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

Article excerpt

The key purpose of the Bank of China's strategic plan is to generate, process, track, and close its leads in the Chinese financial market. 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 management (ABC/M) in one provisional bank branch, the name and location of which are not disclosed for confidentiality 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 mentioned 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 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 flexibility 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 cultural 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 analyzing 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.


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 different activity-based cost pools with respect to their classifications. 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. …


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