We all know a couple people who have changed the direction of our lives and careers, even with very brief interactions. Something they said created an a-ha moment that changed our perspective or provided the catalyst that helped draw the connection between thoughts we’ve been mulling for a long time.
For me, one of those people was Norm Bodek, who passed away about two years ago. Norm was instrumental in bringing lean thinking back to the western world, but his particular focus was on the respect for people pillar of lean.
I don’t remember the name of the conference or the title of Norm’s presentation, but I remember the moment as if it was yesterday. Norm explained how respect for people is one of, if not the, most critical attribute of lean yet it is often forgotten in deference to just using the tools. Without growing and supporting people, tools will eventually fail and improvements will not be sustained. Respect for people is the glue that holds together and sustains – and grows – the improvement.
He emphasized, emotionally and passionately, how respecting this value in people’s brains could jumpstart and expand the potential of improvement. As he detailed, the concept of respect includes recognizing that value, providing compassion and empathy, but also being forceful in encouraging people to grow through new knowledge and especially learning from failure. He described how the value of people was in their experience, creativity, and shared problem-solving – not in their pair of hands, yet traditional accounting methods determined cost and value in the exact opposite manner.
Interestingly, that concept of the “cost” of people being on a P&L but the “value” of the experience and creativity in their brains not being represented as an asset on the balance sheet, which leads to all kinds of crazy decisions to chase cheap labor to save a buck while laying off experienced people, is what led me to question traditional accounting… and the second person who impacted my career.
I began attending the Lean Accounting Summits put on by Lean Frontiers, where I learned how traditional cost accounting creates all kinds of problems in lean environments. The “estimates” on how some costs should be allocated cascade and compound into huge potential error bands in product costs, and then those costs are used to make product decisions that can be wildly inaccurate. A better method is value stream costing and lean accounting, which is described by experts like Nick Katko.
Back in 2010 or so, while I was president of a mid-sized multi-site medical device contract manufacturing company, I asked my CFO to also attend a Lean Accounting Summit with me. We learned more about lean accounting, but the real game-changer was a presentation by Steve Player on the problems with traditional budgeting. During that one hour he forced us to confront many of the budgeting fallacies that we inherently knew existed, and described improvements and alternatives.
In the lean world one of the first lessons operations professionals learn is to not fall for the “month end” production cram, trying to make each month look good. Instead, customer demand drives the process, not a desire to hit arbitrary time buckets. The same exists in the financial world. Steve asked us what the value is to “budget to the wall” – with the wall being each calendar year. Operationally – and from a customer value perspective – how is December any different than January? Does focusing on the next calendar year truly add value? Don’t confuse “budgeting” with “planning” – they are radically different concepts.
Of course not, and it adds costs. Who can predict what is really going to happen 14 or 15 months in advance? But it gets worse, much worse.
We gaze into the crystal ball and make those predictions, taking the time to figure when every little expense will hit, knowing all along that this prediction will be obsolete as soon as we set it in stone. Then what do we do? We spend even more time looking in the rear view mirror doing variance analysis on why current actuals didn’t meet the forecast, and perhaps even additional time revising the upcoming forecast in another attempt to predict the future, after we already failed to do so.
There are two major costs associated with this absurd activity: the first being the vast hours spent by operations and finance people to inaccurately predict the future, then reconcile that failure with reality each month and attempt to re-predict the future. But the second is more hidden and far more insidious: a budget, especially if it is taken to a minuscule level, constrains thinking. Instead of looking forward and being able to creatively pivot to take advantage of new opportunities, budgets create behaviors to achieve the budget rather than truly improve and expand the business.
Steve walked us through alternatives to budgeting, which he also details in this white paper. There are several components, but they align around the following core concepts:
- Instead of budgets driven by the arbitrary calendar year, use rolling forecasts.
- Use relative targets to create improvement, not specific financials which incentivize sandbagging.
- Focus on processes, not numbers. Align KPIs, incentives, and desired behaviors with process definition and improvement.
- Become very good at making decisions with the information and reality of the moment, not at some point in the future.
- Take advantage of the removal of budget constraints to allow freedom and authorization to experiment.
- Look at processes and activities from the perspective of the customer. Does everything create customer value?
- Planning is not budgeting. Planning is defining and improving processes.
You can see why his presentation excited the attendees at a lean conference. A focus on process definition and improvement through experimentation and learning from failure, looking at value from the perspective of the customer, continual improvement instead of arbitrary time frames like calendar years. What problem are we trying to solve with budgeting? How does it create value from the perspective of the customer?
On the plane ride home from that conference back in 2010 the CFO and I sent an email to the finance and executive staff saying that budgets were cancelled, effective immediately. As a private company with a trusting ownership group, we had the luxury to be able to do that.
The change (and relief!) was immediate. Instead of thousands of hours being spent on budgets, variance analysis, and budget reconciliation, the finance team became integrated into the operations teams. Instead of looking backward and managing in hindsight, we were all focused forward on identifying and analyzing new opportunities. Instead of trying to figure out why our guesstimates on cost allocations were wrong, we defined and improved the financial and operational processes to create value for the customer. By creating and improving value for the customer, we created value, and success, for our company.
A couple days ago I learned that Steve Player passed away at a relatively early age. In an obituary on LinkedIn, Jack Sweeney described his experience in a Steve Player workshop a few years ago:
The finance professionals knew that he was right. They knew that large portions of their days and nights were focused on budget targets that just didn’t matter, and here was this guy bearing witness in public to the everyday madness of their professional lives. “Finance has got to stop doing dumb stuff!” was the favorite phrase that got heads nodding and blood circulating. A number of Steve’s presentations that I attended felt more like church revival meetings than gatherings of finance and accounting professionals.
Thanks for the lessons and passion, Steve. I know I’m not the only person you changed.
To learn more about Steve Player, moving beyond budgeting, and lean accounting:
- White paper on The Power of Rolling Forecasts
- Dragon Slayer of the Budgeting World – a Steve Player obituary by Jack Sweeney in CFO Thought Leader
- Book: Implementing Beyond Budgeting (with Bjarte Bogsnes)
- Beyond Budgeting video presentations by Steve, me, and others at a conference in San Francisco back in 2014, filmed by Gemba Academy (sorry – old videos, but good content!). No registration required for the next two weeks.
- Nick Katko on The Benefits of Lean Accounting and the upcoming 2nd edition of The Lean CFO
- Lean accounting video courses at Gemba Academy