The Sonax Group From Data To Decisions
A Practitioners Viewpoint on the Priorities forManagement Accounting Education & Research
David A.J.AxsonPresident and FounderSonax Group Inc.
January 2005
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About David Axson
President of The Sonax Group
Co-founder of The Hackett Group
Author of the book Best Practices in Planning and
Management Reporting (John Wiley & Sons)
Former Head of Corporate Planning for Bank of America
Twenty years of business and consulting experience in
finance and accounting
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Discussion Topics
Comments on the current environment
Current state of management accounting
Implications for management accounting education and research
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Today the spotlight is on financial management like never before ...
Manage Risk
Provide Visibility
Accept Uncertainty
Assure Integrity
Reduce Costs
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Prompting some serious questions...
Are we:
Focused on the right things ?
Fast enough ?
Delivering insight ?
Cost effective ?
Technology enabled ?
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The world is very different
Then Manufacturing centric
Demand exceeded supply
Local to national markets
Few competitors
Long product life cycles
Constrained capital
Weak special interests
Now Service centric
Supply often exceeds demand
Global markets
Many competitors/alternatives
Short product life cycles
Easy access to capital
Organized special interests (lawyers, environmentalists)
• Simplicity• Predictability• Stability
• Complexity• Volatility• Uncertainty
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Quiz … What do these companies have in common?
Amdahl Boeing Chesebrough-Ponds Data General Delta Airlines Digital Equipment Du Pont
K-Mart Kodak Levi Strauss McDonalds Raychem Revlon Wang Labs
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Quiz … How long will today’s most admired remain there?
Wal-Mart Berkshire Hathaway Southwest Airlines General Electric Dell Microsoft Johnson & Johnson Starbucks Fedex IBM
Rubbermaid Digital Equipment Lucent Technologies Levi Strauss Eastman Kodak Time Inc. Merck Walt Disney Motorola AT&T
2004 Former Top 10 Companies 1983-2002
Source: Fortune Magazine/Sonax Group Research
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Fact … most companies are fighting a tough battle
Innovators & Leaders
Stagnating
Declining
15%
25%
60%Growth
TimeSource: Sonax Group Research
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Fact… after 5 years most stagnate
-10%
-5%
0%
5%
10%
15%
Years in existence
Profitability of New Market Entrants Relative to Industry Peers
Source: Foster & Kaplan, Creative Destruction, Doubleday 2002
0 5 10 15 20
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Two key reasons companies stagnate and die
1. Miss profound external changes
2. Too much good management…
Let’s discuss each in turn
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1. External changes are coming faster
Globalization
ProductLife Cycles
Channels
Outsourcing/Offshoring
SpecialInterests
TechnologyLoyalty
Innovation
Regulation
Stakeholders
Demographics
Competitors
Market TurmoilMarket Turmoil
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Companies miss the danger signs
The challenge of running day to day operations is so great that little time is left to look outside
No one has responsibility for understanding the environment
Success tends to breed risk aversion and desire to protect the status quo
Plans focus on success rarely contemplating failure No early warning mechanisms exists Useful information is scarce – all history all the time
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2. Good management is stagnating companies …
Follow a professional approach to decision making Plan in detail and stick to it MBA discipline – all analytics all the time
Follow the latest management fads Systematic planning Activity based costing Six sigma Sustainable competitive advantage ERP/Web/CPM etc. Balanced scorecards Continuous improvement
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… By using mid-20th century processes to manage turmoil
Current management process created by Alfred P. Sloan at General Motors
Doesn’t work todayMulti year strategic plans
Detailed annual budgets
Static monthly reporting
Single point or rolling estimates
Metric overload
Consumed by rapid short term problem solving
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Reinforced by an inflexible culture
Stiffens over time Assumption of success and continuity Reward predictability Unwillingness to shed dying business Poor track record of driving major changes Relentless pursuit of incremental improvement
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Current trends are making it worse
More data – less insight More analysis – less dialog and intuition Single point decision making – missing the big picture Inwardly focused – controlling the controllable Over reliance on technology – bad data faster
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Most finance executives are very frustrated…
Ever increasing compliance load Developing detailed plans and budgets Inability to develop accurate forecasts Unproductive internal cost allocation and transfer
pricing Incentive compensation systems that reward the best
games players
Top causes of senior finance management frustration
Source: Sonax Group Research
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ExampleBudgeting is a dangerous and pernicious activity Only certainty is you will be wrong Mismatched with business cycles Ceased to be an effective control mechanism Riddled with sandbagging and conservatism Desire for detail increasingly mismatched with predictive capability Used as an excuse for poor performance not a motivator of excellent
performance
What’s important Acquiring customers Retaining customers Retaining talent employee Fostering innovation Successfully managing projects
What’s budgeted Salaries and wages Facilities expense Telecommunications costs Travel & entertainment Depreciation
Plan what matters
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One definition…
Management accounting is concerned with the provision and use of accounting information to managers within organizations, to facilitate the
managers in their decision making and management control functions.
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What does this mean for management accounting? A personal view
Current focus Costs Certainty Precision Budgeting Cost accounting Operational execution Criteria for success Calendar driven processes Silver bullets
Required focus Revenues Risk Accuracy Forecasting Cost elasticity External threats Criteria for abandonment Event triggered processes Portfolio of skills and tools
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Attributes of an effective 21st century set of management practices
Well developed risk based early warning system Reporting that balances external and internal views Dynamic planning replacing annual budgeting Desire for detail matched to predictive capability Finance staffs focused exclusively on risk
management and decision support Reward performance not plans Value speed and responsiveness over precision and
detail
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ExamplePerformance measurement -- measure what matters
What We Measure
Plant & equipment
Rent
Travel expenses
Depreciation
Bad debt
What We Value
Talented associates
Customer relationships
Supplier partnerships
Unique knowledge
Execution capability
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ExamplePerformance measurement – redefine balance
Lagging Leading
External
Internal
1
23
4
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ExamplePerformance measurement – drive decisions & action
0%10%20%30%
40%50%60%70%
J F M A M J J A S O N D
Close ratio
Orders placedQuotes issued
1
2
34
56
• Pipeline of quotes has dropped 30% in last 30 days
• ABC Inc is aggressively discounting in top 20 markets
Attributes1.Relevant ratio2.Trend3.Tolerance4.Early alert5.Call to action6.Forecast impact7.Additional information for context
7
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A personal list of issues that require further research and education
Risk management Identifying and analyzing risk Integrating risk and scenario planning into core management practices
Developing an early warning mechanism Use of tolerances Event triggered Context based
Project and initiative accounting Integration with planning Development of more credible ROI measures Incorporation of risk of failure -- criteria for abandonment