ABC* Company - Activity Based Labor Contract Costing

ABC Guy When management enters into negotiations with the union representing their employees with that kind of a "take away" proposal, the wheels come off the wagon immediately. So plant management enlisted the assistance of Human Systems development group (HSdg) to help them find other ways of reducing costs. HSdg offered its Activity Based Labor Contract Costing (ABLCC model). HSdg representatives sought to provide ABC* Company with a clear view of both the impact and true cost of labor contract language so as to satisfy their need to remain flexible and competitive. This ABLCC model provided the wherewithal to determine the true cost of the use of the labor agreement and allowed the management team to exercise maximum flexibility at the bargaining table as it related to:

  • Determining individual contract clause cost
  • Determining actual cost of the total contract
  • Determining true per person cost under the labor agreement
  • Matching organization cost and cash flow targets to contract costs
  • Determining more accurately the cost of specific policies, procedures, and practices
  • Tying the corporate and plant directions and decisions to the floor level of the organization.
Working with key individuals from the ABC* team, HSdg determined that excessive costs seemed to be emanating from four articles of the Labor Agreement, i.e., Seniority, Lunch and Rest Periods, Grievance Procedure, and Overtime Equalization. For each of these clauses and related Letters of Understanding, HSdg developed:
  • a detailed flow chart of the processes involved in the clause
  • a dictionary or detailed description of each step of the clause process
  • a time task analysis of each step (as required of the participants)
  • a cost of task analyses for each step (based on actual employee wages)
  • a summation cost of each clause
These deliverables provided the basis for the negotiation team to develop proposed contract language for the articles cost estimated, enabling the parties to measure the plus and minus cost impacts by comparing against the current documented standard.

Grievance Procedure: The current process for the 5-step grievance procedure was costing over $110,000 per year (excluding settlement costs and arbitration costs). A modification to the process, i.e. the removal of an unnecessary step, could save between $15,000-$20,000 per year.

Overtime Equalization: The negotiated process of soliciting employees to work overtime one day per week, was costing the company over $2,000 per year, per department. Modifications to the equalization process and to the overtime posting process could result in the savings of many thousands of dollars per year. These savings ideas were shared by ABC* management with the union. New language was drafted by the parties during negotiations modifying existing, costly processes, which resulted in substantial cost savings, thus negating the need to seek wage reductions. The HR director's observations about ABLCC is best captured by the following comment:

"We knew that we had a cumbersome overtime assignment provision in our labor agreement, which was the result of many years of adjustments and add-on language. Not until HSdg broke down the process into its step-by-step activities and attached specific costs to each step of the process, did we realize the excessive dollars it was costing us. We were then able to take these numbers with HSdg's recommendations to the union and negotiate significant cost saving changes to the overtime assignment process."

*Note: ABC is being used in place of the company's real name for reasons of confidentiality.