August Book Feature: Sue Sondergelt, CMA is the author of The Controller As Lean Leader, available through the Society BookStore at http://costmgmt.org/resources/cost-management-library/
The day after a Category 3 hurricane, my neighbor received a call from his landscaper for his Florida home. She asked him, “What would you like me to do with your yard this month?” and he responded, “Probably nothing if there is no house there anymore!” The moral of the story, for the financial person in any business today, is this: If you do not have a cost management system there will be no need for a cost accounting system as the business will cease to exist.
Today so many top executives try to both report and manage the business with a financial standard absorption cost accounting system. But forcing top executives to manage the business solely on the basis of how their actions affect the financial statements can only bring myopic behavior and thus negative consequences. Therefore, to keep up with the ever-changing and always competitive global business environment, traditional Cost “Accounting” systems must be replaced with Cost “Management” systems. To strengthen any corporation today, and assist the corporation in sustaining growth, financial as well as non-financial information (not just accounting data) must be distributed among, as well as originate from, all associates in an entity. It is not enough to have only the accounting “department” involved in collecting data and transforming it into information. And it is not enough to have only the accounting “department” involved in cost reduction. The financial professional must step up and become more than just a numbers person. The financial professional must become both a change agent as well as a business partner with the executives and all associates in the business.
If you have read any of our past newsletters or attended any of our seminars, you have heard it said that one of the primary reasons why Lean initiatives fail in any organization is “accounting.” Most traditional cost accounting systems measure efficiency of use of machines and people using “volume” variances, but in Lean we do not have volume variances as we do not ‘make one’ until the customer ‘takes one.’ Cost accounting focuses on debits and credits and variances to individual standards, but in Lean we focus on trends in the actual cost of families of parts, not standard costs for individual parts. Thus cost accounting systems are inadequate for today’s Lean business environment. A cost management system, on the other hand, is a cost system by operations and for operations. It is a methodology for costing processes in the value streams of individual families of products. Cost management ties together cost with operations in each product family of the business, is part of every worker’s headset, and is thus every associate’s responsibility. We also need to rethink our traditional metrics as well as our traditional cost accounting system, both of which cause managers to make the wrong decisions. The role of the accountant today must change from merely reporting the numbers in the business, while looking in the rearview mirror, to directing and leading the enterprise toward increasing productivity.
So exactly what is productivity? A simple definition of productivity is sales per employee. Thus to increase productivity we would have to either decrease number of employees or increase revenue. Decreasing number of employees is a form of cost-cutting. Increasing revenue can be accomplished in two ways: increasing prices or growing the business. If we accept the premise that businesses cannot or should not lay-off, cost-cut, or price-increase to get better productivity, then how do they achieve growth? In my book, “The Controller as Lean Leader,” I explore the hypothesis that a company’s values and culture can be a starting point to restructuring the business and obtaining true productivity without “gaming” the system.
And what, you may ask, are values? The very first of the five principles of Lean is to create value. Most companies today utilize MBO – managing by objectives – to attempt to do this. Here the business is focusing on the financial performance of the business. Did we hit the numbers? The Lean business, however, is managing by values (MVB.) Here the business has determined what will drive success in the organization – factors such as quality, teamwork, and diversity. In the old world organization, what gets done and what gets measured is what counts, and this organization usually measures only financial factors which are easy to measure, e.g., operating income, sales, and profits. However, in managing by values, we understand that how we achieve success is really what counts, for it is the process we utilize to get to our goal that matters most.
Then, too, what is culture? Simply put, culture is the aggregate of the work habits of everyone in the business. Culture is thus a by-product of the lean philosophy of business together with the passion of its entire people to succeed in its lean endeavor. Consequently changing the culture really starts with changing behavior which starts with replacing that cost accounting system with a cost management system. Most of the current leaders in business today, in early 2012, are still shell-shocked by the past several years of economic turbulence and staggering employee moral which are the result of cost-cutting and lay-offs. Yes, corporate earnings are up in early 2012, but can we conclude that we are leaner…or meaner, with even more employee lay-offs and cost cuts? Did we use those T.A.R.P. funds to take the opportunity to truly restructure our business into Lean product families to create value and acquire true productivity gains? I think not. What we do not see in most businesses in 2012 is a permanent restructuring of corporations into product families where cost can be monitored (not allocated) by cross-functional “neighborhood watch” groups rather than by the “accounting police.” What we also do not see in business today is a cost management system for more non-financial data to assist us in growing the business.
This Lean Cost Management system is a Target Cost system for achieving both cost (waste) reduction and cost control. The key premise in this Target Cost system is that we are planning profits. We have asked our customer what he would be willing to pay for a product or service. We then plan for profits of, say, 8% or 12%. What is left in between the well-defined and planned sales price (or revenue) and the planned profit is the target cost (or the allowable cost) or what some refer to as the “go-get.” When you look at your business in this manner, whether in pricing your products or in setting your operations budget for next year, you will see that the basic financial cost accounting system and the cost management system must be separate systems. Yes, you must have a financial accounting system for external users such as banks and investors, and perhaps the government. But this financial accounting system does not give executives or OPS managers the information necessary for planning and controlling the day-to-day business. Many will argue that two separate accounting systems are not worth the investment of time, people, and money. However, to ensure success in this turbulent environment and take market share from our competitors, top execs need information (not just accounting data), and they need it in a capsule format, and they need it on a daily basis (not every month to six weeks.) So the end result of utilizing a single cost accounting system to manage the business is merely an ongoing spiral of slashing jobs and cost-cutting in an attempt to gain productivity. Thus a cost management system is a necessity for growth.
It seems, though, that cost-cutting is still the main corporate strategy in US businesses in 2012. And there is still poor public perception and mistrust of the current leaders in business as a result of the T.A.R.P. bail-outs of yesteryear. Thus I believe it is apparent that leaders today need to get a strategy in place –other than cost-cutting — to help their business get a bigger share of a smaller pie. But who will step up and be the new-age Lean leader? And what does this new leader need to know to truly increase productivity and grow the business?
I believe the leader needs, as always, to find a way to sustain long-term growth without ‘gaming’ the system. The leader needs to practice lean continuous improvement always – in good as well as in bad times. He needs to know the customer and create relationships with his customer. He needs to practice ‘systems thinking’ – how the pieces affect one another within the whole – to better understand complexity. The leader also needs to look at his business from the outside in, standing in the shoes of his customer and ask, “Does this add ‘value’ for the customer?” Then, finally, the leader needs to be aware of the culture of the business. He needs to ignore the Myers-Briggs edict on recognizing only extraverts as leaders, and instead focus on (and search for) new-age leaders who possess the more important personality traits of leaders: willingness to compromise, openness to innovation, diligence of learning, and freedom from negativity.
Only then are you not just ‘leaning’ your organization, which many managers today see as merely a feat of moving furniture and implementing new technology, but you are changing the culture through changing the behavior of all people in your organization. Technology is the easy part – changing the culture and leading are the hard part. Let us just say that, to accomplish this, passion is essential, but cheerleading is optional. And who best to lead? As I state in the final chapter of my book, “You, the controller, do not have to be charismatic or a Myers-Briggs extravert to be a leader.” You just need to know the business cold, and be passionate regarding what you know the Lean philosophy of business can accomplish. Look beyond Myers-Briggs and the hard skills of cost accounting to the other four personality traits of a leader and the soft skills of becoming a business partner — managing the business with a Lean Cost Management system. When the financial professional executes on all of the above, then the controller of the business may very well be the next Lean leader.