Turning Knowledge into Action – From One’s Head to One’s Heart

Those of you who have read my periodic authored articles will recognize that I am frustrated by the slow adoption rate by CFOs and accountants with implementing progressive management accounting methods including activity-based costing (ABC). Well, this essay that I am writing is another one about my frustration.

I recognize there is doubt and skepticism by CFOs and accountants. Many of them cannot believe that what they currently report is insufficient. The problem is they have misbeliefs that alternative methods are substantially superior to what they currently report.

The causes of resistance to specifically to ABC are mostly because of their misbeliefs. They include: 

·       A perception that ABC is too complicated and complex.

·       A belief that the extra effort’s benefits do not exceed the administrative effort to implement the ABC system. (The “ABC rapid prototyping with iterations” implementation method resolves this. With this method ABC can be implemented in 3 weeks, not in 6 months.)

·       Consultants wanting lots of billable hours construct the large and complex ABC systems where most are not understandable by their client and difficult to update and maintain.

·       The CFO worries that having two accounting systems (i.e., (1) external financial compliance reporting for government regulatory agencies using GAAP; (2) internal management accounting for insights and better decisions) will confuse their managers and employee teams. … Which cost data should I use?   !!!!

·       A perception that all employees must fill our daily time sheets as source input data for high-cost accuracy. They are not needed (and employees hate completing time sheets).

·       A belief that the higher cost accuracy of ABC compared to their existing traditional costing is maybe 5% error. It can be 30% to 60% or higher error.

Another problem is with the imbalance of a CFO’s excessive emphasis on external statutory and compliance financial reporting for government regulatory agencies (e.g., the USA’s SEC) dominating over internal management accounting. The purpose of the former is for “valuation” (e.g., inventories, cost of goods sold) whereas the latter’s purpose is for “creating financial value” for shareholders and owners by providing insights for better decisions. Most CFOs and accountants place their emphasis on the former rather than the latter

From the Head to the Heart

What is needed by CFOs and accountants is to pay attention to their head and their heart. I think of their “head” is what many of them know are the facts that that their current method of allocating overhead expenses (more properly referred to as indirect expenses) to calculate the costs of products and services are inaccurate and flawed. Their cost allocation factors (e.g., number of labor hours, number of units produced, number of services delivered, sales amounts, square feet or square meters) violate management accounting’s causality principle. There should be a cause-and-effect relationship between how much products and services consume of the resource expenses.

I then think of the “heart” as understanding why it matters to provide their managers and employee teams with better information. It is to enable them with insights to make better decisions. For CFOs and accountants knowing that they are underserving their organization is not enough. They need to progress from knowledge to action. And this means they need to exhibit caring. Indifference to the needs of managers and employee teams is irresponsible.

Second Chances

Some CFOs and accountants have attempted to implement ABC, but their effort failed. This is because of reasons I described above. Their ABC system was excessively large and complex and well beyond what was needed. So, its information was not understandable by the managers, and it was too difficult to maintain and update.

Those CFOs deserve a second chance. There are always second chances. Examples are a failed marriage or lack of success the first time with a college education. Even the television game show Jeopardy has a special edition of contestants who lost in their first round to a player with a higher score and are invited back to play with two others with same experience.

With a second chance one can learn from the prior mistakes in the first attempt. For example, with ABC the next attempt should be a implementing a simpler ABC system that’s accuracy is good enough. Management accounting does not require 100% accuracy the way that external statutory financial compliance reporting is does.

Cost versus Benefit … or Enchantment?

CFOs and accountants usually to think rationally. They are Newtonians like the famous physicist Isaac Newton. To them the world is a big machine. They want the pulleys, levers, and dials. They need to be Darwinian like the biologist Charles Darwin. Their organization is comprised of people … organisms. One needs to pay attention to “sense and respond” behavior.

My appeal to CFOs and accountants is to pursue a feeling of enchantment and fascination. They need a quiet passion to be ignited and inflamed. They need to seize the opportunity that can convert the knowledge about progressive management accounting methods into action. Procrastination and delay are costly when inferior decisions are being made daily compared to what can be much better decisions. These two questions are examples. Which types of customers are more attractive to retain, grow, and win back? And which types are not? Management accounting (e.g., ABC) can answer these questions including reporting a profit and loss (P&L) statement for each customer.   

What is needed by CFOs and accountants is that moment of ignition, something outside touching something deep inside. This ignition can spark the opening up of new personal possibilities that they can make a much bigger difference for their organization than just closing the books and producing external statutory compliance financial reporting. They can shift from being a “bean counter” to a “bean grower”.

These “ignition” moments may not happen in one’s conscious state but in an unconscious state where their interests ignite, desires get formed, and motivation is stimulated. This is where the CFO and accountant can transition from their head to their heart.

The Benefit from Curiosity – Improvement and Mastery

When CFOs and accountants were children they had much curiosity. We all did. Why should they stop being curious now? Many of them may wonder “How did other organizations successfully implement an activity-based costing (ABC) system and achieve the alleged benefits (i.e., higher profits) from its information?” Astronomers are curious about the physics of the universe, and biologists are curious about DNA and cell behavior that causes diseases. So, why can’t CFOs and accountants follow their inherent curiosity and do so passionately?

Like any passion, curiosity needs to be transformed from an intuition that there are better ways to the skills to achieve those better ways. Effectively curious CFOs and accountants like to explore new ideas and methods, but they also need to be brave enough to confront hard problems. An obstacle however is back to a problem many CFOs and accountants have which is the lack of awareness – insufficient knowledge. We are back to the “head”. For the progressive CFOs and accountants, the issue involves what they currently know and what they would like to know. There is a gap between them. To transition from the head to the heart CFOs and accountants need to be humble enough to recognize where the knowledge they currently have comes up short and then be inspired enough to learn and understand more – to close that gap.

Most people have a need to improve and get better whether it is shooting baskets in a house’s driveway basketball court or making a better tasting food recipe.

Whenever you are seeking improvement, you are on the edge of your existing abilities. Expanding those abilities provides a thrill accompanied with each next step’s accomplishment. Implementing progressive management accounting methods can be a joy with fulfillment for CFOs and accountants who have the will (the heart) to improve.

As the journey up the improvement mountain continues at the peak is mastery. Whether it is with golf, cooking or gardening, people intrinsically desire to achieve excellence at their craft. When CFOs and accountants seek to improve they have interest in being successful. They are not driven by a fear of failure. They perceive obstacles as challenges, not threats. They continue to search for more knowledge and strive to be better. The effort to do so becomes one’s reward. They can endure any setbacks but proceed with determination. Endurance, persistence, and stamina matter a lot in the pursuit of improvement. Making an effort means you care a lot about something.

Head, Heart, and Hands

What have I not added to my head and heart message? Hands. Having the will and caring (i.e., the heart) to implement progressive management accounting methods is not enough. One also needs “hands” to implement them. The “ABC rapid prototyping with iterations” approach that I wrote about above is a proven way to implement an ABC system in two weeks.

I can sum up this essay. It is about learning, accumulating knowledge, and accomplishing results.