29 – Cost Consciousness Part 4

Mitch MaxCost Consciousness

Mitch Max completes his series on developing cost consciousness within organizations with five factors to consider in looking at how the information is presented and used.

Click HERE to enter your own question.

In episode 29

Coming up on Performance Management Edge… Mitch Max wraps up his series on creating a Cost Conscious organization.

Thanks for coming back to our final segment in this series on Raising your Cost Consciousness.  If you missed the earlier segments, be sure to watch them right here on Performance Management Edge.

Our first segment introduced the notion that an organization can only become Cost Conscious when it has a strong set of cost analytics to guide its culture in making effective decisions. In segments 2 and 3 we reviewed different types of cost analysis techniques and reports to help the organization identify ways to improve its cost structure.

In this segment, I want to explore how this information gets used in a company’s culture.  It is an axiom that information is only valuable when used for decision-making.  Organizations have two types of reports that can be used – regular reporting and ad-hoc analytics.  Ad-hoc reports are used for specialized reporting to support specific point needs for information.  For example, while branch profitability reporting is used for regular performance monitoring, a branch-close decision requires special analysis that isolates variable costs that will truly “go away” from fixed costs that will be reabsorbed within the organization.

I want to focus more on regular reporting as a vehicle for improving Cost Consciousness.  There are 5 factors to consider in looking at how the information is presented and used:

  1. QUALITY – Is the information provided clear, transparent and understandable?

Information based on activity analysis is different than the type of financial information that managers are used to looking at.  It’s important that it is presented clearly, and that users can drill down to understand how it was developed.  It needs to reconcile to the financial information they otherwise receive, and it needs to be presented consistently within the organization and over time.  The tools provided to support the analysis must be robust, intuitive and easy to navigate.  Where appropriate, graphical capabilities should be provided to support visualization of trends and underlying data anomalies.

  1. INTEGRATION – Is the information integrated as a part of the total financial reporting package, or is it seen as additional information?

When information is presented outside of the regular reporting cycle, its perceived value is diminished.  We have seen some organizations even delay their reporting by a day if needed in order to incorporate cost analysis.  When presented at the same time as other financial information, the ability to use it as part of the monthly review cycle is enhanced, and it then can be further leveraged to support ongoing forecasting.

  1. ALIGNMENT – Does the information align with accountabilities?

Nothing frustrates managers more than seeing costs that they cannot manage included in their performance reports.  It’s critical that overhead costs allocated to businesses be separated out from those that are directly controllable.  If costs are allocated, such as HR admin or payroll, the cost rates used should be held fixed during a planning year so as to eliminate rate variances.

Similarly, new information won’t be used when decisions conflict with other more established or incentivized information.  For example, if branch managers are measured and compensated on sales volume, reporting on profitability will be a wasted exercise.  Or, if performance is based on Line of Business reports that use other allocation methods, people won’t trust or use the new costing information.  Often, conflicting information is more damaging than new information.

  1. TRAINING – Are the users trained and supported in the use of the cost information

Training is more than just helping people understand the reports.  To be truly effective, training needs to help people see how to use the information to support decisions.  Building case studies for training in the business context helps people internalize new decision styles, and become more comfortable in using the information effectively.

  1. TRUST – Are managers trusted to make decisions?

This last item is perhaps the most difficult to implement.  Our nature is often to centrally control decision-making.  To truly give managers the ability to manage their costs in a “cost-conscious” way, they need to have the freedom to act, and to make tradeoffs in how they are spending the company’s funds.  Great organizations ensure that their mangers understand corporate strategy, give them the information and tools to make decisions, and reward them based on the decisions that they take.

I hope you have found this series interesting as you work to raise your own organization’s Cost Consciousness.  I welcome any feedback or questions as you explore this in your own environment.

Thank you Mitch. This is Alan Stratton your host. Until next time on Performance Management Edge.

Comments are closed.