Culture and Cost Control Go Hand in Hand
Corporate culture is finally emerging as a critical issue for effective governance and performance; there are even consultants who promise to benchmark your organizations culture against “best practice” so that you see where the gaps are and start to change your culture. This is probably in itself a sign that you should avoid these consultants, because culture is unique to every business—not something that can be created by following what others do. In many situations this uniqueness in culture explains why many organizations try and implement process improvements developed by successful companies, such as Toyota, yet don’t achieve the same results. The result is often millions of dollars invested and wasted in ideas that fail to deliver the desired returns.
So why should this interest financial managers and in particular those in business?
Financial managers play a key role in guiding decisions around cost control and minimization in every organization no matter what sector they work in—manufacturing or service, public or private sectors, small- and medium-sized entities, family business or multi-national corporations. Everyone is struggling to minimize cost. For most organizations, payroll and people -related costs represent a major piece of the cost picture; the other major cost is often supplier costs, which for many are a growing element as more organizations out-source and sub-contract many functions. Many financial managers focus on reducing payroll costs through headcount reductions as an approach to sustaining the bottom line.
Once when I, as a young divisional controller, questioned my senior international CFO about the wisdom of this, I was told that this constant approach to taking cost out of the system and forcing employees to find a better way of doing things drove continual improvement. When the company went out of business I started to develop a feeling that surely there must be a better way of engaging employees.
In today’s businesses, there is a great deal of emphasis on competitive advantage through customer focus and responsiveness, process effectiveness, innovation, partnerships with key suppliers, agility, and many other initiatives. What is the connection between developing these organizational capabilities in parallel to cost reduction? The answer is that if approaches to cost management and reduction are “done right” an organization can harness the power of human capital to deliver on all these competitive capabilities. However, if “done wrong” the financial manager can be aiding and abetting the destruction of these organizational capabilities and, ultimately, the organization itself. In the desire to enhance financial capital through improved profitability, all other “capitals” (in particular human capital, the driver of many organizational competitive advantages) can be depleted.
In the Statement on Management Accounting I recently wrote for the Institute of Management Accountants, The Behavioral Aspects of Cost Management, I set out the background to the changing competitive environment and the approaches needed to address effective cost management and control. The approach to “doing it right” is based on a 5C framework where organizational culture is at the center.
The challenge for many accountants is that culture is strongly related to the soft skills that impact relationships both internally and externally. While professional accountants must develop their soft skills for personal career reasons—such as their ability to interact with others and influence decision making—this need extends across the whole organization and must be part of its expected behavior. In the same way that traditional approaches to economics that assumed the “rationality of decision making” have been proven to be broadly invalid and lead to behavior-based economics, so it is with accounting. Accountants intuitively know the truth of un-anticipated behavior relative to internal controls, where employees who fail to buy-into the need for controls may make their own decisions on whether or not to comply. Where this failure in underlying buy-in exists and is complemented by an environment of low ethical standards, the results can be disastrous.
While the 5C approach starts with culture as a core aspect of strategy and organizational purpose, it embraces other key aspects—some of which parallel the 14 principles of W. Edwards Deming in terms of embedding quality into an entities’ culture. The next C is caring about cost as an organizational commitment. While culture creates the base for this effective approach, areas such as organizational structures, compensation frameworks, control systems, and procedural alignment are all important aspects. If these aspects, within which employees carry out their day-to-day responsibilities, discourage caring about cost then employees are not encouraged to pay attention to cost. Employees may react with an attitude of “why should I care” and “what’s in it for me” behavior.
The next C is for communications, an area where management accountants have a major role. For cost management to be effective, cost information must be understandable and aligned with the reality of the business—such as aligning process management and cost consumption through application of activity-based accounting. In addition, training to understand cost management and control must be in place for all decision makers. Responsibility and accountability for cost control must be clear. Allocations are frequently inconsistent with effective cost communication. Again, engagement and involvement are key to successful commitment to cost management, control, and reduction.
The next area is collaboration; this C focuses on the reality that in most organizations, the management of costs are inter-dependent and require focus on cross-silo and cross-functional efforts. This requires that costs are presented in a framework that aligns with cross-functional process management and also that there are effective approaches to teamwork and collaboration between departments. This extends to the ability to reward improvements on a team rather than individual or departmental basis, and also to ensure there is a culture that extends the sharing of cost-reduction benefits to all stakeholders involved, including suppliers.
Finally, one of the principles Deming talked about was not resorting to slogans and campaigns to ensure consistent quality. The same consistency of purpose is core to effective cost control. The final C is all about continuity; many financial managers become caught up in the periodic push for enhanced performance to meet quarterly or annual goals and the often short-term initiatives around cost reduction that support these. Among the several aspects included in continuity is the focus on communicating organizational context to key stakeholders on a continual basis—the reality of the competitive environment within which the business operates. This aspect of education cannot be over-emphasized—people need to understand why just as much as what and how in order to become engaged. In addition, efforts must be continuous and driven around concepts such as life-cycle management and communication of costs-savings goals and achievements. Focus on costs cannot be absent in the good times and then apply only in the bad times.
The accountant’s traditional focus on the task of both accounting and cost management cannot just be driven by systems and processes. These must be supported by and aligned with the human dynamics and the internal frameworks that impact how people behave. Accountants can influence cost control but at the end of the day, people control costs across the organization and to be effective everyone must want to participate in these efforts.