Date: 2025-05-02 Page is: DBtxt003.php L0913-TVM-MMW-000019
|
TrueValueMetrics ... Peter Burgess Manuscript
Making Management Work for Relief and Development |
| HOME | Nav ... L0913-TVM-MMW-000000a | Last ... L0913-TVM-MMW-000018 | Next ... L0913-TVM-MMW-000020 |
|
Chapter 19
Management Information |
|
Management Information
Without it, anything goes Every successful organization has good management information. In these organizations every knows that management information is important, and the decision making responds. Did you ever go to a sporting event where they did not keep score, and do measurements? Did you ever see a coach that was not trying to improve the team's performance? Sports Performance There is performance measurement in all serious sports whether it is football or baseball or track and field. Performance is measured because it enables different performers to be compared, and it enables coaches and the athletes themselves to keep track of progress. I contend that anything worth doing is worth measuring. But in the serious matter of relief and development we do not keep score. In less performance oriented organizations, which are prevalent in the relief and development sector, management information is weak and few people in the organization want good management information. Good management information would change the dynamic of these organizations, and make results more important than the “bull-shit” of PR. Without management information, the staff of an organization can do what they want when they want and not be held accountable for anything. All the staff have to do is to be able to tell a good story and sound convincing. Without management information, the person with the best story and the best presentation of opinion wins. For people with the gift of the gab, an organization without management is ideal. Performance really does not matter, just enough of activity to be able to have a story and run the PR machine. Key characteristic of management information. You only get high performance by doing measurements and figuring out how to do it better. This is what management information should do. The key characteristic of management information is that it is the least amount of information that gives decision makers the best possible basis for decision making. Good management information does not cost a lot but is very valuable. Nothing additional is achieved by having lots and lots of the same information. All that is needed is enough data so that the information is reliable enough and accurate enough for good decision making, no need for perfection. This is not the place to go into a lot of detail about management information and accounting (see companion book “Management Information in the Relief and Development Sector”) but it is appropriate to summarize some of the key points. KISS Keep It Short and Simple (KISS) is a useful idea to keep in mind. Good accounting is always simple enough to be 100% clear. If it is not simple and clear it is not good accounting. Accounting is not a sophisticated construct. But it is a very powerful way of getting control of and keeping control an organization's activities. Management information is best when it is simple. What information is needed? The data that exist are not what are needed for a valuable management information system. Most of the data in the relief and development have been prepared using statistical methods, frequently anonymous, usually late and rarely precise enough for good decision making. They rarely have the precision that can be obtained from good accounting. They also do not address issues of performance in the way that is needed. What is needed is: (1) a full set of community metrics; and (2) for all activities information about cost, the nature of the activity, the results achieved and the value of these results. Start by measuring and collecting data There is a lot of evidence that performance improves merely by measuring it. Measuring Performance I have been interested in performance and its measurement for most of my life ... in athletics ... in motor sports ... in engineering systems ... in corporate profit performance ... and in relief and development performance. In order to make progress, there performance has to improve, and the starting point is to do some measurements. We should start by measuring easy things, and then logically progress to things that are more difficult. We should start by measuring things that are somewhat obvious, especially to those close to the activity. Once upon a time, I was told that the line supervisors in a factory I was running could not understand production and performance statistics. I disagreed, mainly because I knew they were all better than I was at sports statistics. We started a dialog about how to do statistics in their various departments, and very soon (within an hour or two) we had identified dozens of useful datasets that would enable them to know how well their respective departments were performing. In many cases they already had the data in some desk drawer in their department because they absolutely needed it to do a decent job. We built a company-wide performance dataset on top of data the individual department supervisors already were using ... and then we combined this with a little bit of accounting information to have a very powerful, very relevant data foundation for our factory. With this information ... decision making improved immensely ... and then performance. The factory produced more ... at lower cost and better quality and more quickly than ever before. It is part of the broader experience that performance improves when something is changed ... anything. When factory lighting is increased, production goes up. When factory lighting is reduced, production goes up. Perhaps it is something about showing interest. Who knows? When performance is measured ... there are two factors at work: (1) the simple act of showing interest; and (2) the possibility of learning something valuable about the way the performance can be improved. And of course, information without any use for it is simply value destruction. On the other hand a small amount of low cost information that facilitates substantial performance improvement is net value addition. Low cost Information should be as low cost as feasibly possible. The techniques for getting this information should have almost zero incremental cost to society. The information system should be always a net value adding activity. Improve the management information Improving management information need not be done as a big “project”. Rather, it is better done in a more “organic” fashion, in a series of many steps. What is needed is a little bit of relevant information everywhere it is needed. Less is more ... but best if the right amount is everywhere. And also get management information where somebody can do something with it. Having information that is never used is not very valuable. Performance Measurement Accounting is a part Accounting information is part of performance measurement, but only a part. Accounting is a good way to compile information about costs, and about all financial transactions. It can also be used to compile useful information about activities that have a quantity and unit of measure (UOM) that is relatively simple. But accounting has to be supplemented by other information that has a meaning in the operational context. Performance - resources in, value out The idea of performance being the relationship between resources in and value out is both simple and relevant. It is the basis thermodynamic idea of efficiency, and is just as useful for management and in economics as in engineering. The Thermodynamic Idea of Efficiency I got a jump start on how to measure performance as a student engineer doing thermodynamics ... measuring the efficiency of various ways of converting energy to work ... and learned the practical and simple idea that we measure inputs and we measure outputs and compare the relationship. We can easily measure efficiency or performance without having to know all the details of what happens in between. The measurement of performance that works for a steam boiler or an internal combustion engine can be applied in the analysis of business and economic performance. Accounting needs to be supplemented when the question of socio-economic value is being measured. There are some useful techniques that can be modified to use, notably the concept of standard costing where all activities are assigned a standard cost, and actual experience can be related to the standard. Using a similar concept of “standard value” for various aspects of progress and regression in relief and development gives a very powerful technique for measuring performance ... and is one reason why my overall assessment of relief and development performance is “failure”. Operating costs – activity costs - variances Accounts are the foundation for a lot of useful analysis. The cost of any activity should be easily available. It should be expected that the cost of any activity is more or less the same everywhere, and if not there should be some good reasons for the difference. A lot of financial numbers are incorporated in plans, and used to prepare budgets. Plans and budgets are not accounts. But it is good to compare what is in the plans and budgets with what actually happens. In a well managed entity, plans, budget and actual tend to be quite close together. In entities where the operation is out of control there usually are wide divergences. There is a lot of utility in relating costs to the activities in ways that permit unit costs of various activities to be determined. Management information that contains clear information about how much was spent, how much things cost and what was done is very useful. Results and realized values But management information that contains also clear information about the results and the realized values is even more useful. Costs, Activities, Results and Value The fact that the State Senator drove at 50 mph for three hours to get to Albany, and spent $4.30 on gas and $2.00 on tolls is of rather little interest. But it is more interesting when you also know that he made a critical speech in Albany in support of some new legislation, voted for it and it was passed. The new legislation made it possible for senior citizens to have easier access to medication under the Medicare Program. Cost and activity is not particularly useful, but when related to results and the resultant value, then there is something very useful. The activities ... driving a car and making a speech are interesting, but not very important until they are related to the legislation that was passed and the value of this legislation to senior citizens. The cost is not significant, though it is easy to get these numbers. The value is very important, and getting a reasonable estimate of what this value might be is not at all easy. This is the challenge we have to face in getting management information in the relief and development sector. Integrating key items and accounting The logic of accounting can be expanded to include any number of key items. There can be accounting for key items using a transaction logic, or it can be quite simplified. Key item information makes it possible to move beyond just the accounting numbers. How much something cost is not very interesting unless one knows something about what is is that is being paid for, what activities are being paid for and what results are to be expected. Different ways to assess performance Comparison Comparison is one of the most useful techniques for accountants and for managers. When making comparison it is always important to remember not to compare “apples” with “oranges” in order to get meaningful results. Time series The time series of very powerful. One piece of information is not very valuable. It needs to be put into context. The cost this year compared to the cost last year is much more interesting. A time series of costs can be very informative. When a time series is related to “events” it gets to be even more interesting. Almost immediately after I was appointed CFO of Continental Seafoods I learned of the importance of shrimp prices on our business and its profit performance. I tracked prices in the New York market by month from 1945 to the present (at that time 1974) a period of 29 years. The graph showed three distinct periods ... the first when prices stayed stable for about 15 years ... the second where prices steadily increased year after year ... and the third when prices increased dramatically, and then started oscillating violently. In the first period, supply was increasing year by year with no (shrimp) resource constraints. In the second period new shrimp resources were becoming less easy to find, and costs were increasing. In the third period no more new shrimp resources were found ... and then the oil shock made it unclear what would happen to the industry, costs were up and customer demand went down, and then companies went out of business, and then more demand, and less supply and ... etc. In a subsequent period the role of shrimp aquaculture in increasing supply has stabilized prices, in spite increased costs and stable supply from the capture shrimp fishery. Consistency – enabling comparisons Comparison from year to year or from place to place or from organization is only valid if the data are compiled using consistent rules. This is one of the great values of accountancy, because, in the main, good accountants add up transactions in more or less the same way, and tend to produce similar analysis, no matter where in the world the accounting is being done. Budgets Budget are part of the management toolset. They serve to help plan, and to help control implementation. There are two perspectives of a budget: (1) is the idea that a budget authorizes expenditures; and, (2) that a budget guides expenditures. Both these views have some validity. Under the law, in many places, the government budget is, in fact, the instrument that authorizes expenditures of the government. But when a budget is used as a planning tool in the operations mode it is better to think of a budget as a guide, with the goal always to do “better” than the budget. Typically a budget will have a certain amount of expenditure related to some level of activity and some expectation of results. “Better” performance will be when less money is used to get more results. Management Accounting Accounting to analyze performance Accounting to have financial control, and to provide reports to various stakeholders does not have the same dynamic as accounting that is used to analyze and understand operations. The French refer to this a “comptabilite analytique”, while Anglo-Saxons tend to refer to cost accounting or management accounting. What is important is the use of analysis to get an understanding of the behavior of costs and value creation as a result of the activities that are going on. Cost accounting Cost accounting answers the question “How much did something cost?”. In order to have this information in an operation where thousands of different things are being produced, there is a lot of detail and the analysis is prone to error. But without knowing how much something costs, there is rather little basis for anything. Of course, where a factory produces on single product, the analysis is quite simple ... but when there are multiple products the analysis rapidly becomes complex. Standard cost accounting Standard cost accounting is one accounting techniques that can be used to simplify the analysis. In my view it is one of the most powerful tools in analytical accounting. When standard cost methodology is made an integral part of the relief and development sector framework of management information, accounting and accountability, there will be a very big improvement in performance, and overall accountability. In its simple form, standard cost accounting is based on the idea that everything has a calculated standard cost. When actual performance is compared to the standard there will be a difference, favorable or unfavorable. Management attention can be focused on the differences (usually called variances) so that the reasons for the variances are understood. If there is a favorable variance, it may be a clerical mistake, or it might be an opportunity that should be exploited. Where the variances are unfavorable, it might be that the standards are wrong, or it might be that Cost accounting combined with operational research is very powerful. When I was working as the Division Controller of one of the Aerosol Technique Inc. units we did some thinking about why our cost accounting showed that factory operations in Connecticut had labor costs almost double what they were in a plant in California. Wage rates were the same. It was something to do with how we were operating the plant and the work that they were doing. Most cost analysts think that making the best use of your equipment is the best strategy to optimize efficiency ... but it turned out in our situation, that by having equipment idle, we could reduce our unit labor cost in the product and increase profit. Getting the company to make this change paid my salary many times over. Cost centers and profit centers Every part of an organization should have a purpose. There will certainly be costs, and there will also be values that are derived from the costs. The analysis of this is fundamental to have a low cost high performance organization. None of this is particularly well developed in the relief and development sector, where most of the costing has been developed to satisfy the needs of project management and the information needed by donors. Good management control probably requires better understanding of the costs of operating units and the behavior of these costs. Knowing how costs behaves will argue, almost certainly, in longer deployments so that the impact of start-up and close down is minimized. Knowing more about costs and performance will also highlight the need to make the best use of staff ... not only expatriate staff, but also local staff. Value accounting The value realized is the most important component ... but what is it. Value is not as easy a concept as cost, but it is even more important. How much is my life worth? An attorney would argue that it has value in the case of my accidental death ... and would ask for substantial money award because I am dead. Something of the same argument should be made for all the deaths that are going on around the world because relief and development has been such a failure. How much is the value of averting a death ... or delaying a death by one year, or two or ten years? The value is substantial, even though it is difficult to say exactly what the money number should be. What is the value of better nutrition ... and better health? Well ... substantial since they extend life. And education ... because education helps someone get a higher paying job that goes on for 20 or 30 years. And what is the value of the community ... or the incremental value as it goes from a place where all the farmers cannot feed their families and pay their bills to a more prosperous place where families are no longer absolutely destitute? Measuring value is not easy ... but it can be estimated and a value assigned. If the value is patently wrong, then the value can be changed. The assigned value is then available for use in calculations just as a standard cost is available for use in standard cost calculations. Simply by using the assigned values, it will become clear that values are reasonably right, and what values are obviously wrong. There is a lot of power in the use of “standard” computations in management analysis ... applying the technique to value in relief and development can help reform performance and make improvement value centric. |
| HOME | Nav ... L0913-TVM-MMW-000000a | Last ... L0913-TVM-MMW-000018 | Next ... L0913-TVM-MMW-000020 |