The Sonax Group From Data To Decisions A Practitioners Viewpoint on the Priorities for Management Accounting Education & Research David A.J.Axson President.

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

Page 2Copyright © 2004 The Sonax Group The Sonax Group

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


Discussion Topics

Comments on the current environment

Current state of management accounting

Implications for management accounting education and research


Today the spotlight is on financial management like never before ...

Manage Risk

Provide Visibility

Accept Uncertainty

Assure Integrity

Reduce Costs


Prompting some serious questions...

Are we:

Focused on the right things ?

Fast enough ?

Delivering insight ?

Cost effective ?

Technology enabled ?


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


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


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


Fact … most companies are fighting a tough battle

Innovators & Leaders

Stagnating

Declining

15%

25%

60%Growth

TimeSource: Sonax Group Research


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


Two key reasons companies stagnate and die

1. Miss profound external changes

2. Too much good management…

Let’s discuss each in turn


1. External changes are coming faster

Globalization

ProductLife Cycles

Channels

Outsourcing/Offshoring

SpecialInterests

TechnologyLoyalty

Innovation

Regulation

Stakeholders

Demographics

Competitors

Market TurmoilMarket Turmoil


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


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


… 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


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


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


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


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


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.


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


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


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


ExamplePerformance measurement – redefine balance

Lagging Leading

External

Internal

1

23

4


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


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

The Sonax Group From Data To Decisions A Practitioners Viewpoint on the Priorities for Management Accounting Education & Research David A.J.Axson President.

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