What are the Barriers and Obstacles Preventing the PAF?

Many often question why organizations are hesitant or slow to move forward with implementing systems and adopting progressive management accounting methods including analytics. I am also frustrated by this slow adoption rate. The “methods” are in the PACE Analytics Framework (PAF), and they are similar to the components with enterprise and corporate performance management (EPM/CPM).  

The PAF and enterprise and corporate performance management (EPM/CPM) are not a process. They are the integration of multiple performance improvement methods including:

·  Product, service line, channel, and customer profitability (using activity-based costing [ABC] );

·       Strategy management using strategy maps, balanced scorecards (with strategic KPIs) and dashboards (for operational OPIs);

·       Process improvement using lean management with lean accounting;

·       Process improvement using quality management with the cost of quality (COQ);

·       Capacity-sensitive driver-based budgeting and rolling financial forecasts;

·       What-if scenario analysis and sensitivity analysis with alternative input variables (e.g., forecast sales volume and mix);

·       Enterprise risk management (ERM); and

·       Data science and analytics.

These methods are imperative for any organization to excel at to remain viable and competitive. Sadly, many CFOs and accountants are still in the 1970s. How do we get them into the 21st century?

The Imbalance Between External Financial Accounting and Internal Management Accounting

The problem begins with the imbalance of emphasis of 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. Yes, if you get the external statutory accounting wrong you might go to jail. But if you get the internal management accounting wrong you don’t go to jail!

With internal management accounting it is better to be approximately correct than precisely wrong. That is, it is better to be roughly right than exactly wrong. An example of this is the tradition cost allocation of overhead (more properly referred to as indirect expenses) to product and service line costs. Many CFOs and accountants take the convenient route when allocating indirect expenses to calculate product or standard service-lines costs. They allocate expenses (e.g., salaries, purchases) into costs like “spreading butter across bread”. They use broadly averaged cost allocation factors that violate costing’s universal causality principle. Examples of these cost allocation factors are sales volume, number of employees, square feet, or number of direct labor input hours. There is no cause-and-effect relationship! The result is their calculated costs are substantially inaccurate and flawed compared to reality. Yes, they reconcile exactly for the external financial accounting, but they are wrong with the parts. (Activity-based costing [ABC] resolves this problem.)

Below are two categories that I have accumulated for my personal field of expertise with enterprise and corporate performance management (EPM/CPM) methods including advanced analytics. The two categories are Excuses and Barriers.

Excuses for not implementing PAF and EPM/CPM methods

·       We are profitable, so why does it matter?

·       We will purchase software that will fix our problems.

·       We already know our “true” costs from our general ledger financial reporting system.

·       We have done it this way forever. And we don’t do that here. We already know everything. It is in our heads.

·       We are a small organization. We’ll worry about better methods when we get larger.

·       All this hype is just made up stuff from highly paid consultants.

·       No one looks at the reports I create, so there is no point generating better reports.

·       We cannot afford better software to fix our problems.

·       We are way too busy doing other things.

·       We don’t know where to start or how to get started. (Using rapid prototyping with iterations can implement the methods in 3 weeks, not 6 months.)

Barriers: Reasons for the slow adoption rate of methods and systems

·       Dirty or low quality source data.

·       Disparate hardware as data sources (e.g., Dell, IBM, Hewlett Packard)

·       The perception that implementing PAF and EPM/CPM methods is too complex, and not worth the effort.

·       Human nature’s resistance to change. People like the status quo.

·       Fear of others knowing the truth … or its flawed truth.

·       Managers and employees not wanting to be measured and held accountable.

·       Excel Hell. The PAF and EPM/CPM methods require flexible modeling software and not racked-and-stacked columns and rows in Excel.

·       Insecurity and confidence deficiency – obsession to know “who else has done it” rather than judge if it just makes sense to do. (The ROI dilemma.)

·       Confirmation bias – starting with preconceptions to be validated.

·       Stove-pipe rivalries.

·       Misalignment of incentives. Poor KPI metrics and their targets.

·       Not realizing that line managers have less interest in historical reporting and greater interest in predictive outcomes (e.g., budgets and what if scenario analysis).

·       Inflated expectations that analytics is the magic pill … to cure all problems.

·       Lack of or weak leadership (which is not the same as management).

The causes of resistance to specifically to ABC are mostly because of 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.

A Need for Justice

Synonyms for justice are fairness, honesty, and righteousness. My message here is that an organization’s executives and line managers (e.g., sales, marketing, operations, supply chain) deserve much better financial information from their CFO and accountants. The CFO and accountants typically provide flawed and misleading management accounting information. The accountants are underserving their managers. It is borderline irresponsible.

A prior PACE Forum Article

To expand on this prior paragraph please read the PACE Forum article in this link below. Its title is “Bill of Rights for Users of Management Accounting Information”.

A Bill of Rights for Users of Management Accounting Information | PACE (profitability-analytics.org)