be careful what you measure, says management guru gary cokins
^ click to play
with steven sacks
cpas and finance leaders must start asking some really painful questions, according to gary cokins, an internationally recognized expert in performance management, in this interview with steven sacks for 卡塔尔世界杯常规比赛时间.
questions like:
• do we know where we make or lose money?
• do our managers understand the strategy? the executives?
• are we measuring the right things?
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there is confusion, a lack of consensus about what enterprise performance management and corporate performance management is. many think both are a process and a system. they are actually the integration of multiple methods.
an effective epm and cpm method depends on good high-quality source data that needs to produce facts and cannot just depend on opinion.
key takeaways
- epm is much broader than a cfo initiative. it’s all about giving cfos better information so they can have the insights to make better decisions. it is for any type of organization in any type of industry.
- three major issues in operations: strategy, execution, failure, flawed measures of costs and profit of products, service lines and customers. it’s all about aligning the behavior of the employees and managers with the strategy of the executives.
- activity-based costing is just standard that is basically full absorption costing done correctly. this is management accounting information. with external reporting, if the numbers are wrong, you go to jail. management accounting, you get the numbers wrong, you don’t go to jail.
- when people are defining key performance indicators, they need to use a technique called correlation. you can look at a kpi and how it goes up or down and its impact on the next kpi that it influences. if it’s poor correlation, it means that is it not a particularly good kpi.
- epm and cpm can be applied to customer or client profitability. consider high maintenance customers; always changing schedule; never buying standard, always special. always calling the help desk. always returning goods. low maintenance customers are preferable because they only buy standard. never changed schedule. never call help desk. never return goods. if those two customers bought the same volume, same mix, same price, they’re not equally profitable. because the high maintenance one is really, really eroding a lot of work.
- for cpa firms, they have to look at their clients, their revenues, and their billable hours. and basically, if they use activity-based costing principles, they’re all based on work activities. it differentiates very profitable clients from low-profit clients.
- activity-based costing is necessary to get the true cost of products, service lines, etc. when it comes to strategy, execution, leaders have to understand the strategy. it is important to get measures. that’s where the kpis come into play. you get what you measure. if you can’t measure it, you can’t manage it. if you can’t manage it, you can’t improve it.
- the impact on robotic process automation and artificial intelligence on the cpa profession, will eliminate a lot of jobs, and not just in the area of audit, but also transactional areas like payroll clerks, invoicing and purchase orders.
- everyone should go to the youtube video: “humans need not apply.” the audit is not just sampling, because through ai, it’s going to be 100%.
gary cokins is an internationally recognized expert, speaker, and author in enterprise and corporate performance management improvement methods and business analytics. he is the founder of analytics-based performance management, an advisory firm located in cary, north carolina at www.garycokins.com. gary received a bs degree with honors in industrial engineering/operations research from cornell university in 1971. he received his mba with honors from northwestern university’s kellogg school of management in 1974.
gary began his career as a strategic planner with fmc’s link-belt division and then served as financial controller and operations manager. in 1981 gary began his management consulting career first with deloitte consulting, and then in 1988 with kpmg consulting. in 1992 gary headed the national cost management consulting services for electronic data systems (eds) now part of hp. from 1997 until 2013 gary was a principal consultant with sas, a leading provider of business analytics software.
his two most recent books are performance management: integrating strategy execution, methodologies, risk, and analytics, and predictive business analytics. his books are published by john wiley & sons.
https://www.linkedin.com/in/garycokins. find cokins’ books at https://www.goodreads.com/author/list/47692.gary_cokins
3 responses to “the myths of performance management”
gary cokins
frank … i am the person interviewed by steve sacks in this podcast.
to reply to your comment, time sheets are not necessary if the organization is interested in reasonably accurate (and not precise) reporting of its profit margins by product, service-line (e.g., audit), channel, and customer / client.
the source input for much of the calculation of these profit margin can be collected from a limited number of managers and employee teams. they can provide approximate estimates (with percentages) for how customers / clients consume the work activity costs that in turn consume the resource capacity expenses (e.g., salaries, wages, supplies, assets, etc.)
the issue here is what are the “prioritized determinants of accuracy” to calculate costs. a key principle for costing is all cost assignments must “normalize to 100%”. that is how reconciliation of expense into costs is perfect. using a few managers’ percentage estimates of time (rather than using time sheets) for all employees as groups is sufficient. it is counterintuitive to many accountants, but there is “offsetting error” from those percentage estimates. this means the accuracy of the output costs are relatively more sensitive to the relationship between the final cost objects and the work activities and less sensitive between the work activities and the resource expenses (e.g., salaries and wages). hence, time sheets are not needed.
however, time sheets are required if they are integrated to a billing and invoicing system to clients (e.g., law firm, cpa firm). but that is different topic. this topic is for an organization to understand where it makes and loses money and by how much by the products, service-lines (e.g., audit), channels, and customers / clients.
on this topic, you and others might enjoy this article that can be downloaded from the link below. i wrote the article for the strategic finance magazine published by the institute for management accountants (ima). it is titled “measuring and managing customer profitability”. it is related to my part time role as the ima executive in residence where i served a 3 year term as the ima’s part-time “executive in residence” concluding last in 2018. (the http://www.imanet.org has 145,000 members in 140+ countries.)
http://sfmagazine.com/wp-content/uploads/sfarchive/2015/02/measuring-and-managing-customer-profitability.pdf
if you or anyone is interested in how a repeatable and reliable abc system can be implemented in 3 weeks, and not in many months, (including a your firm’s clients), i can share a document describing my “rapid prototyping with iterative remodeling” abc implementation method.
there are many misconceptions and misunderstandings about abc. if you (or anyone) is interested in knowing these, this link to a pdf of slides titled “why use abc?” describes them.
https://static1.squarespace.com/static/58496e0fd2b857f95040ecdd/t/5da73c74e15e936ba8eef497/1571241077664/gary+cokins+why+use+abc.pdf
i welcome further comments or questions. … gary … gary cokins
frank stitely
remind me how you evaluate client profitability if you’re no longer tracking costs. you’re pretending. that’s how you do it when you’ve thrown out your time tracking.
gary cokins
frank … i am the person interviewed by steve sacks in this podcast.
to reply to your comment, time sheets are not necessary if the organization is interested in reasonably accurate (and not precise) reporting of its profit margins by product, service-line (e.g., audit), channel, and customer / client.
the source input for much of the calculation of these profit margin can be collected from a limited number of managers and employee teams. they can provide approximate estimates (with percentages) for how customers / clients consume the work activity costs that in turn consume the resource capacity expenses (e.g., salaries, wages, supplies, assets, etc.)
the issue here is what are the “prioritized determinants of accuracy” to calculate costs. a key principle for costing is all cost assignments must “normalize to 100%”. that is how reconciliation of expense into costs is perfect. using a few managers’ percentage estimates of time (rather than using time sheets) for all employees as groups is sufficient. it is counterintuitive to many accountants, but there is “offsetting error” from those percentage estimates. this means the accuracy of the output costs are relatively more sensitive to the relationship between the final cost objects and the work activities and less sensitive between the work activities and the resource expenses (e.g., salaries and wages). hence, time sheets are not needed.
however, time sheets are required if they are integrated to a billing and invoicing system to clients (e.g., law firm, cpa firm). but that is different topic. this topic is for an organization to understand where it makes and loses money and by how much by the products, service-lines (e.g., audit), channels, and customers / clients.
on this topic, you and others might enjoy this article that can be downloaded from the link below. i wrote the article for the strategic finance magazine published by the institute for management accountants (ima). it is titled “measuring and managing customer profitability”. it is related to my part time role as the ima executive in residence where i served a 3 year term as the ima’s part-time “executive in residence” concluding last in 2018. (the http://www.imanet.org has 145,000 members in 140+ countries.)
http://sfmagazine.com/wp-content/uploads/sfarchive/2015/02/measuring-and-managing-customer-profitability.pdf
if you or anyone is interested in how a repeatable and reliable abc system can be implemented in 3 weeks, and not in many months, (including a your firm’s clients), i can share a document describing my “rapid prototyping with iterative remodeling” abc implementation method.
there are many misconceptions and misunderstandings about abc. if you (or anyone) is interested in knowing these, this link to a pdf of slides titled “why use abc?” describes them.
https://static1.squarespace.com/static/58496e0fd2b857f95040ecdd/t/5da73c74e15e936ba8eef497/1571241077664/gary+cokins+why+use+abc.pdf
i welcome further comments or questions. … gary … gary cokins