Activity-Based Costing and CSR at Barclays Bank

Introduction and Research Framework

In the wake of widely publicized corporate scandals in recent years, corporate transparency has assumed a new level of importance. Many companies have attempted to improve their public image through various social initiatives in the communities, regions, and countries in which they compete, and some of the larger ones have implemented these initiatives on a global scale. While it would be hard to argue against the need for such socially responsible actions by the corporate sector, the various stakeholders involved will likely hold widely differing views about what constitutes sufficient effort and why. Measuring the level of corporate socially responsible activities must therefore be accomplished in some quantifiable way so that assessments of program effectiveness can be made and changes introduced when needed. Such quantifiable measures may also identify opportunities for improvement and expansion of existing initiatives.

To this end, this study proposes to use activity-based costing (ABC) data from financial institutions in general, and Barclays Bank in particular, to determine whether these performance metrics provide insights into the level of corporate social responsibility. Likewise, this study seeks to determine whether these financial metrics can be, or have been, misused by analysts and researchers to misrepresent or overstate the degree of corporate social responsibility at such institutions. According to Blanden (2000), many financial institutions have used questionable tactics under the guise of socially responsible actions to mask target marketing initiatives such as beer and sports team sponsorships. To accomplish this overall research aim, the study is guided by the following research questions:

1. What financial performance metrics are associated with corporate responsibility?

2. Is there an inherent gap between the prevailing conception of financial performance and the ability to measure this performance using the activity-based costing approach?

3. Does this gap increase as companies become larger and lags between actions and their economic results lengthen?

4. Do some companies exploit the gap — if any — between what should be measured and what can be measured, and how much does this affect the ability of activity-based costing to discriminate good performance from bad?

5. Does the activity-based costing approach overcome any of these limitations?

Today, managers have a wide range of tools available to help them accomplish their organizational goals, but one fundamental issue quickly emerges from an analysis of various accounting systems: "Despite the ebb and flow of theory and reform, the bedrock question of what matters in budgeting remains: On what factors do budget outcomes depend?" (Hildreth, Miller & Rabin, 2001, p. 15). Various financial and accounting performance measures frequently appear to possess a degree of objectivity that is subsequently shown to be illusory. In this regard, Neely (2002) emphasizes that, "Even when a ratio has been defined in a conceptually appropriate way, there remain issues of measurement. Again, the non-accountant generally has a sense of the objectivity of an accounting measurement that is unsupported in practice" (p. 20).

Furthermore, there is a very real risk that some financial services organizations will simply fail to recognize when change is needed, due to complacency or inertia. As Bamber and Hughes (2001) emphasize, "Broken cars and computers simply stop running. In contrast, 'broken' or outdated cost systems continue spewing out (potentially misleading) costs. Consequently, managers need to recognize clues that the cost system needs refinement" (p. 381). According to Neely (2002), the factors used in any accounting ratio can be defined in various ways, but there is no absolutely correct or incorrect approach; even the most experienced investor or analyst must use this information in the manner most conducive to a given need, while keeping in mind that the marketplace is a dynamic environment where even the best-laid plans often do not come to fruition.

Activity-Based Costing and Financial Performance

Providing companies with a more effective approach to financial analysis requires a more comprehensive method of examining a company's performance in the industry in which it competes. In this regard, Bamber and Hughes (2001) report that "a major segment of the service sector — banks — needs accurate cost information to make strategic decisions, and more refined accounting systems help fulfill this need" (p. 381). A number of proponents suggest that activity-based costing represents a valuable tool for measuring a wide range of performance metrics, including, perhaps, a company's degree of social responsibility.

A fundamental shift that took place during the period from the 1960s to the 1990s was the introduction of activity-based costing (ABC). ABC assumed new importance as more and more companies used these techniques to identify the actual costs of labor, equipment, and premises associated with each activity performed by the firm, rather than relying on arbitrary formulas to allocate overhead (Meyer, 2002). According to Cortese-Danile and Latshaw (2002), "Activity-based costing (ABC) has become extremely popular in recent years. In fact, it is difficult to find an academic or practitioner journal that does not include at least one article on activity-based costing, activity-based management, or activity-based budgeting" (p. 30).

Although activity-based costing was originally used primarily in manufacturing settings (Meyer, 2002), the ABC system has an alternative approach that includes various non-manufacturing costs — such as marketing, design, and engineering — as product costs (Hussein & Tam, 2004). According to these authors, "Marketing and sales expenses include salaries and benefits of sales staff, and promotions and other marketing costs. General and administrative costs include top management, accounting, personnel, and legal counsel" (Hussein & Tam, 2004, p. 539). Today, "it is difficult for any organization, whether it be a manufacturer, distributor, or service provider, not to jump onto the activity-based bandwagon" (Cortese-Danile & Latshaw, 2002, p. 30).

One of the reasons for this widespread interest in ABC appears to be technological innovations that have allowed companies to compare profit-and-loss statements for every customer and identify customers that cost the organization money rather than generating a profit. This trend has affected banks in particular: "Banks are by far the biggest industry yet to marshal this data-crunching ability. Already, about half of big banks with more than $1 billion in deposits use profit data to make customer decisions, more than double the percentage just a year ago. For banks, a typical 'bad' customer makes frequent branch visits, keeps less than $1,000 in the bank and calls often to check on account balances" (Bamber & Hughes, 2001, p. 381). By sharp contrast, a bank's most profitable customers maintain several thousand dollars in their accounts, use a teller less than once a month, and rarely use a bank's call center for assistance. While such favored customers annually generate more than $1,000 in profits apiece, the bank's worst customers frequently cost the bank at least $500 a year (Bamber & Hughes, 2001). Moreover, the top 20 percent of average banking customers today produce as much as 150 percent of overall banking profits, while the bottom 20 percent of customers siphon off approximately half of the bank's revenues (Bamber & Hughes, 2001).

Whatever financial performance metrics are selected for a given application, the more detailed the data used, the more reliable the results of the analysis: "Without adequate detail, it is hard to see how economic consequences arise from the choice of costing systems" (Platt & Towry, 2001, p. 99). According to Latshaw and Cortese-Danile (2001), "There are many variables that need to be considered when determining the type of costing system, such as ABC, that is best for an organization" (p. 30). Maiga and Jacobs (2003) report that many companies are turning to ABC because it can help improve the accuracy of cost measures; proponents of ABC have cited a number of benefits associated with such systems and have identified several factors associated with ABC success that can be used as a best-practices guide for similarly situated firms. As these authors note, "ABC focuses on costs associated with activities, but also evaluates whether those activities add value, thus providing a means of understanding how to most effectively reduce costs" (p. 283).

While ABC also provides a framework in which companies can monitor the ongoing performance of initiatives, some constraints have been identified when these techniques have been used in practice, including the failure of companies to follow through and the inability to achieve expected benefits once ABC has been implemented (Jacobs & Maiga, 2007). Many organizations have sufficient control over their cost drivers, specifically those that work with activity-based costing, and can locate sufficient cost information within the company to accomplish these analyses in a timely fashion (Chatzkel, 2003). In reality, however, ABC systems are typically structurally complex and, despite the need for full integration, many such systems remain as stand-alone analysis tools that generally begin with resource-based rather than activity-based data fed from the general ledger system (Platt & Towry, 2001).

In their case study "Activity-Based Costing in the Service Sector: The Buckeye National Bank," Bamber and Hughes (2001) report that "banks, like other businesses, are under attack from all sides. Brokerage firms and mutual-fund empires in particular are trying to grab traditional bank customers, and highly profitable ones are the most attractive. To fend off the assault, banks say they need to identify the customers they should fight hardest to keep" (p. 381). To address the issue of declining profits at the hypothetical "Buckeye National Bank," an ABC team was assembled consisting of the managers of each of the three bank branches, a bank teller, and a representative from the customer service call center. The team began their analysis by identifying the activities Buckeye National Bank performed (Bamber & Hughes, 2001) and identified the three most important activities for their pilot project:

1. Paying checks;
2. Providing teller services; and,
3. Responding to customer account inquiries at the customer service call center.

The ABC team began by identifying the actual costs associated with each of these three banking activities and determined that, as is common in service industries such as banking, labor (personnel) costs dominate (Bamber & Hughes, 2001). Thereafter, the team requested that every bank employee complete a short survey to determine how they actually spent their time on the job; the team then administered one-on-one in-depth interviews with each employee and used this combined information to estimate the percentage of time each employee spent on each of the three activities (Bamber & Hughes, 2001).

The ABC team subsequently estimated the non-labor resources that each activity required. For instance, they linked the "responding to customer account inquiry" activity to the following cost drivers: (1) the cost of toll-free telephone lines at the customer service call center, and (2) depreciation on other equipment and facilities used by call center personnel. According to Bamber and Hughes (2001), "A cost driver is a factor, such as the number of checks processed, that causally affects costs. For example, the costs associated with the activity 'paying checks' rise and fall as the quantity of the cost driver (the number of checks processed) rises and falls" (p. 381). In addition, the team estimated the percentage of time the bank's information system was used for check processing and providing teller services versus other uses, to determine how much of the equipment's depreciation to assign to those activities.

To complete the pilot study in a timely fashion, the ABC team based their estimated activity costs on the prior year's actual data, which were already available. If the pilot study succeeded, the team planned to develop budgeted indirect cost rates for each activity the following year. The advantage of budgeted rates over actual rates is that budgeted rates can incorporate expected changes in costs and operations. After examining the three branch banks' indirect costs, the ABC team classified the annual costs in each activity's cost pool. The identified cost drivers for each activity cost pool were as follows:

Table 1: Cost Drivers for Each Activity Cost Pool at Buckeye National Bank

Paying checks — Number of checks processed
Providing teller services — Number of teller transactions
Responding to customer account inquiries — Number of account inquiry calls to the customer service call center

Source: Bamber & Hughes, 2001, p. 381.

The Buckeye ABC team estimated the annual activity levels for retail and business customers across the three pilot-test branches and found that retail customers used much more than 10 percent of the three activities. The team then analyzed these activities in relation to the four-level activity-cost hierarchy developed by Horngren et al. (1999):

1. Unit-level activities are performed for each unit of product or service. In Buckeye Bank's case, "paying checks" and "providing teller services" were considered unit-level activities.

2. Batch-level activities are performed for groups of products or services rather than individual units. For simplicity, the Buckeye pilot study did not include batch-level costs, though these costs exist in service firms such as banks, particularly where each service represents a unique demand on resources.

3. Product-sustaining, service-sustaining, and customer-sustaining activities support individual products, services, or customers. The ABC team regarded "responding to customer account inquiries at the customer service call center" as a customer-sustaining activity.

Banks and Corporate Responsibility

4. Facility-sustaining activities are general activities that support the organization as a whole but cannot be traced to individual products or services. Because it is not possible to identify cost drivers for facility-sustaining costs, many ABC systems exclude these costs or allocate them using a general allocation base. For simplicity, the Buckeye team did not consider this type of activity in the pilot study (Bamber & Hughes, 2001).

The results of this analysis showed that ABC customer cost data could assist Buckeye's managers in identifying more effective marketing strategies by more appropriately pricing their services and assessing the profitability of different customer and service mixes. "For example," Bamber and Hughes conclude, "after recognizing that attracting and retaining business accounts is the key to profitability (given the existing cost and revenue structure), Buckeye may want to add special services for business customers" (p. 381). Given the complexity and costs associated with a transition to an ABC methodology, it is vitally important for any organization to consider the impact of such processes on their community relations activities and what these initiatives can do to improve corporate responsibility — an issue of particular importance for banks, given their already poor image in the minds of many consumers.

Many people dislike banks, and the decision to patronize one over another may simply be a matter of choosing between the lesser of two evils in terms of convenience and costs. According to Barclays' Corporate Responsibility Report for 2005, "The UK banking sector as a whole has often been taken to task for not giving customers good enough service, and some of this criticism has been justified. But in recent years the picture has changed quite significantly. A great deal of effort and investment has gone into improving our products, and giving our customers better service, but more still remains to be done" (p. 4).

Barclays is not alone in these initiatives. Blanden (2000) reports that "in the past year, UK banks have spent around 300 million pounds trying to persuade the public that they are not so bad after all. But they know they are on to a loser, and much of the money spent on advertising is wasted. The simple truth is that people do not have good feelings towards banks" (p. 37). Given this environment, it is little wonder that many banks would seek to take advantage of opportunities to improve their public relations image through various corporate socially responsible initiatives — initiatives that also serve to improve employee morale (Blanden, 2000).

Blanden (2000) also notes that community sponsorship initiatives have become commonplace among large banks: "Not only does it associate the banks with people's favourite sports — and they are big sponsors of yuppie sports such as rugby, cricket and golf — but it also provides great opportunities for entertaining their own staff and their families. Financial institutions are bigger sponsors than beer brands or any other. Indeed, so many are involved that the field has become overcrowded, and they are failing to stand out from one another" (p. 37). It is therefore important to distinguish between social programs that genuinely help the disadvantaged and promote social initiatives versus those that merely entertain or function primarily as marketing vehicles.