About fifteen years ago I had lunch with an individual who had recently left one of the “Big Three” domestic auto companies where she worked as a financial analyst for about five years. During our conversation, I half-jokingly asked the question, “While you were working as a financial analyst, how much of your ‘financial analyzing’ was done before a decision was made and how much was done afterwards?”
Her answer surprised me. In her estimate, only about 25% of her work was done before a decision was made and 75% after it had already been made. Her task was usually to justify a decision that had already been made; not to provide input for the decision making process.
Inspired by her answer, I began an unscientific, undocumented, informal survey that I continue to conduct today. Whenever I get a chance, I’ll ask someone the same question I asked her fifteen years ago. The only difference is that I carefully define what I mean by “before.” “Before” means that the analysis takes place while alternative courses of action are being considered or, in the case of decisions that must be approved by ‘higher-ups,’ before it is decided to submit the decision for approval. For example, forecasts and plans that are constructed to arrive at a target result are not done before. Cost estimates that are “tweaked” to arrive at a predetermined cost are not done before. Similarly, analyses done to justify a capital expenditure are not done before unless they were done before it was decided to submit the request for approval. A “before” answer requires that it be performed as part of the initial decision making process.
I’ve asked somewhere between 25-30 financial executives and managers this question since that lunch fifteen years ago and the answers almost always follow the same pattern. Somewhere between 25%-40% of the analyses come before a decision and 60%-75% afterwards. I recall only once instance where the interviewee’s answer was as good as 50% before and 50% after. In other words, it appears that financial analyses are usually performed to justify a decision that has already been made, not to arrive at the decision itself.
How about the analyses you perform? Do they usually support the decision making process, or do they justify decision that have already been made? If they usually justify already-made decisions, why do you suppose the decision makers didn’t ask for the analyses before making their decisions? I’d be interested in hearing both your experiences and your take on the subject.
Thanks to Doug Hicks for writing this blog.
Great observation! This is a question I wish I had asked more often, but will now start to ask. What really concerns me is WHY?
I would suggest it is because most cost information available to organizations simply isn't used because it really isn't timely, representative of reality, or useful. As a result, most senior managers continue to use "rules of thumb" that have allowed them to succeed and be promoted over time. Most cost systems are fundamentally designed to meet minimum regulatory financial reporting compliance. The principles of regulatory financial reporting are NOT the principles that create effective decision support information. There is one principle for effective decision support information - Causality. It is not part of GAAP.
A second problem is timeliness. Actionable information is information that stops a problem in real time. Typical cost accounting information (regulatory/GAAP) is announced 2-6 weeks after the event. In all likelihood, a lot has changed. It is no longer information, it is a history lesson - irrelevant noise.
When costing is done with the clear objective of providing timely internal decision support, management can come to trust that the data and information will be available to use and rely on. When accountants understand and are active in the business, they will present the information in a way that their internal customers will value and seek.
I definitely agree. I gues management accountants need tools (IT skills maybe) to get relevant information to prepare a relevant profit analysis (Profit means sales and costs). Not only getting information from accounting records but also getting from the DB tables in their ERP systems so they can get what they really need and prepare analysis according to what operational departments are demanding. Need to get it on weekly basis not 2 or 3 weeks after the month ends. Here IT technology and skills are relevant but more relevant is to know what we want to get to provide really an valuable profit analysis
"If they usually justify already-made decisions, why do you suppose the decision makers didn’t ask for the analyses before making their decisions?" Yes: that's the key question: but then I guess - is it that... - They don't want the analysis before they make the decision because they prefer to make the decision based on something else (experience, intuition, etc.)? - They are used to getting 'analysis' but not insights and/or suggested and a reasoned course of action? - No-one (from Finance) is working sufficiently closely with them to even know there is a decision to be made - and therefore suggest obtaining information first?
(And I'm sure there are other scenarios, too)
All of the reasons noted are valid, but I believe the first one is the most fundamental; executives prefer to rely on their intuition, experience and emotion in making most of their decisions. Although that may be a good approach to decisions that must be made on short notice, there is plenty of time to consider the financial ramifications for the vast majority of decisions. Management accountants must position themselves as key advisors in the decision making process. They must develop influence in areas where they have no authority. This can be done by gaining a sound understanding of their organization’s business processes, building trusting relationships with their peers, developing valuable leadership skills and using causal modeling to gain a deeper understanding of the economics that underlie their organization’s operation.