Author Topic: What accountants cannot measure  (Read 77 times)


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What accountants cannot measure
« on: November 04, 2015, 04:59:00 pm »
Figures alone are not the key to keeping a grip on a business. Roger Cowe looks at a broader approach

MANAGING by numbers is enormously attractive to those struggling to make sense of a complex, fast changing world. But the most easily available numbers - accounting figures prepared primarily for regulatory reasons - are not much use in running a business.

A recognition of that truth in the eighties helped to reduce an excessive reliance on financial control in many companies. Instead, there was greater emphasis on strategy, marketing and employee relations. But now the accountants are fighting back - or, at least, the notion that measurement is all, and only those aspects that can be measured are important. For example, a recent paper from accountants Price Waterhouse proposed a wider form of corporate reporting than is common either in the UK or the US - what they dub "value reporting". The authors' ideas are interesting in their attempt to go far beyond the measures which managers usually communicate externally and, in some cases, internally. But in pursuing "shareholder value" through a "balanced scorecard'' of performance measures, the PW duo remain limited to measures. As they say: "The scorecard consists of a wide range of measurements - some financial, some related to customer service and other factors, and all expressed in quantitative terms."

As they acknowledge: "Value reporting is a professional service firm's dream - we have so many roles to play in order to accomplish it." But they argue that it comes from market demand - the demand by managers for numbers to guide them towards higher shareholder value.

Yet numbers can be a distraction, as the inventor of the Balanced Scorecard acknowledged last week. In London to promote the book of that name which he co-authored with Harvard Business School accounting professor Robert Kaplan, David Norton was explaining how his approach can help companies translate strategy into action.

"Organisations have tended to be exclusively focused on financial management," he said. "That can cause you to do the wrong things. For example, in the eighties we saw corporate raiders who found it easier to break up businesses and sell them off than to make them work in the long term."

The concept of the balanced scorecard came from US research under the auspices of another accountancy firm, KPMG, which showed that successful companies pay close attention to customers, product development and staff development as well as finances. Many executives do not have this broad approach, however.

"Even at executive levels people don't have a balanced understanding of their own strategy," Mr Norton said. He cited one of the companies in the research, a petrol marketing subsidiary of the oil giant Mobil. The company's profitability was poor by comparison with its peer group. So executives were struggling to shave a few cents off the product cost.

Suddenly, however, they listened to their marketing director, who pointed out that most customers did not buy on price. Mr Norton used this example as an argument for having a broader range of performance measures, but it also casts a rather dim light on the kind of people who run major companies. It suggests they are so cocooned in the executive world that they have little understanding of who their customers are and what motivates them. That concern is confirmed by another study from KPMG, published last week, which found that even retailers who might be expected to have better insights than other businesses have little understanding of their customers. Being an accountancy firm, of course, KPMG's instinct is to measure and analyse and manage data. But while it is true that "what gets measured, gets managed", that glib phrase also means that what doesn't get measured doesn't get managed. Management is about understanding and judgment and instinct and the real balance should be between what can be measured and what cannot.

Extract from Pursuing Value: The Emerging Art Of Reporting the Future, by Philip Wright and Daniel Keegan

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