This may be a fictitious story, but how true could it be?
Our company’s quarterly financial results were just announced. The loss was unexpectedly double last quarter’s loss, and we have now been in the red each quarter for more than a year. How can this be happening to us? Our company has been profitable for decades!
I can track the meetings, phone calls and emails among our managers from the moment the CFO’s staff calculated this quarter’s disappointing financial statement.
The Blame Game
When our CEO first saw the bad news, she immediately asked the CFO if there was an accounting error. Nope. The CFO reported that sales were down 2 percent, but the bottom line tanked at the product gross profit margin line, and it worsened further at the operating profit level due to over-budget distribution, selling and marketing expenses.
The CEO called our operations VP into her office and asked what happened. The operations VP pointed his finger at the excessive distribution expenses – specifically all the emergency premium shipments.
The CEO called the materials manager into her office for an explanation. He observed that production was missing many customer order shipment due dates, requiring costly overnight and premium shipping expenses to lessen the damage to customers satisfaction and loyalty. He pointed his finger at the production manager.
The CEO called the production manager into her office for an explanation. He noted that the sales department’s sales order forecasts missed the actual by a mile, and this has created costly chaos in production planning.
The CEO called our sales VP into her office for an explanation. The sales VP complained the sales forecasting software was limited and pointed a finger at our chief information officer.
The CEO called the CIO into her office for an explanation. The CIO said that our marketing department had not seen high value in forecasting software because it did not appear in the strategic plan. So he bought the cheapest forecasting software.
The CEO called our VP of strategic planning into her office for an explanation. He pointed out that the bonus pay incentive measurements for the marketing department were imbalanced, with little weight on customer service and mostly on how many sales brochures and emails were sent to customers and prospects, without differentiating the future potential of high versus low customer value.
The CEO called our marketing manager into her office for an explanation. The marketing manager pointed her finger at the CFO’s financial controller, complaining that the accounting department refused to reform their cost accounting to adopt activity-based costing to allow an understanding of true product costs and margins. Further, she complained that our controller had no interest in calculating how the expenses below the gross-margin line accurately trace to channels and customers to produce customer profitability reports for analysis and insights.
The CEO called the financial controller into her office for an explanation. The controller said our company’s external auditor, a highly respected CPA, worried that with ABC math there would be different numbers reported between the external financial reports (for valuation) and the internal managerial accounting system (for decisions to create value). The controller also noted that any cost-to-serve expenses below the product gross margin line are not capitalized as they are for products, so there is no reason to allocate them to customers.
The CEO phoned our auditing firm for an explanation. The audit firm partner denied making any such comments and advised our CEO that he felt our organization was fearful and resistant to change, and we did not possess a culture for metrics and business analytics. The auditor pointed his finger at our human resources VP for failing to advocate progressive performance measurement and management – from the CEO on down. This would involve adopting strategy maps, a balanced scorecard and dashboards.
The CEO called our human resources VP into her office for an explanation. The HR manager pointed his finger at the CEO and said, “Leadership is not the same thing as management. Managers cope with complexity while leaders cope with change. Leadership must exhibit vision and inspiration. Leadership sets the strategic direction, and performance management systems, which we do not have, then translates the executive team’s strategy into operations and the thousands of daily decisions made by employees and managers.”
The CEO thanked the HR VP for the lecture and fired him.
A Lesson Learned
What is the lesson? One can observe the irony that this circle of blame began and ended with the CEO. But the intended message is that this circle could have been broken several times by applying performance management methodologies:
- The CFO could have had an early warning alert signaling the rapid decline in earnings.
- The operations VP could have detected as a leading indicator the escalation in late scheduled orders.
- The materials manager could have analyzed the cause and effect of the late production runs and begun mitigation.
- The production manager could have recognized the declining accuracy of the sales forecasts sooner and recommended a powerful predictive analytics solution.
- The CIO could have realized the adverse consequences of not having a strategy map and balanced scorecard system and fought for its adoption.
- The VP of strategic planning could have demanded better selection of key performance indicators to drive behavior aligning operations to the strategy.
- The marketing manager could have strongly demanded the need for customer and product profitability and customer intelligence systems to identify which types of customers to retain, grow and acquire.
- The financial controller could have implemented an ABC management system to provide deeper sales and marketing insights.
- The CPA firm’s audit partner could have advised the CEO of the need for the ABC management system to shift the CFO’s emphasis from financial accounting to managerial accounting.
- The human resources VP could have recognized how essential organizational change management is to overcome the natural resistance to change in employees and managers.
- The CEO could have exhibited greater leadership by inspiring her staff with a full vision of a performance management framework fully integrated with the methodologies of business analytics.
A culture for business analytics, metrics and performance management solutions has become essential for long-term sustained competitiveness and organizational transformation.