The four requirements for effective cost management are manager, support staff, coherent process and managerial cost information. Each of these topics will be the subject of extensive description so the goal here is more of an introductory nature.
Why is Strong Management Essential?
I can’t imagine any effective management process with strong management . Now it seems that some people think being a manager has negative conotations so they can substitute “leader” for manager. The basic point is that effective use of resources does not happen organically or magically. Accountability is non existent without someone who expects or demands it.
Much has been written about the characteristics of good managers and leaders. They certainly have a role in training or teaching subordinates the principles of good stewardship and their performance expectations. This can be done formally and informally. Much is conveyed through signalling.
Consider the senior civilian leader at one military organization that was trying to implement a role based (more on that later) cost management process. He was the first briefer at a cost review and started by excusing his lack of familiarity with the numbers by saying it was the first time he had seen them. What kind of signal does that send for the level of effort that subordinates should be expected to exert?
In my experience with hundreds of managers in government operations I’ve found most to be very capable especially. Business managers are more experienced in cost and financial areas while government managers have an edge in leadership qualities.
Government managers’ lack of experience with cost management is particularly relevant to this topic. They are relatively naïve when it comes to asking the right questions and expecting good answers. My assessment is that there is great potential for much better use of public resources by developing the existing management structure or chain of command.
What is the Staff Role?
Most accounting is done to meet external requirements. Managers and leaders, however, require intelligence crafted to their needs. This might be more frequent, less aggregated, and differently scoped than existing external reporting. Staff must translate the data and details accumulated in the accounting system to meet this customized, actionable requirement.
The skills of this kind of cost analyst are rare: particularly in government operations. Most accounting staff is tasked with supporting the external reporting requirements. While the accountant can be thought of organizing myriad transaction detail into a number using generally accepted principles, the analyst is more interested in what the number means to the mission. Is it high or low, good or bad, trending up or down, etc? Moreover, the staff analyst is particularly interested searching for for improvement opportunities. As such the staff analyst is a valuable partner to the strong leader.
We called this person the ACE: analytic cost expert.
What Kind of Process is Required?
There must be a process of engagement on the issues of resource consumption and organizational output. This is typically a meeting between principles rather than staff people. The accountable subordinates must brief “their” numbers, ie “their” results, to the boss. Instilling a sense of ownership is important. A meeting is usually needed because this is an interactive brief where questions are asked and answers given.
The goal of this meeting is collective learning. As such the meeting must be focused on finding answers to mission related problems rather than finding blame for them. Mistakes are inevitable: repeating mistakes is intolerable.
What Information is Needed?
There is no easy answer to this question since the information requirements are customized to the process, the people, and even the manager’s style. It is also the case that this information design should be flexible and evolve as the organization matures or the issues change.
Consider the index of a popular cost accounting textbook. It lists the following variations of cost: actual, appraisal, average, budgeted, carrying, controllable, conversion, defined, differential, discretionary, engineered, external failure, facility-sustaining, fixed, incremental, indirect, infrastructure, internal failure, manufacturing, non-manufacturing, ordering, prevention, prime, procurement, product-sustaining, purchasing, quality, relevant, service-sustaining, standard, stockout, sunk, supervision, unit, and variable. This list is not all inclusive, but it should be clear that each type of cost exists because it provides value in certain circumstances that justifies its development.
See the posts on Cost Accounting.
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