A Circle of Blame for Failure
Here is a fictitious story. But how true could it be?
Our company’s quarterly financial results were just announced. Our loss was unexpectedly double last quarter’s loss, and we have now been in the red each quarter for over a year. How can this be happening to us? Our company has been profitable for decades!
I can track the meetings, phone calls, text messages, and e-mails amongst our managers from the moment the CFO’s staff reported this quarter’s disappointing financial statement.
The Blame Game
When our CEO first received and saw the bad news, she immediately questioned the CFO if there was an accounting error. Nope. The CFO reported that sales were down 2% but the bottom line tanked at both the product gross profit margin line and it worsened further at the company net profit level due to over-budget distribution, marketing, selling, customer service, and administrative expenses.
The CEO called our Operations VP into her office and asked what happened. Our operations VP pointed his finger at the excessive distribution expenses – specifically all the emergency premium shipments and special handling for customers.
The CEO called our materials manager into her office for an explanation. He observed that production was missing many customer order ship due dates requiring costly overnight and premium shipping expenses to lessen the damage to our customers’ satisfaction and loyalty. He pointed his finger at the production manager.
The CEO called our production manager into her office for an explanation. He noted that the sales department’s sales order forecasts missed the actual by a mile, and this has created costly chaos in what, when. And where to make products.
The CEO called our Sales VP into her office for an explanation. The Sales VP complained the sales forecasting software was limited and pointed a finger at our chief information officer (CIO).
The CEO called our CIO into her office for an explanation. The CIO said that our marketing department had not seen high value in predictive business analytics and forecasting software because it did not appear in the strategic plan. So he purchased the cheapest forecasting software.
The CEO called our VP of Strategic Planning into her office for an explanation. He pointed out the bonus pay incentive measurements for the marketing department were imbalanced with little weight on customer service and mostly on how many sales brochures and e-mails were sent to customers and prospects without differentiating the future potential of high versus low value customers and prospects.
The CEO called our marketing manager into her office for an explanation. Our marketing manager pointed her finger at the CFO’s financial controller complaining that the accounting department refused to reform their cost accounting to adopt activity based costing (ABC) to allow understanding true product costs and margins. Further, she complained that our controller had no interest in calculating how the expenses below the product gross profit margin line accurately trace to channels and customers to produce customer profitability reports for analysis and insights.
The CEO called the financial controller into her office for an explanation. Our controller said our company’s external auditor, a highly respected CPA firm, worried that with ABC math there would be different numbers reported between the external financial reports (for valuation) and the internal management accounting system (for decisions to create value). The controller also noted that any cost-to-serve expenses below the product gross profit margin line are not capitalized as they are for products, so there is no reason to allocate them to distribution channels and customers.
The CEO phoned our auditing firm for an explanation. The audit firm partner denied making any such comments and advised our CEO that he felt our organization was fearful and resistant to change and that we did not possess a culture for metrics and business analytics. The auditor pointed his finger at our Human Resources VP for failing to advocate progressive performance measurement and management – from the CEO’s top desk to the desk top of every employee. This would involve adopting a strategy map and its associated balanced scorecard with key performance indicators (KPIs) and their targets to monitor the company’s strategy execution.
The CEO called our Human Resources VP into her office for an explanation. Our HR manager pointed his finger at our CEO and said, “Leadership is not the same thing as management. Managers cope with complexity while leaders cope with change. Leadership must exhibit vision and inspiration. Leadership sets the strategic direction, and enterprise and corporate performance management (EPM/CPM) systems, which we do not have, then translate the executive team’s strategy into operations and the thousands of daily decisions made by employees and managers.”
The CEO thanked the HR VP for the lecture and terminated him.
What are the lessons learned from this fictitious story? Of course one can observe the irony that this circle of blame began with and ended with the CEO. But my intended message is that this circle could have been broken several times by applying and integrating EPM/CPM methods plus imbedding each of them with business analytics:
• The CFO could have had an early warning alert signaling the rapid decline in earnings.
• The Operations VP could have detected as a leading indicator the escalation in late scheduled orders.
• The materials manager could have analyzed the cause-and-effect of the late production runs and begun mitigation with error correction.
• The production manager could have early recognized the declining accuracy of the sales forecasts and recommended a more powerful predictive analytics solution.
• The CIO could have realized the adverse consequences of not having a strategy map and its associated balanced scorecard system and fought for its adoption.
• The VP of Strategic Planning could have demanded better selection of key performance indicators (KPIs) to align their managers and employees behavior and priorities with the executive team’s strategy.
• The marketing manager could have strongly demanded the need for a product, service-line, channel and customer and profitability reporting system to provide insights to answer the question of which types of customers to retain, to grow, to win-back, and to acquire.
• The financial controller could have implemented an activity based costing (ABC) system to provide sales and marketing deeper insights.
• The CPA firm’s audit partner could have advised the CEO of the need for the ABC system to shift the CFO’s emphasis from financial accounting to management accounting.
• The Human Resources VP could have recognized how essential organizational change management is to overcome the natural resistance to change with employees and managers.
• The CEO could have exhibited greater leadership in inspiring the benefits of implementing the full vision of a performance management framework with integration of all its methodologies with each one embedded with business analytics.
A culture for business analytics, metrics, and enterprise and corporate performance management (EPM/CPM methods and their supporting systems has become essential for long-term sustained competitiveness and organizational transformation.