Some Accountants are the Blind Leading the Blind

I recently met a managerial consultant whose intentions were sincere, however his advice was surprising, but not totally surprising, to me.

He mentioned to me that a company had inquired to him whether they should consider using activity-based costing (ABC). His next step was initially encouraging. He contacted the accounting departments of the inquiring company’s major competitors. He asked them if they are using ABC. The answer from them was that none of them are.

A missed opportunity for good advice

I was hoping the next thing he would tell me is this. I was hoping he would inform the inquiring company that they had an opportunity to gain a competitive edge.

I presumed he would say to them, “I have good news for you. Your instincts are correct. You have realized that the amount of your indirect and shared expenses have grown large relative to your direct expenses. You may understand that this expansion is a result that your products and services have expanded with much diversity and variations. And the result is that complexity has caused this increase to manage the complexity. By your using a highly aggregated indirect cost pool with a single allocation factor that has no cause-and-effect relationship with those indirect expenses, the consequence is that you are simultaneously over- and-under-costing your products. Their costs exactly reconcile in total but not in with parts. This is because cost allocations are a zero sum error condition. Your competitors do not realize this, but you do. Go for it. Implement ABC. Your company will much better understand their profit margin layers and where it makes and loses money – and why.”

Sadly, he advised the inquiring company that since its competitors do not use ABC then that is evidence that ABC is of little benefit.

How long can this ignorance continue?

Exceptional EPM / CPM Systems are an Exception

Many organizations over-rate the quality of their enterprise and corporate performance management (EPM / CPM) methods and supporting software systems as well as exaggerate how comprehensive and integrated they are. For example, when you ask executives how well they measure and report their costs and non-financial performance measures, most proudly boast that they are very good. However, this is inconsistent and conflicts with surveys where anonymous replies from mid-level managers candidly score their scaled answers as “needs much improvement.”

Every organization cannot be above average!

What makes exceptionally good EPM / CPM systems exceptional?

Rather than try to be a sociologist and psychiatrist to explain the contradictions of executives boasting superiority while anonymously answered surveys reveal inferiority, let’s simply describe the full vision of an effective EPM / CPM system that organizations should aspire to.