office decided

to implement an activity-based costing system in order

to achieve more efficient cost control. There were sev-

eral reasons for this decision: First, the Bank had been

facing tough competition since the mid-1990s, when

well-developed foreign banks started taking market

share from Chinese banks. Second, the Bank was

preparing to become a listed company. Third, the fast

development of the Bank’s foreign branches required

better management performance to gain competitive

advantage. All these factors called for an effective cost-

ing system, which ABC was originally designed to pro-

vide. The implementation was slow, however, and has

ceased in most branches.

Further contacts were made with 16 other local

branches in Shanghai City and in Jiangsu and Zhejiang

provinces. None reported that it had launched ABC

successfully, and only two are still considering how to

implement it. One of the general managers we contact-

ed revealed: “No successful implementations (of ABC)

have been reported to me within the Jiangsu province,

and I believe rare branches are still considering imple-

menting ABC, at least within Jiangsu range.”

W H Y I M P L E M E N TAT I O N FA I L E D

Here is a closer look at the six factors that interviewers

identified as obstacles to ABC implementation.

No clear business purpose. The ABC project was initiat-

ed by the accounting department, and a basic ABC

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model was designed, but no one from the management

level or from each individual department showed an

interest in the work. People from the accounting

department were disappointed and lost their motiva-

tion. On the other hand, employees from each individ-

ual department felt confused about ABC. They did not

know its purpose, and some guessed that it was a tool

to limit their daily spending. Others thought it might

help to redesign the work process, while a few

believed it would redesign their current department

structure. From the view of the general manager, ABC

should be an instrument that would increase the trans-

parency in management control. Therefore, no clear

business purpose was initially designed for the

implementation.

“The purpose of implementing ABC was to intro-

duce a more effective costing system to BOC,” respon-

dents from the accounting department said. “However,

the term ‘effective costing system’ was too general to

be followed. All employees had different ideas about

ABC. People felt confused and lost interest in ABC. We

then felt bored when no one looked at our work; the

project stopped at this point.”

Lack of education/knowledge. The interviews revealed

that few employees understood ABC. Despite the

accounting department’s efforts, one respondent from

the corporate banking department revealed that he had

heard about ABC but did not understand its key points.

Two managers mentioned that they knew about ABC,

but only one of them could provide details about the

system. In the accounting department, accountants

learned about ABC from books rather than real experi-

ences. In other words, none showed confidence in

building an ABC model that could apply to that branch.

The interviews further indicated that employees

required systematic education about ABC. Fourteen

out of 18 respondents agreed to study ABC if they were

offered a chance.

Poor ABC model. An accurately designed model is

important for ABC implementation. No one could find

the original file of the ABC model, but, according to

feedback from respondents, it was considered “too

complicated to build and maintain” and “too complex

(for managers) to understand and act upon.” Further-

more, the initial model designed by the accounting

department was rough and needed further redesigning.

Because of the lack of education and knowledge about

ABC, however, employees could not provide valuable

suggestions about the initial model. One line manager

described the situation when people were introduced to

the ABC model: “The system seemed very complicat-

ed, and I could not understand it. My colleagues had

the same feeling. Therefore, we all stayed there but

had no comments. Without corresponding benefits, the

model soon collapsed.”

Lack of participants. A pitfall arose when the accounting

department undertook the project without gaining

senior management support. The rest of the Bank saw

the project as one done by and for the accounting

department, so no one outside the department paid

attention to it. As a result, because the accounting

department was not able to make decisions about the

process and had a limited knowledge about other

departments’ functions, no actions were followed to

improve the project.

Respondents in the accounting department said, “We

knew the general process in a department, but that’s

not enough for us. We require more details from senior

and line managers, who could provide operational infor-

mation and valuable suggestions.”

Respondents from the corporate banking department

said, “We thought the system should be taken by the

accounting department rather than us. We were asked

to give suggestions, but everyone was so busy, and no

one had time to analyze a project which did not belong

to them.”

Resistance to change. The interview results also

revealed that managers welcomed a new technical cost-

ing system, but individuals resisted new ideas and

changes. Managers believed that a new system would

increase their control over operating costs. Thus, they

encouraged it through an ABC presentation about prof-

itability, but they continued to behave just as they had

in the past. Individuals were afraid of ABC, especially

fearing the new system could reveal unprofitable

processes and problems in their daily work. Further-

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more, individuals preferred the current system, which

allowed them to use the surplus money available in

their department in any way instead of returning it to

the general account in order to be counted as part of the

Bank’s annual profit.

Few outsourcers available. Poor outsourcing was another

factor that limited the development of ABC. When the

implementation was called off, the Bank tried to look

for other solutions from outside. Contacts were made

with other banks, but none had relevant experience

with ABC implementation. Some employees suggested

retaining consulting companies who might have the rich

experience to design the system, but the local manage-

ment consulting companies did not show a sufficient

capacity to accept such a project. The developing busi-

ness support institutions still cannot satisfy the demand

of financial sections.

S O M E A DV I C E

The framework for implementing an ABC system into a

provisional branch provides a valuable experience for

the other branches within the Bank of China system or

other Chinese banks. We suggest that a company teach

its employees about ABC, provide sustainable resources

from both internal and external sources, encourage

employees to participate, and consider employees’

resistance when applying ABC. We recommend that a

pilot test be run on a small scale, such as in a depart-

ment or a subunit, to examine the effects of the imple-

mentation. The implementation is costly and

time-consuming, and an organization is advised to take

it step by step in order to allow employees to under-

stand the new system and, hence, offer valuable feed-

back to enhance the process.

To ensure its accuracy, however, an ABC model

needs to be tested and continually improved. The long-

term effects of implementing ABC in Chinese financial

institutions are still not clear, and further investigation

is still required in the near future to see if ABC imple-

mentations are feasible.

By reflecting the view of employees of one of the

biggest Chinese financial institutions, Bank of China,

this study contributes to the existing knowledge about

ABC in practice. It represents a real example of why

ABC implementations might fail, which should benefit

both academics and practitioners. ■

Abed AL-Nasser Abdallah, Ph.D., is an assistant professor

of accounting in the School of Business and Management of

American University of Sharjah in the United Arab Emi-

rates. He can be reached at [email protected] or

971-6-515-2594.

Wei Li holds a master’s degree in management with finance

from the School of Management at the University of Bath.

E N D N OT E S 1 Ronald W. Hilton, Managerial Accounting: Creating Value in a

Dynamic Business Environment, Sixth International Edition, McGraw-Hill Irwin, Boston, Mass., 2005.

2 Gary Cokins, Activity-Based Cost Management: An Executive’s Guide, John Wiley & Sons, Inc., New York, N.Y., 2001.

3 Ibid., p. 11. 4 A.L. Friedman and Stephen R. Lyne, Success and Failure of

Activity-Based Techniques: A Long Term Perspective, Chartered Institute of Management Accountants, London, England, 1999.

5 Robert S. Kaplan, “Kanthal,” Harvard Business School Cases, Ref No. 9-190-002, 1989.

6 Friedman and Lyne, 1999. 7 John Innes, Falconer Mitchell, and Donald Sinclair, “Activity-

Based Costing in the U.K.’s Largest Companies: A Comparison of 1994 and 1999 Survey Results,” Management Accounting Research, September 2000, pp. 349-362.

8 Mohan Nair, “Activity-Based Costing: Who’s Using It and Why?” Management Accounting Quarterly, Spring 2000, pp. 29-33.

9 Robin Cooper, Robert S. Kaplan, Lawrence S. Maisel, Eileen Morrissey, and Ronald M. Oehm, Implementing Activity-Based Cost Management: Moving from Analysis to Action, Institute of Management Accountants, Montvale, N.J., 1992; Ian Cobb, John Innes, and Falconer Mitchell, Activity-Based Costing: Prob- lems in Practice, Chartered Institute of Management Accoun- tants, London, England, 1992; Ian Cobb, Christine Helliar, and John Innes, “Management Accounting Change in a Bank,” Management Accounting Research, June 1995, pp. 155-175; Chris Argyris and Robert S. Kaplan, “Implementing New Knowl- edge: The Case of Activity-Based Costing,” Accounting Hori- zons, September 1994, pp. 83-105; Michael Bromwich and Al Bhimani, Management Accounting: Pathways to Progress, Char- tered Institute of Management Accountants, London, Eng- land, 1994; Michael Shields, “An Empirical Analysis of Firms’ Implementation Experience with Activity-Based Costing,” Journal of Management Accounting Research, Volume 7, 1995, pp. 148-166.

10 Shields, 1995. 11 Annie S. McGowan and Thomas P. Klammer, “Satisfaction

with Activity-Based Costing Cost Management Implementa- tion,” Journal of Management Accounting Research, Volume 9, 1997, pp. 217-237; George Foster and Dan W. Swenson, “Mea- suring the Success of Activity-Based Cost Management and Its Determinants,” Journal of Management Accounting Research, Vol- ume 9, 1997, pp. 109-142.

14M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y S P R I N G 2 0 0 8 , V O L . 9 , N O . 3

12 Innes, Mitchell, and Sinclair, 2000. 13 Cobb, Innes, and Mitchell, 1992. 14 Argyris and Kaplan, 1994. 15 Chris Argyris, Strategy, Change, and Defensive Routines, Pitman,

Boston, Mass., 1985; Chris Argyris, Overcoming Organizational Defenses: Facilitating Organizational Learning, Allyn and Bacon, Needham, Mass., 1990.

16 Cooper et al., 1992; M. Lynne Markus, “Power, Politics and MIS Implementation,” Communication of A.C.M., June 1983, pp. 430-444.

17 Anthony A. Atkinson, Rajiv D. Banker, Robert S. Kaplan, and S. Mark Young, Management Accounting, Prentice-Hall, Upper Saddle River, N.J., 2001, pp. 184-188.