Nothing warms the heart of a top executive like seeing everyone in the organization rowing in the same direction. CEOs and CFOs have spent years green-lighting IT investments to get business information flowing smoothly across the organization, keeping everyone in the know to support competitive agility and deploy capital wisely. They’ve pushed for the standardization of everything from processes to systems, data definitions, charts of accounts, policies, and procedures.

Executives now have a wealth of actionable performance information, rising up from the business unit level to be consolidated and analyzed by the board, key leaders, and shareholders. When it all comes together, it’s the perfect fuel for effective navigation.

That’s why many executives might be surprised to learn that one essential link in the performance management chain may be weaker than thought. A recent APQC study of executives at 628 electronics manufacturing companies suggests that line-unit managers don’t always grasp the big picture of how cost behaves. They might not fully understand the nuances of when and how cost is absorbed or by whom. And they may not have a firm idea of how cost can potentially creep out of control.

electronics cost behavior

When only 16% of line management employees in this cost-sensitive sector have a strong understanding of cost behavior — and 26% have little or no understanding — alarm bells should be sounding.

It’s not that organizations haven’t been trying. Again, looking at the efforts to impose cross-enterprise financial discipline, APQC’s study showed that 74% of organizations in this particular example have global process ownership in place for planning and management accounting (PMA). That effort is typically driven by a desire to weave strategic imperatives into worldwide operating plans.

Consider also that fully 70% say they insist on enterprise-wide standards for information, so there shouldn’t be any confusion about language and short-term targets. And 61% have implemented a standard financial chart of accounts, so costs should be crystal-clear to everyone involved. Right?

Think of getting a 100-piece orchestra playing perfectly in sync. It takes a maestro, a.k.a. the CFO, to pay close and steady attention and lead the process architects, change managers, and systems consolidators toward effective outcomes. You cannot just hire a consultant to come in and expect it all to work out.

My two cents: The prize won’t be found in incremental wins, like closing the books a few days faster. It has to do with financial management of human resources. Among the electronics companies that have benchmarked with APQC on the topic of PMA, only one in four are willing to rate themselves as “very effective” at developing their finance people. When organizations don’t develop their finance staffs successfully, chances are those staffs will fail to educate business line managers about what one CFO calls “the economic template of the business.”

In many organizations, top-line growth isn’t soaring like it used to before the recession. Keeping a tight rein on operating costs is more essential now than ever. Yet an organization’s understanding of cost control is only as strong as the weakest link in its performance management chain.

If your organization’s line-unit managers are flying by the seat of their pants when it comes to cost control, it’s time to step in. Cost management starts at the business-unit level, and good systems and standards only go so far. By training your finance and accounting people on operational financial analysis, then putting them to work as coaches and analysts supporting unit managers, you’ll get a better handle on cost while boosting the entire cost-information chain with better data.

As coaches, your team can help line managers better understand data about cost categories, sales patterns, and margins. They can help business-unit managers focus more on financial planning and analysis so they can make smarter decisions about allocating resources.

Gone are the days when companies could safely assume that as the top line grows, operating profit will just take care of itself. If you think your business-unit leaders could use a refresher course in Cost Behavior 101, remember that you’ve already got the teachers on your team. Why not commit to training some trainers to make good cost management an organization-wide practice?

Mary Driscoll is a senior research fellow in financial management at APQC, a nonprofit business benchmarking and research firm based in Houston.

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One response to “Metric of the Month: Cost Control Savvy”

  1. Key in detailed, yet clear cost analysis and traceability is to have ERP systems like SAP have complete integration of operational (time/xx, time/yy) and output measures (sales qty), where operational measures (xx & yy) are related to output qty.
    SAP isn’t quite there. Their ABC module is the farthest along out of all IT solutions, but could be much farther along, if myriad gaps not currently covered in it’s data schemas can be filled in, on the fly, by the HANA data fetching capability (speed) coupled with customization capabilities for data tracking and reporting that business level users can use. SAP needs to commit to this, not just HANA’s feed and speed applied to current ERP data relationship functionality.

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