Apr 3, 2023 | Innovation, Lean, Management
The double entry bookkeeping system we are familiar with, or should be, has been around for millennia. In the form we now know it, double entry bookkeeping was codified by Franciscan monk Luca Pacioli, a collaborator of Leonardo da Vinci in a mathematics text published in 1494.
It remained largely unchanged, just increasingly complex until the 1920’s when Alfred Sloan, the king of General Motors for 50 years developed the system of management accounts we still use, with standard product costs as a foundation.
As the ‘lean manufacturing’ movement, pioneered by Toyota, extended throughout the western world from the late 70’s onwards, the system of standard costs became increasingly problematic.
It tends to set in stone the assumptions that are built into the standard product costs, rather than using them as a basis for continuous improvement. Even worse, management KPI’s tend to be centered around functional silos that have little to do with the overall productivity of assets in delivering value to customers.
I have been subjected to ‘stalking’ variances, those that seem never to go away, but persist in defiance of management edict many times. The easiest way to get rid of them is to adjust the standard. Not very smart, but accepted practice and often the only way to achieve KPI’s in a corporate environment. It also has the effect of hiding opportunities for improvement, and ensuring reliable data is not available in real time. In parallel, we have increasingly digitised operational processes by multimillion dollar installations of MRP (Manufacturing Resource Planning) and its more expensive sibling ERP (Enterprise Resource Planning) systems. These tend to set in stone standard costs and variances down to the micro transaction level contained in work orders, which complicates and adds cost to the reporting and management processes without adding value for customers.
One of the core ideas of Lean is ‘Flow’ which is at odds with standard costing systems. Standard costing gives precedent to operational efficiency at individual stages in a process, rather than flow through a whole system, ignoring varying capacity and efficiency constraints. This results in several usually uncomfortable conflicts.
Two examples:
- Lean seeks to reduce inventory of all types, raw material, work in progress and finished goods, seeing it as a cost, tying up working capital. Traditional accounting treats inventory as an asset, and when a Lean project reduces inventory, it reduces the current assets in the balance sheet, giving a misleading perception of financial performance.
- Lean focusses on capacity utilisation and ‘Flow’ through the processes necessary to create a product. Capacity is the key operational constraint, but does not appear anywhere in the general ledger other than by inference, as a function of capital invested, the calculated value of inventory, and unit sales. Delivering capacity is only of value when that capacity is used to add value in some way, usually by producing more product from the same fixed cost base. Standard costing ignores this reality of operational management.
There are no easily GAAP (Generally Accepted Accounting Practice) conforming measures for calculating immediate capacity utilisation, and flow, and no sensible calculation of actual product costs on a short term basis that conforms to the standard cost model. A second set of measures, which use the same data base as GAAP accounting, but in different ways is necessary.
While it will take work to set up these alternative measures, once deployed they will reduce the reporting workload and error rates inherent in the highly transaction based standard cost models, delivering both utility and accuracy to operational reporting and analysis. Deployment is however not like installing an ERP system, it is a process of continuous improvement.
Setting out to implement a Lean accounting environment in the absence of collaboration and mutual understanding at the senior executive level, is akin to climbing Everest in a t-shirt. Success requires a complete change of mindset from that taught by most accounting institutions where the concentration is on financial and reporting compliance, rather than gathering and critically analysing the information that enables better management decision making and continuous improvement.
Header credit: Nick Katco from ‘The Lean Accounting CFO’
Mar 29, 2023 | Change, Governance, Strategy
The government’s $15 Billion National Reconstruction Fund faces a range of strategic and management dilemmas.
The Treasurer Jim Chalmers set out the governments priorities in his essay ‘Capitalism after the crisis’ in February. He called for focus on three things:
- An orderly energy and climate transition of the economy
- A more resilient and adaptable economy
- A focus on growth hand in hand with equality of opportunity.
The response has been roughly equal from those who see his views as the defining principles for development of the economy from the poor relations role currently played amongst the OECD, to those who condemn his views for their generality and naivety.
Given these seem to be about equal, he must be close to the mark.
The dilemma in the deployment of any ambitions public program is governance.
The opposition condemns it, claiming that it will achieve no useful outcome, being just a huge a magnet for rent-seekers. I guess they should know how to recognise a snout-ready trough when they see one. The government seems to dismiss this concern as something that can easily be managed, and while it is an admirable sentiment, the ‘yes minister’ syndrome will play a big role. Again, the very difficult middle path seems to be the ideal outcome.
From my experience running a tiny, micro version of this initiative 25 years ago there are some lessons to be learnt and applied, or at the very least, considered in the design of the management and operational infrastructure:
- There needs to be an accountable board made up of mix of experienced and wise people from outside the vested interests, committed to the outcome of moving Australia up the various ‘industrial complexity’ scorecards.
- It needs to be separated from the bureaucracy and run its own management processes, and grant budgets that are multi-year. Tying the operational and grant budgets to an annual calendar dictated by allocations in the national budget is to ensure its failure as a strategic tool. This choice will be difficult for any government, and will probably precipitate another bureaucratic turf war.
- A company limited by guarantee is one structure that can be useful. This does not in any way compromise the accountability of the management for the financial governance of the ‘business’. The shareholders would likely be Federal government, via Dept. of Industry, CSIRO, and one of the credible business associations with a wide cross-industry membership.
- The board would be chaired by a credible figure like Proff. Roy Green. Board members will represent the shareholders, and include several non-aligned members familiar with the areas of strategic focus from the perspective of the evolving technology, financial constraints and opportunities, business development, and strategic marketing expertise.
- The first job of such a board must be the definition of the strategic priorities of the ‘business’. These are one step down from the general outline in the Treasurers essay and take the form of a priority list of industry sectors that will be eligible to receive funding. Within this pathway there must be some discretion, as predicting the future is a challenging task, and you never know what will bob up in the development process that deserves support. The parameters of ‘deserve support’ should be at the discretion of the board, but widely agreed.
- Staffing and budgeting of the ‘business’ must be from outside the bureaucracy. Bureaucratic rules and conventions need to be taken only selectively when they clearly add value to the process. It is quite likely there will be very qualified people currently within the bureaucracy, who may elect to take a leave of absence from those roles to take up one with the business. This could be regarded as a secondment, but the management of the personnel concerned must be at the discretion of the management of the ‘business’.
- Non-profit, research institutes, and quangos are not eligible for funding unless in collaboration with a viable commercial operator. The business will play a pivotal and catalytic role in putting these two pieces of the puzzle together in ways that may lead to funding.
- Dictate to collaborative bureaucracies that they are required to collaborate and co-operate with the ‘business’. This is not to ensure primacy, but to ensure collaboration within the boundaries of commercial in confidence. The business must be ‘cross departmental’ and seen as a neutral player there only to be a ‘compounder’ of public resources.
$15 Billion is a big chunk of money, although dwarfed by the magnitude of the challenge facing the country. This sort of approach should have been implemented 30 years ago, but better late than never, so long as it is done right!
Header credit: Knicked from the NRF website
Mar 27, 2023 | Management, Small business
A start-up funded with a cash stake from family, friends, and fools, supplemented by available savings has in its future one of only three options.
- It runs out of cash before the end of the ‘runway’. Crash and burn.
- It extends the runway by finding more cash, usually from equity injections. This generally requires that an MVP (Minimum Viable Product) has been produced. MVP is a term usually associated with a tech start-up, but is just as applicable to a local accountant or plumber hanging out their shingle.
- It achieves ‘lift-off’ before the end of the cash runway. This makes it easier to attract the necessary second round funding to scale from further equity or loan funds based on the expected cash flow from the expanded enterprise.
Assuming the start-up succeeds at option three, it is no longer a ‘start-up’, it has become a business.
These are very different beasts.
The start-up by necessity is acting to attract further investment. This is available from funding institutions of various kinds, and from those very early adopters of a new product or service who value the buzz of being early adopters, the risk takers. Those running ‘start-ups’ need to be highly ambidextrous, as they must work on the ‘product-market fit’ as well as continually chasing the next round of finance.
Once it has become a business, ‘lift-off’ has been achieved, the focus must be wholly on serving the chosen customer set, or the pack of cards will fall, eventually.
Mar 22, 2023 | Branding, Communication
‘If you want to change the world, change the metaphor‘. Joseph Campbell
Every storyteller knows how powerful metaphors are, we all use them to describe to ourselves and others, the complex situations and challenges we face. The tales our parents read us as children are all metaphors, almost always describing desirable behaviour. I remember my father telling me the ‘angry bee’ metaphor on several occasions as a kid. Once when I was losing a tennis match, and my temper, he said, ‘An angry bee stings, and dies. It was therefore better not to get angry’. (I later discovered it was a metaphor Seneca had used to try and persuade Nero that being a murdering pyromaniac would not be good for his legacy)
Metaphors can also be subtle uses of language that go largely unnoticed, but which can have a significant effect on the way we think about a situation. For example, ‘crime wave’ is an emotive term that may lead to someone reading the term conclude that there was more crime than if the numbers were simply stated. The latter lacks the drama and emotive impact of the former.
Similarly, President Reagans ‘war on crime’ drove a military type response to drugs that resulted in a huge increase in incarceration rates, but no reduction in the availability of drugs. The ‘war’ was won when the ‘enemy’ was stopped, while doing nothing to address the causes of them becoming enemies in the first place. (Americans seem to be very good at this sort of self- delusion)
There is a substantial body of academic evidence surrounding the proposition that the use of metaphors counts for much more than we would naturally assume.
A former client, an SME whose lifeblood was being able to get to the senior people in target businesses in a B2B environment, found themselves struggling.
Many of those he needed to speak to, build a relationship with, and persuade that his solution was one that could be deployed easily, were increasingly protected by personal assistants in various forms.
He referred to them as ‘gate-keepers’ which they were. Their job was to ensure as far as possible that their bosses time was not wasted, that distractions were minimised and that they only saw the most important things.
My clients product did not necessarily fall into the ‘must see’ category, and he was therefore often frustrated.
After several conversations, we changed the metaphor in his mental model of the PA as ‘gate-keepers’ to one where they were ‘enablers’. In other words, he took the view that his task was not to get to the MD through the gatekeeper, but to engage the gatekeeper and turn them into an ‘enabler’ and even an advocate for their product.
Once this approach was understood and implemented, the results were spectacular.
Consider for a moment the impact of the current usage of the words ‘War’ and ‘China’ in any political statement from proponents of the AUKUS submarine deal. The language and the resultant frame through which most will consider the merits of this project will be influenced by the usage of those two words. Had anyone in power used the term ‘industrial development catalyst’ or ‘nation building’ it would have significantly changed the nature of the ‘debate’ surrounding this decision.
Metaphors are a natural and very important component of our communication. We learn to understand them as children, using them automatically to communicate effectively.
What metaphors are you using in your communication?
Mar 20, 2023 | Governance, Leadership
The dream of every entrepreneur is to have a monopoly, a place where they can set prices without any of those nasty competitive forces impacting on profits.
Monopolies are the poison of public policy, it is why we have the many agencies that seek to ensure transparency, competition and good behaviour by corporations with some level of pricing power.
The management of these two extremes by public institutions has created some really ugly children.
Public assets that have been developed by public money to provide a service and the infrastructure upon which to build businesses has been sold off to the highest bidder. Surprise, surprise, the price goes up.
Natural monopolies and public assets flogged off for the same reason, with the same result. Power, communications, education, roads, rail, land, the list just goes on, and on.
The seeming disconnect in the current election campaigns, both state and federal is instructive. People are sick and tired of the political narrative that all will be well. Just trust us, we will be better than the other lot who are the devil in a shiny suit!!
At our core, we all seem to know that the problems are being swept under the carpet, where they are mouldering and compounding, and at some time will bite us on the arse. This post on the Guardian website looking at the changes in Australia’s tax base over time is instructive. It is now quite old, but the trends shown are not just still evident, but thriving. We all are demanding more, and the pollies are dishing it out to get elected, but increasingly we will not have it. The disinterest and dissatisfaction with our institutions is just magnified by this sort of misinformation, but in the absence of any genuine leadership, we vote for self-interest, with our wallets.
On Saturday, I have no idea who will get my vote in the state election. Neither of the major parties appear capable of anticipating and responding to the tsunami of change coming at us. Both ‘leaders’ are spraying Monopoly money around, making hollow promises to fix current problems that cannot possibly be met, without any reference to the challenges of the future.
I have emailed both the major parties seeking to understand the capabilities and experience the candidates in my electorate brings to the table. The incumbent Labour candidates office sent me an automated generic response that told me nothing beyond the fact that he is a good bloke, with some academic and work credibility, and loves his family. The Libs excelled, by not even sending an auto response. This is probably because they did not have a candidate, a now remedied situation by the nomination of an unknown young party hack last week. If they cannot organise something as simple as that, how can they run the state?
Are the current opposition any more capable? I suspect not.
We will just end up with more ugly children that need to be understood and funded. Somehow. .
Header cartoon credit: Tom Gauld, whose acerbic take on life is refreshing after writing a post on politics.
