The Navigator and the Management Accountant

About two centuries ago there was a navigator who served on a ship that regularly sailed through dangerous waters. It was this navigator’s job to make sure the captain always knew where the ship had been, where it was, and how to safely and efficiently move the ship from one point to another. In the performance of his duties, the navigator relied on a set of sophisticated instruments. Without the effective functioning of these instruments, it would be impossible for him to chart the safest and most efficient course for the ship to follow.

One day the navigator began to suspect that one of his most important instruments was calibrated incorrectly. If his suspicions turned out to be correct, the navigational information he provided to the captain – information on which the captain based the decisions necessary to safely and efficiently direct the ship – was inaccurate. After several days of reexamining the evidence and rethinking his conclusions, the navigator concluded that something was definitely wrong with the way his instruments were making their measurements.

No one but the navigator had any inkling that there might be anything wrong with the ship’s navigation information. He knew, of course, that he should immediately report the problem to the captain. He was, however, intimidated by the captain’s style and thought that pointing out a problem with instruments that had seemingly worked in the past would make him look bad. As a result, our navigator decided not to inform the captain.

As a result of his decision, the navigator always made sure he slept near a lifeboat so that if his inaccurate navigational information led to a disaster, his chances of survival would be high. Unfortunately, faulty navigational information caused the ship hit a reef that the captain believed to be many miles away. The ship was lost, the cargo was lost, and many sailors lost their lives. Our navigator – always being in close proximity to the lifeboats – survived the sinking and later became the navigator on another ship.

What is your opinion of this navigator? Do you think he’s worthy of being considered an able navigation professional? Would you want him as your ship’s navigator?

Two centuries later there was a management accountant who worked for a company in which there were hundreds of stakeholders – from investors who had put their savings at risk to long-time employees who invested many years of their life in the firm. It was the job of this management accountant to make sure the company knew how it had performed, its current financial position, and the likely consequences of decisions being considered by the company’s president. In the performance of his duties, the management accountant relied on a cost information based on a model that was believed to be a true representation of the company’s economics.

One day the management accountant began to suspect that the model on which his cost information was based was calibrated incorrectly – it did not reflect the business underlying economics. If his suspicions turned out to be correct, the decision costing information he provided to the president – information on which the president based the decisions necessary to direct the company toward its strategic objectives – was inaccurate. After several days of reexamining the evidence and rethinking his conclusions, the management accountant concluded that something was definitely wrong with the way the company’s cost system was making its measurements.

No one but the management accountant had any inkling that there might be anything wrong with the company’s decision costing information. He knew, of course, that he should immediately report the problem to the president. He was, however, intimidated by the president’s style and thought that pointing out a problem with the cost model that had seemingly worked in the past would make him look bad. As a result, our management accountant decided not to inform the president.

As a result of his decision, the management accountant made sure he kept his network up-to-date so that if his inaccurate management accounting information led to a disaster, his chances of landing another job would be high. Unfortunately, faulty management accounting information caused the president to make inappropriate pricing, operating, investment, and other decisions that led the company into bankruptcy. The company went out of business, the owners lost their investment, creditors incurred financial losses, and many long-time, hard-working employees lost their jobs. The management accountant, however, easily found a job at another company.

What is your opinion of this management accountant? Do you put him in the same category as our navigator from two centuries earlier? Is he someone you would actually want on your management team?

An organization’s operating and cost models are critical components of its decision support system. Along with revenue and investment models, the make up the Profitability Analytics Framework. If those models are not causality-based and do not reflect the fundamental economics that underlie the organization’s operations, the information they provide will mislead decision makers and undermine the quality of their decisions.

As stewards entrusted with ensuring the quality of cost information, management accountants cannot bury their heads in the sand like the one in the story, but must actively pursue the development and use of models that accurately reflect the cost economics of their organizations. Instead of being value-depleting members of the team, like the navigator and management accountant in our story, they must become value-adding members through the development and use of causality-based models that accurately reflect their organization’s underlying economics for use in supporting revenue, operating and investment decisions – a process emphasized by the Profitability Analytics Framework.