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by Brian H. Maskell, President, and Bruce L. Baggaley, Senior Partner, BMA Inc.

Journal of Cost Management, Jan/Feb 2001

Change is needed in the methods, approach, and function of management accountants in most Western companies - if we are to be relevant and useful in these increasingly challenging times. The focus of management accounting needs to move from cost to value creation. Our planning and performance management must start with the needs of the customer. The role of the management accountant must move from collector and presenter of financial data to team-member and change agent. Management accounting systems must move from transaction-heavy inspection and reconciliation engines, to lean and vital providers of business insight.
While this article emphasizes lean manufacturers, the principles are applicable to a wide range of organizations.

Support for Value Creation

The fundamental role of management accountants in 21st century companies is to support the creation of value for the customers. Traditional management accounting emphasizes such issues as the control of the organization through the planning and tracking of costs, full utilization of resources, the integration of management accounting with the company’s financial accounts through inventory valuation and full cost absorption, optimizing efficiency through the comparison of "actual" costs to predetermined standards, and so forth. The change taking place in forward-thinking manufacturing companies place the emphasis upon the creation of customer value.
Value creation starts with the customer. Everything we do as manufacturers must be focused on customer needs and desires for products, services, and other value-added offerings. Our existing customers understand the value we create for them. But our customers may not be aware of their future needs; and we must anticipate and innovate to create new value; through innovative products, services, and processes. It is vital that we understand the value we provide to the customers; both now and in to the future. At the end of the day, our companies will only prosper when we provide increasingly high levels of value to the marketplace.

Understand And Evaluate Customer Value

If our companies are to focus on the value we create for the customer we must have a method of recognizing and evaluating that value. We must clearly understand our "value proposition" and how that value proposition can be applied daily to the benefit of the customers, and to drive the company's employees to further enhance the value created and to reduce waste. This requires the integration of the company's market research, product development, and customer development activities with a detailed assessment of the financial implications of this work.
Such tools as quality function deployment help assess the value placed by customers (and potential customers) on the features and characteristics of the company's products and services. This analysis is enhanced by careful assessment of the financial value of each aspect of the products and services provided to each segment of the marketplace. Some of the aspects that make up the value proposition can be tangibly assessed but others, like reputation, brand, or customer portfolio are inevitably less clear-cut. But the aim of the analysis is to provide a financial interpretation of how our customer's view the value created by the company.

Performance Measures Linked To Value Stream Goals

The measurement systems used by a company have an important influence on the performance and motivation of the people. The management accountant must see performance measurement as a significant part of his/her role. We need to develop a system that clearly links the strategic goals of the company to the measurements used throughout the organization; at every level.
Many companies suffer from performance measurements - particularly financial performance measurements - that are driving the people in a different direction from the company's strategy. The classic example is a company implementating lean manufacturing methods that continues to use traditional variance analysis and standard costing. The measurements pull the people one way while the lean philosophy is pulling another. Usually the financial measurements win out and a major opportunity for the company is lost or curtailed.

Often companies facing this problem develop new performance measurements for the operational control of the business, while maintaining traditional cost accounting methods to "keep the books straight". This is perhaps the worst of both worlds. Instead of one control system, the company now has two. This is not only creating more waste, it is creating a platform for conflict, confusion, and misdirection.
We need to develop a single, balanced, and consistent performance measurement system that directly translates the company's strategy, goals, and objectives into measurements used at every level of the organization. The system must measure not only the outcomes of the company's strategies but also those elements of the business that drive the success of the company's strategy. The measurement system must, in addition, clearly identify the obstacles to this success and provide methods for measuring and analyzing these issues.

Obstacles To The Flow Of Work Highlighted

The company's management accounting systems must clearly identify the obstacles to flow. If we are in the value creating business then the value is created when the work flows unencumbered through the company's value streams and processes. When the flow stops value is no longer created and waste begins. The management accounting systems must have a way to show this clearly and timely. The obstacles to flow must be identified and show their impact on time, cost, and quality. The management accounting system must also have a method for showing the root causes of this waste and how these obstacles impact the company's strategic and tactical goals.
The management accounting system must have deep roots into the company's capacity analysis. Merely tracking and reporting costs and variances does nothing to address the real issues an organization faces when transitioning to a lean and customer-value focused company. The capacity available throughout the value streams and processes is of the first importance; particularly the capacity constraints and the unused capacity. The management accounting systems need to address these issues and provide business insight.

Waste Made Visible

Closely tied to the issues of obstacles to flow is the identification and analysis of waste. Traditional management accounting systems deliberately hide the waste through standard costs and budgets. The management accounting systems needed by 21st century organizations must be the opposite. We need to see the waste clearly and often. We need to identify the root causes of that waste and assess its impact on the company's strategic and tactical goals. The waste can be identified financially, in terms of time (particularly lead time and cycle time), and in terms of quality.

Much waste within traditional companies is contained within high levels of inventory. Inventory can be considered as "stored capacity". It is capacity that is expended at one time and used later. Inventory can also be seen as the principle method used to cover over problems the company can not solve at this time. The identification of inventory, not merely as an item on the balance sheet, but classified and with assigned responsibility is an important driver of improvement. Companies that place a high value (financial or otherwise) on the reduction and elimination of inventory are companies that drive fast effective improvement throughout their production and distribution operations.

Show Continuous Improvement Progress

The most important purpose of management accounting is to engender relentless continuous improvement. Our management accounting systems must provide measurements, analysis, classification, and insight into the problems of the process; cost problems, time problems, quality problems, waste problems, inventory problems, customer service and satisfaction problems, and so forth. The management accounting systems must not only identify these issues but provide guidance on their importance and their root causes.

The reports and measurements within the management accounting system must actively support the local empowerment of continuous improvement teams. This is done by making available the right information at the right time, and in a format that is accessible and useful to the team members. Much of this information is gathered and provided locally. Other information is constantly made available within data warehouses or web-sites; ready for the teams to pull down, analyze, summarize, and provide graphical presentation. This information is used to initiate improvement project designed to achieve strategic performance goals. Other information is used to identify variability or problems ahead of time so they can "headed off at the pass". Information is also analyzed so that root causes and their sources can be identified and eliminated.

When a company has a large number of continuous improvement projects on the go all the time, it can be important to assess the impact of these changes. The management accounting system must have a simple and standard method to assess the impact of each project on the company's strategic and local performance measurements, the costs and waste within the processes, and the combined effect of multiple projects. The management accounting process must be able to identify the success (or otherwise) of the projects. And the continuous improvement process (often the 7 Steps of quality improvement) must include the updating of the management accounting cost and measurement information along with the standardization changes made to bills of materials, production routings, work standards, and other documentation.

The company's continuous improvement teams - in whatever form they are established - should see the management accounting systems as their principle source for project initiation, analysis, prioritization, and measurement of success. The management accounting system must not be seen as a watchdog to keep track of the business changes, but an inherent part of every aspect of the continuous improvement process.

The Value Creating Management Accountant

To achieve the transformation from traditional management accounting to this focus on creation of value requires changes to every aspect of a management accountant’s work – indeed to the role of the management accountant in the company.
Changes are needed in the regular accounting methods of the business to eliminate transactions, replace traditional control methods with operational controls, and to free-up the management accountant for a more pro-active role. Traditional management accounting methods including budgeting, performance measurements, financial planning, and variance analysis need to be changed. The work of financial planning and control the business is integrated with the operational planning and control of the business using such methods as sales & operations planning, balanced performance measurements, and simple, summary direct costing that eliminates most cost allocation.

The broader business control becomes focused on customer-driven value creation through the use of such methods as target costing. Target costing is used to understand the value created for the customers and the drive the implications of this through the entire value stream. The company is organized into value stream units focused on addressing customer requirements; now and into the future. Value stream organization greatly simplifies the accounting processes by enabling summarized direct costing. The value streams are somewhat autonomous entities with their own P&L and Balance Sheet responsibility.

The role of the management accountant becomes very much integrated with the value-creating business functions. The finance people become important members of the value stream teams. The accounting, control, and performance measurement information is designed to support and enhance the continuous improvement process. The management accountant becomes a change-agent within a world-class organization.

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