Imagine if an organization had a chief performance officer (such as Nancy Killefer, who was recently appointed by President Obama) and a small department that assisted line managers with the application of various methodologies in the performance management framework. Further imagine if that department had a help desk. Here are some questions, including answers from help desk staff members, which might be fielded:
I am in the pricing department. We determine what price the market can bear in an attempt to maximize our sales volume. We also make sure that the price provides an adequate profit margin. My concern is this: our cost accountants provide standard costs that are grotesquely flawed due to the way our sizable indirect and shared indirect expenses are allocated to products. I want true costs, not the reported costs. What should I do?
Almost every pricing department is in the same boat as ours, except for those organizations where the accounting department changed from traditional costing to an activity-based costing (ABC) method. What most pricing departments do is create their own shadow product costing data separate from the accountants. They assign the various indirect expenses to those products that use more or less (or all or none) of the indirect expenses - thus applying some cause-and-effect consumption relationships. Sadly, these pricing departments are doing the cost accounting departments job. Needless to say, things get confusing because managers are always asking, "Whose cost data are you using?" Eventually, you may want to get up the nerve to suggest to the CFO and financial controller that they implement an ABC system. But be prepared for their backlash argument: they must only use their traditional costing method to comply with generally accepted accounting principles. They dont want to break the rules and go to jail. What they dont realize is that if they trace and assign costs the correct way for internal managerial accounting, they wont go to jail.
I am the manager of our delivery operations. It baffles me that our marketing and sales departments seem to provide so many deals and special services to specific groups of customers who cause us so many headaches. We are constantly jumping through flaming hoops to do extraordinary activities (such as special packaging and expedited shipments) for these customers. My guess is that if we added up all these extra costs and combined them with our regular costs, these customers may possibly even be unprofitable to us. What should I do?
You and our marketing and sales departments have a misconception. By only considering short-term profitability - and focusing too much on the current costs of customer acquisition and retention and not enough on a customers long-term economic value to shareholders - you are missing the big picture.
By classifying our customer segments into a two-by-two matrix with the two axes as "easy or hard" and "to acquire or to retain," what will be revealed will influence managers to target mostly those customers who are easy to acquire and easy to maintain. But this leads to the false assumption that acquisition and retention costs are the major driver of customer profitability. This would not be a problem if each customer segment were equally profitable. But they are never equal!
I suggest you try to educate someone in marketing and accounting to apply business analytics to segment customers into this two-by-two or 10-by-10 grid of acquisition and retention. But dont stop there. Next, project the future for each segment using forecasting tools for future price, volume, costs, up selling, cross-selling and so on. This information can guide them to determine the optimal level of spending to maximize long-term customer profitability. Applying business analytics provides a competitive edge.
As CEO, I am constantly challenged to make difficult decisions regarding trade-offs between cost-saving measures and high customer satisfaction levels. For example, how do we improve customer service levels and cost-saving process efficiencies while restricted to fixed contract-like budget constraints and profit targets? How do I balance short-term and long-term goals?
I think we need better performance measurements - and they should somehow be causally linked to our strategy as well as to each other as leading or lagging measures. We also need to rethink how we conduct our annual budgeting process.
As background, I understand your pain that external forces are producing unprecedented uncertainty and volatility. The speed of change makes calendar-based planning (and long cycle times for planning with multiyear horizons) unsuitable for management purposes. Both short- and long-term pursuits involve change.
- Short-term goals require agility to maintain the linkage of a constantly adjusting strategy with operational execution, while complying with and meeting aggressive performance-level expectations of stakeholders, including our board of directorss demands for constantly increasing earnings.
- Long-term strategic objectives require continuous innovation, foresight of risk and opportunity, relentless process improvement, an eye on recruiting and retaining a motivated workforce, and leveraging partnerships and alliances of all kinds for interdependent mutual benefits.
I dont believe organizations need a performance management help desk. They simply need to complete implementing the integrated components of their performance management framework and be sure that each component is embedded with business analytics.
Register or login for access to this item and much more
All Information Management content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access