About these articles…
Author
Editor’s Note: These columns examine how
& driving their scoring system, enabling
Articles written by Jahn Ballard, Chief Process Officer
of Vinovation Inc., (www.vinovation.com), Jahn is
founding director of the Performance Management
Institute Inc., creator of the Financial Dashboard
(www.financialdashboard.com) and developer of
Integral Operations Finance and Accounting Practices.
leaders and organizations that are
Editor
transforming themselves to be a continuous
improvement leadership culture.
Edited by Tonya Vinas, former managing editor and new
media editor of Industry Week, and current editor of
Lean Accounting News.
ARTICLE 4: May 2007
Publisher
Rolling Projections with KPIs Can Create
Lean Accounting News is a free, monthly electronic
newsletter published Lean Accounting Summit, LLC and
can be accessed at www.leanaccountingnews.com.
Lean Accounting and the emerging practice
of Integral Operations Finance can facilitate
the engaging of operating people in owning
Meaningful Financial Statements
Copyright © Lean Accounting News, 2007. This article
and Lean Accounting News text, photos, graphics and
logos shall not be reproduced, published, broadcast,
rewritten for broadcast or publication or redistributed
directly or indirectly in any medium.
The first 3 articles, in the order in which
they were printed, are listed below. Note, if
you are a business leader who is interested
in how senior leadership can enable
Lean Accounting Summit
engagement by operations people in owning
The Lean Accounting Summit is the world’s premier lean
accounting event that draws the majority of today’s lean
accounting thought leaders. Information on the Lean
Accounting Summit can be accessed at
www.leanaccountingsummit.com.
and driving the scoring system, you might
consider reading Article 3 before 1&2.
ARTICLE 1: February 2007
The Birth of Performance Management
in Organizational Leadership
ARTICLE 2: March 2007
Connecting The Mobley Matrix
and Financial Scoreboard to
Lean Accounting
ARTICLE 3: April 2007
Integrating Operations Finance and
Accounting Practices, The Mobley
Matrix, Financial Scoreboard and Lean
Accounting into a Complete System
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primarily designed and intended as a summary of
financial results of a company that allow outside
observers to compare management’s past performance,
and for tax compliance purposes — not as tools to
manage an enterprise.
ARTICLE 1
The Birth of Performance
Management in Organizational
Leadership
By Jahn Ballard, founding director of the Performance
Management Institute Inc., creator of the Financial
Dashboard (http://www.financialdashboard.com) and
developer of Integral Operations Finance and
Accounting Practices
Lou saw that the very structure of accounting requires
one group of people (client companies) to pay another
group of people (CPAs and financial services
professionals) to do work on behalf of third parties
(bankers, IRS, shareholders, and the public), using tools
and practices designed only for those purposes. After 20
years of working with Lou’s ideas, it has become
apparent to me that this situation sets up a series of
unresolvable double binds that subtly detract from every
level of peer and direct-report relationships if attempts
are made to use that same data for management
purposes. (You will see more on the reasons and costs,
plus the solution to this problem, in next month’s
column).
When Henry Ford set up the Highland Park Plant, he
used all of the lessons learned from the industrial
revolution to create one of the most efficient
manufacturing operations in history. The Highland Park
Plant eventually became a foundation for the Toyota
Production System and still is one for almost every
modern manufacturer to equal.
In the 1920s Alfred Sloan wanted to beat Ford, and make
his company, General Motors Corp. (GM), the largest car
manufacturer in the world. He asked Donaldson Brown,
a protégé of GM vice president John Raskob, to help him
figure how to track his own performance so he would
know if he actually was improving the way he ran his
business. Brown came up with a formula that allowed
him to measure GM’s efficiency, effectiveness, and
overall return on the total resources employed to make
cars and deliver them to customers. His formula was
revolutionary for the time and remained a competitive
advantage for GM well beyond the time that it eclipsed
Ford as the largest car company.
Lou discovered the concept of Operating Cashflow
(sometimes called Cash Flow from Operating Activities)
and showed me how to resolve these double binds so that
leaders can use financial data as the tool they need it be.
In 1952, Lou was present at the American Management
Association (AMA) meeting where GM’s secret was
revealed to the marketplace. His ROA (return on assets)
visualization tool was the basis for an argument with
DuPont’s treasurer, who made the formula public at the
AMA, by proposing using only ROA (N/A) as a measure
of company performance. (This became the basic
measure of performance in the capital markets for the
next several decades, being superseded in the latter part
of the century by concepts such as EVA and EBIDTA,
which were valiant attempts to fill the gaps that Lou, as
an engineer, saw that first evening at the AMA meeting.)
He used the ROA chart to demonstrate that presenting
ROA as a single percentage hid its most crucial value,
which had been used by GM for more 25 years.
The idea was astounding in its simplicity and usefulness
and has been the foundational tool for performance
management for 80 years. GM found that it could
continuously improve on last year’s performance by
understanding a few basic facts. For efficiency, GM
focused on how much profit it made for every dollar of
sales, represented by the ratio of net profit over sales
(N/S); for effectiveness, the focus was on how much
sales it had for every dollar of assets, represented by the
formula of sales over total assets (S/A). When you
multiply these two ratios together, sales cancels out,
giving the ratio net-profit-over-assets (N/A), which then
shows how much profit is being made for every dollar of
assets. This was the genesis of return on assets, which
originally was called ROI, or return on investment.
Much of what I am going to share with you came from
the direct experience of my late friend, mentor, and
colleague Lou Mobley. Lou never tired of pointing out
that the original purpose that drove the creation of the
Certified Public Accounting profession by the Security
and Exchange Commission Acts of 1933 and 1934 was
to protect the public and the government from dishonest
businesspeople. As a result, Generally Accepted
Accounting Principles (GAAP) financial statements are
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Lou went on to found and run the Sands Point Executive
School for IBM’s Tom Watson Jr. in 1955. His students
applied the ROA chart to running IBM, starting with the
Profit Planning initiative, which began the company’s
ascendancy over the next 20 years to become one of the
most successful, most respected, and best-managed
businesses in history. In profit planning, as shown on the
chart below, the goal is to create balanced growth in both
return and capital turnover, which then results in the
most-efficient growth in return on assets. As you can see,
it took the leadership at IBM from 1957 into the early
1960s to get their business model “tuned” in order to
achieve the optimum 45-degree angle that shows
balanced planning for both efficiency and effectiveness
improvement.
the need to be competitive in a new economy, especially
by transforming accounting data and practice to add
more value for clients and colleagues. The leadership
understood that they needed to bridge into a new
paradigm of value creation and delivery. When the way
things have been done is no longer going to work, and
the new way is not yet created, everyone is then being
driven to shift from an old paradigm to a new one.
(Vision Paradigm Courtesy of CPA Vision Project: 2011
and Beyond.)
(For a 50-year version of this chart, go to
http://www.financialscoreboard.com/history.html and
double click on the graphic down the page to the right at
the bottom of Lou Mobley’s bio.)
Tom Hood, executive director of the Maryland
Association of CPAs (MACPA), who also served as the
chair of the American Institute of Certified Public
Accountants’ (AICPA) Vision Team, has been
instrumental in supporting the adoption of Lou Mobley’s
breakthroughs, which will be introduced the next two
months columns. He and many others within the
profession have laid the foundations for cogent and
effective response to colleagues, clients, and customers
who demand that financial data provide value. The
promise of the Lean Accounting movement is to be the
cogent and compelling voice of that demand, which will
allow financial professionals to employ the new tools
that are available to make what they do a highly valued,
respected, and pivotal part of every lean initiative. Only
when this bridge to the new paradigm is crossed, will the
promise of Highland Park and Toyota’s shining example
be accessible to companies throughout the world.
Over the next several decades, the influence of the
capital markets on the practices of the accounting
profession in service to private and smaller companies
continued to play out in generating the ongoing tensions
of operations-versus-finance-department mandates. (In
the next column, we will explore the cash flow aspect of
this ongoing situation.)
Meanwhile, for over 50 years the CPA profession, in a
market-wide poll, garnered the distinction of the Most
Trusted Profession. With emergence of personal
computing and the Internet, the poll added another
question: Who is the most-valued profession? In this, the
accountants were nowhere near No. 1, causing a major
self-assessment to take place. Carried out in the mid1990s, the CPA Vision Project: 2011 and Beyond
represented 18 months of work with the participation of
thousands of CPAs from all 50 states.
The CPA Vision Project: 2011 and Beyond emerged
from the National Future Forum, attended by delegates
from the entire profession. What they grappled with was
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ARTICLE 2
Connecting The Mobley Matrix
and Financial Scoreboard to Lean
Accounting
In last month’s column, I recounted how the CPA Vision
for 2011 and Beyond report that emerged from the
National Future Forum in the mid-1990s caused
delegates to recognize their need to be more competitive
in the new economy and add more value to business-asusual accounting practices.
In response to the forum, Tom Hood, chairman of the
American Institute of Certified Public Accountants’
(AICPA) Vision Team, spent several years in the late
1990s assessing tools available to the profession,
searching for one in particular he had used in the past —
the Mobley Matrix. This tool was named after its
engineer-inventor, the late Louis R. Mobley, founder of
IBM’s Sands Point Executive School. Mobley was one
of the fathers of executive leadership education in the
United States, serving as a key internal architect of the
IBM leadership culture between 1950 and 1970.
Working directly for Tom Watson Jr., he oversaw the
creation and execution of two decades of the most
successful business performance the industry has ever
seen.
Pure Cash Statement
The math created an entirely new statement, what Lou
called a “pure” Cash Statement, that shows the cash
account equivalent of every Income Statement and
Balance Sheet account. In contrast to the Income
Statement, this Cash Statement sums up to the change in
cash, thereby reconciling cash from the beginning and
ending Balance Sheets. This was the missing link that
Lou had been searching for, one that logically completes
what financial statements really need to provide — a
comprehensive picture of the status of property and
contract for any given period of time. He was then able
to understand that the money he thought he was seeing
on the P&L wasn’t money at all; it was the total of the
contractual agreements, or promises, that into which the
organization had entered. The Cash Statement then
showed how the bank account activity actually fulfilled,
or settled, those commitments, which were then reflected
on the balance sheet. For the first time in the history of
business, the common sense of how and why of the
balance sheet changes was revealed in a single image!
(For the story in his own words, see
http://www.financialscoreboard.com/history.html)
Mobley discovered and began developing the Matrix for
IBM in 1959 to assist the company in the analysis of its
own financial performance as well as the performance of
its competitors and customers. This powerful tool
enabled IBM executives to truly manage by the numbers
by watching the direct results of their decisions and
actions on the firm’s key performance indicators.
The math that unites the statements was Lou Mobley’s
breakthrough discovery. There is a concept in accounting
that every CPA knows how to do, but most can’t name.
The “continuity equation” states that beginning accounts
receivables (AR), plus total sales, minus ending AR,
equals collections. It turns out that if you follow this
logic for every Balance Sheet account, you end up with a
mathematical matrix that adds and subtracts horizontally
and vertically on every line. Benjamin Franklin called
these “magic squares,” and was fascinated with them for
much of his life.
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Mobley also partnered with the late Chuck Kremer,
CPA, co-author of Managing by the Numbers. They
applied the mathematics of the Mobley Matrix to support
interdisciplinary business decision-making through a tool
now called the Financial Scoreboard. The Scoreboard
shows the relationship between standard financial
statements both mathematically and visually. Chuck
Kremer’s seminal contribution was to color-code the
matrix so that the six different kinds of numbers are
immediately obvious visually. He also codified these
concepts into Three Bottom Line Performance theory,
which was first published in Management Accounting
magazine in 1989, and then reprinted in 1992. Part of
this approach is the powerful insight that these three
bottom lines, Operating Cash Flow, Net Profit, and
Return on Assets (or some variation that fits a specific
business model) are actually created mathematically by
12 key drivers, which then can link to either sub-drivers,
or to key operating metrics. This allows for the creation
of a complete and transparent mathematical
representation of any business, and for the testing of
operation metrics to verify that they are creating the
results desired, and not hidden, unintended consequences
that hurt the enterprise. (More on this aspect in next
month’s column.)
Unfortunately, when FASB rule #95 finally was passed
in November of 1987, the Direct Cash Statement was
made voluntary. To this day, it remains perhaps the
greatest unused and un-leveraged management tool in the
GAAP, to the point that it does not even exist in
Quickbooks. Nevertheless, a simple and common-sense
picture of the operating dimension of the bank account
can be deduced by addition and subtraction in a matter of
minutes, and the bank activity clearly presented in its
three dimensions. It also can be made into real insight
through the key-driver ratio, Operating Cash Flow over
sales, which tells you how many dollars of operating
cash went in, or out, of the bank account in that period
— a basic picture one might think any business would
want to know, but that businesses in the United States
appear to never look at. (The Performance Management
Institute [PMI], after 10 years, still is looking for one
company that uses it for management or planning
purposes) The absence of these basic facts to any
operating business reality makes effective discussion and
operations management relative to property and contract
extremely difficult, if not impossible, to do consistently
and successfully.
In 1980, Mobley began a one-man letter writing
campaign, using his personal clout to single-handedly
build the momentum for creating the concept of
Operating Cashflow, and two new financial statements
(Direct and Indirect Format) as part of Generally
Accepted Accounting Principles (the proverbial GAAP).
This was part of an organic movement that had been
happening in all kinds of companies since the late 1960s.
Cashflow management variations and improvements
were flourishing. Many line managers and executives
were unhappy with the “funds flow” and “statements of
changes in financial position” gobbledly-gook that
purported to disclose information, but in fact could
barely be used, even by the people that constructed them.
One associate of Lou and Chuck’s collected over 100
different formats, all of which had the fatal flaw of
mixing cash and accrual data, thereby rendering all of it
meaningless.
Hood, who also serves as executive director of the
Maryland Association of CPAs (MACPA), began
partnering with PMI in 2001, when he discovered that
PMI’s Financial Scoreboard (FSB) Excel template
incorporated the Mobley Matrix, which he had used
successfully in the past in his position as CFO of a
highway construction firm (see
http://www.financialscoreboard.com/case-brynawl.html).
His earlier use of the Matrix had allowed him to educate
managers throughout Bryn Awl to directly link their
operations to the company’s cashflow management.
A few pioneering souls, realizing that only pure cash
data would do the trick, were experimenting with good
results on methods to create an accurate and simple
picture of how the bank account actually was working.
Mobley believed that this was the missing link in
business information, the absence of which undermined
the usability of accounting data by business leaders. His
intention was to codify a rigorous cash management tool
into a requirement to disclose this crucial information to
the public and investor community.
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Feeling as though he had re-united with an old friend, he
began using the FSB in 2001 to better manage the
challenges at MACPA. He said, “PMI’s Financial
Scoreboard enabled me to share a common language
and engage in a finance conversation with non-financial
people. It serves as a foundation for effective problem
solving throughout the senior team and all the way
through to the line operating people.” (See interview at
http://www.financialscoreboard.com/casesmallfirm.html).
ARTICLE 3
Integrating Operations Finance
and Accounting Practices, The
Mobley Matrix, Financial
Scoreboard and Lean Accounting
into a Complete System
Non-functional financial statements are the underlying
driver of the disconnect between accounting and all other
business functions, especially operations and including
other finance functions. They generate a fundamental
barrier to clear and effective communication and
cooperation among the CEO, CFO, their direct reports
and all other employees. Solving this basic problem is
the key to generating the interest, involvement and
effective support of the CEO and CFO for lean initiatives
and any other continuous-improvement efforts.
With Hood’s support, PMI developed software, training
programs, and management practices that used the
Financial Scoreboard, and created a one-day class,
Executive Finance for Operating Leaders: Engaging
Management, Associates, and your Clients in Cashflow,
Return and KPI Development. This continuing education
has been delivered to more than 900 CFOs, CEOs,
controllers, and CPAs during the past 10 years.
In 2006, PMI connected with The Lean Accounting
Summit and found a parallel effort to address the same
issues that Lou was so passionate about. The goals of
Mobley and his Matrix, PMI, and Hood match the goals
of the Lean Accounting movement. For example, the
“pure” cash statement and operating cashflow insight can
link to a company’s operating metrics because the
common sense of finance can now be made obvious to
operations. The relationship of cashflow to the Income
Statement, Balance Sheet, and Return on Equity can now
be examined and experimented with transparently by
people in executive, finance, and operating roles.
Additionally, as long as goals are presented in dollar
terms only and have no relation to the reality of
operations, they will not translate to the people whose
responsibilities include producing long-term results — or
connect those results specifically to long-term financial
performance.
This column provides an approach to integrating the
needs of operations managers with the needs of company
leadership. This approach starts with internal leadership
practices pioneered at IBM and relates them to the
challenges of creating a complete system that links
continuous-improvement goals with company strategy.
The powerful foundation of a shared language that
operations, executives, and accounting functions can all
use with shared mastery is the beginning of the kind of
cooperation and shared success that IBM enjoyed for
over two decades. Everyone now can participate in the
results of the Mobley Effect: no more annual churn as
everyone dukes it out with incomplete information and
competing facts with which to attempt to move forward
in unity. Now, a truly level playing field can be created,
on which the whole team can excel and evolve together.
Lou Mobley was one of Tom Watson Jr.’s corporate
leadership architects at IBM Corp. from 1950 to 1970.
As IBM grew, creating the field of computer sciences
and launching the information age, it set a standard for
business performance and human resource support that
few have equaled. Internally, Lou was demonstrating
what I am calling the Mobley Effect, perhaps one of the
most crucial contributions to leadership development in
the last century. From 1956 to 1959, he founded an
applied business school at IBM’s Sands Point Executive
School, where he was the director from 1955 to 1970.
The use of the company’s actual financial data presented
in the Mobley Matrix and ROA chart formats enabled
management and key staff to learn concepts, then act
rapidly and effectively by doing live planning for their
business case, which they then would implement. (See
March’s column for more details on the Matrix, and
February’s for the ROA chart.)
I was privileged to be mentored by Lou, who also was a
friend and colleague from 1980 until his death in 1988.
Integral Operations Finance and Accounting Practices
are based on what I learned from Lou and Chuck
Kremer, the CPA who developed the Financial
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Scoreboard (www.financialscoreboard.com) over the two
decades he worked with Lou’s concepts.
how they are performing because they balance efficiency
and effectiveness entirely differently. A, B and C
companies are all having different challenges with the
balancing act. XYZ companies are making incremental
improvements in both domains, while the U.S. economy
as a whole is consistently losing ground in managing
asset effectiveness (asset turnover). This chart and the
ability to know the operating cash position of every
public company in the world gave IBM's leadership not
only the tools to sculpt its own financial future, but to
know more about any other company financially than it
did about itself.
The IBM story holds many keys to giving business
leaders the capacity to more effectively drive innovation
and delegate decision-making. Lou felt very strongly that
business people must have a fully transparent and
applied scoring system, especially in relationship to cash,
the cash-to-cash cycle, and the building of cash reserves.
In 1969, he wrote and submitted an article at the request
of Harvard Business Review, which had been watching
the power of the Mobley Effect unfold since the late
’50s. HBR accepted the article, but Lou was not allowed
to publish it because Watson felt that there was too much
value to be lost in disclosing the leverage IBM enjoyed
over the rest of the marketplace.
Much of what the IBM story implies about practical
transparency has now been demonstrated conclusively
through three decades of national experience with
ESOPs, as laid out in Equity: Why Employee Ownership
is Good for Business, co-written by John Case. The 15year study demonstrates the economic performance boost
that occurs when ESOPs are combined with
communication of the financial picture to all employeeowners. Case also co-wrote Managing by the Numbers
with Chuck Kremer, in which Kremer lays out his CPA
perspective of Mobley’s concepts — what he called
Three Bottom Line Performance. Mobley and Kremer,
many of these ESOP companies, lean organizations and
others too, have all begun to address what Peter Drucker
in Managing in the Next Society: The Information
Society, calls the major challenge of business in the next
two decades — dealing with a 500 year-old accounting
system that is in terrible shape.
IBM had a significant competitive advantage due in part
to its internal financial leadership system, which virtually
eliminated power games in annual budgeting and the
typical turf wars among corporate departments. Lou’s
system also provided a market-intelligence tool of
unheard-of power during the ’60s and ’70s. When they
used his tools to assess prospect and vendors, IBM
executives called it “Mobleying.” The graphic below
shows how the ROA graph was used to map the entire
economy in the mid-60s, although the dates have been
made more recent for teaching purposes. Every senior
manager also was taught this chart as an intelligence tool
to assess their marketing targets and their suppliers.
Drucker says: “ . . . most businesses have two
information systems. One is organized around the data
stream; the other, far older one, around the accounting
system.”
This fundamental disconnect between operations and
finance is the core issue that Integral Operations and
Accounting Practices and Three Bottom Line
Performance address. Based on my observations of the
market’s response to these challenges, I am proposing a
“Transparency Assertion” to express the pivotal problem,
which states:
The single greatest drivers of unhealthy internal
competition and the leadership crisis in organizational
life are the vicious cycles of distrust and fear invisibly
generated by the inaccuracy and operational uselessness
of financial statements as tools to measure and present
the timely and objective facts of process, property,
contract and financial performance.
The picture above is a training slide from IBM’s Sand’s
Point Executive School from the mid-1960s (dates
changed for training in this decade) depicting an analysis
of the four different types of companies in the U.S.
marketplace at that time, plus the U.S. Industrial
Averages for 1962 to 1966, shown circled in the center.
Using Lou’s chart, one can see the different patterns of
how well companies were being managed in regard to
both efficiency (return on sales or net/sales) and
effectiveness (asset turnover or sales/assets). It is
immediately obvious that companies with 5% return on
resources (return on assets or net/assets) are distinct in
Copyright © Lean Accounting News, 2007
This situation is the hidden source of the core
disconnects we all experience in business — all but
invisible unless you are looking for it — which many
lean organization are now recognizing, hence Lean
Accounting.
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This leads to a “Transparency Postulate” to express the
Mobley Effect, which states:
The fundamental operating deliverable for financial
statements must be a clear presentation of the facts
regarding property, contract and performance that
connects operating cash flow with return and
operational metrics. This common language will provide
the capacity to build a culture so that everyone can be
involved in, and use, the business system for continuous
problem-seeing and problem-solving that translates into
constructive behavior change. (I thank Doc Hall of the
Association for Manufacturing Excellence for his input
on this.)
Today’s financial statements create a fundamental
fracturing of context because they are missing
fundamental coherence. It is virtually impossible, for
example, to see how the Direct Cash Statement (the
operating dimension of the bank account) relates to the
P&L and the balance sheet. This is demonstrated by the
fact that not one of the many thousands of businesses we
has seen have used the most crucial financial driver of
any business enterprise, Operating Cashflow over Sales,
which gives the bank account operating activities impact
of every sale. As I have yet to see one, if you know of
any companies watching this perhaps useful data point,
please let me know.
In my work, I am conducting pilot implementations
where we begin by agreeing among team members what
the basic facts of the system are and the language we will
use to communicate them. Then we form a Performance
Management Group (PMG) around the building of a
glossary based on the unified view of the matrix and the
driving forces that the enterprise navigates every day.
Then the PMG can begin the monthly Integral
Operations Finance and Accounting Practices by doing
rolling financial projections, which relate to day-to-day
reality by benchmarking, testing and assessing key
performance indicators.
In his classic book on anthropology, The Silent
Language, Edward T. Hall described the difference
between high-context and low-context cultures. He noted
that every culture falls on a context-generating
continuum, which defines how people in that culture
“know what is going on.” Where they fall on that
continuum, from low to high, dictates how they receive
— or don’t receive — subtle action messages, as well as
their sense of time and relationships. Of all industrialized
countries, Japan is the highest on the context continuum,
and the United States and Europe fall lower in context
knowledge and practice. In high-context cultures, trust is
a much higher value for fundamental working
relationships. By involving all of the senior leadership
and key staff as designers in co-creating the scoring
system, and creating engagement and feedback at all
relevant levels, tremendous energy and alignment are
created. This, plus the coherent and transparent
mathematics, allows everyone who wants to, to engage
together in understanding and using the scientific method
of observation, i.e., creating hypotheses, testing them and
drawing conclusions.
Copyright © Lean Accounting News, 2007
This void of objective facts that everyone can understand
continuously undermines trust, i.e., creates low-context,
generating an environment in which everyone must rely
on the language of their own disciplines and views of the
world to survive. People use the same words for different
things and different words for the same things. No shared
language means no shared context. No shared context
means everyone tends toward the lowest common
denominator, condemning all the players to try to survive
by controlling everyone else “for their own good” or for
their idea of the “good of the whole.” This is seen when
top leaders begin to sink their own programs and
initiatives without even realizing they are doing it. This
is in brutal contrast to the preferred role of the top
leadership: developing people to create a self-running
and self-improving business system; a system that is
being continuously designed to keep everyone alert and
thinking all the time about how to do things better.
Tom Hood at Maryland Association of Certified Public
Accountants and the Integral Operations Finance
Performance and Accounting Management Groups use
the Mobley Effect as a solution to this dilemma. They
build a shared “sacred glossary,” beginning with a set of
simple definitions that can be used by everyone – from
the executive suite’s strategic finance meetings to the
folks carrying out marching orders on the floor. The
development of a shared language creates an effective set
of conversational heuristics, or collective learning loops,
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so that employees at all levels of responsibility can
understand the whole system and their part in it. The
improbable outcome of basing this on the financial
statement accounts and relationships is that once agreed,
the numbers disappear, leaving no barrier to focusing on
the issues at hand. From then on the numbers become —
just as with the dashboard for your car or the scoreboard
in the football game — a shared reference point for
everyone when, and only when, you all need them and
choose to focus on them.
lean efforts finally will be successful at realizing their
potential. Re-engineering initiatives without this deeply
inclusive context typically fail to realize the generativity
and continuous improvement (1 million suggestions per
year, over 90% implemented) found in Toyota’s business
and supply chain.
PMI has found that this transformation can start in a oneday PMG launch, and take solid root in as little as six
months, although full implementation of the practices
typically takes a year or more. In PMI pilots, we have
witnessed the rapid evaporation of complaining, blaming
and low morale as a new culture of initiative, applied
creativity and self-responsibility takes hold at all levels,
from top to bottom.
Lou Mobley’s approach was to give the entire team a
shared and comprehensive picture of, and language for,
the whole system. This picture and language can assure
that every shred of new learning at every level of
context, process and content is captured; which
consistently builds organizational intelligence — the
competitive advantage of the Toyota Production System.
Let me leave you with a caveat — in the recesses of the
past, we may be able to lay blame for finding ourselves
in this “box,” but today, there are only people, who at
every level are doing their best to make things works
with a broken set of tools. No one now living created this
situation, and we are all suffering in it together. Now we
can all join in making a doorway “out of the box,” to
new levels of performance that work for, and benefit,
everyone in every enterprise.
Everyone involved gains the experience of seeing the
system continuously evolve, which assures them that
they can be a significant contributor as long as they are
in the game. Further, the fully coherent and transparent
math makes it possible to rigorously imagine future
results and then test them for accuracy, allowing for a
view of the future that is shared by everyone. Imagine
the CEO and CFO sitting back and watching all of their
employees have an animated conversation that they
could only have inside their own heads before, seeing
their people independently grasping complexity, tradeoffs and ambiguities; and then addressing them in ways
that are operationally compelling and competent.
Once the Integral Operations Finance and Accounting
practices begin to take hold, then the entire organization
can begin to take on the challenge of Drucker’s gauntlet
— systematically and efficiently look at the general
ledger (GL) and the chart of accounts, both of which
have been creating in a reality vacuum. Integral
Operations Finance and Accounting ultimately will allow
for the GL and the chart to connect directly with every
operating activity and flow element in the enterprise
operations manual. Within this contextually rich field,
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forecasting. A commitment to this process must be in
place before using implementation tools.
ARTICLE 4
Rolling Projections with KPIs Can
Create Meaningful Financial
Statements
Think Before Reaching For Tools
At the 6th annual Beyond Budgeting Round Table earlier
this month, attendees frequently asked, “What is the best
tool to use for rolling projections?” Steve Player, of The
Player Group, an advocate of Beyond Budgeting
methods and a Lean Accounting Summit presenter,
emphasized the critical need for thorough thinking prior
to choosing tools. In such thinking, the development and
transfer of shared acumen about the business is critical,
so that everyone involved can own and help create the
financial statements, as well as drive for continuous
improvement of them.
This combination can provide the foundation
for a common learning system — a must for
building a shared vision linked with continuous
improvement.
Financial statements can be meaningful tools for
businesses when forecasting is done in conjunction with
key performance indicators (KPIs) on a continuous
(rolling) basis. When combined, financial statements and
KPIs become rigorous tools for day-to-day operations
and for steering the enterprise. KPIs become even more
meaningful when linked to big-picture rolling projections
because they are closer to reality than long-term
forecasts. (Rolling projections are done on a short-term
basis — weekly, monthly, or quarterly as opposed to
traditional 12-month forecasts. Companies using rolling
projections find they tend to be more accurate and
efficient than longer-term forecasts, and they negate the
need for “negotiating” inaccurate sales targets as
performance goals.)
Financial statements developed without such a process
and lacking in relevancy (because they have no meaning
for operations) and direction (because they lack ties to
KPIs) have led to a common condition among today’s
employees and middle managers. They feel like football
players at work on a round field with no yard markers
and goal posts that tend to move for no obvious reason,
especially when you get close to them. The
destructiveness of this to performance and morale cannot
be overstated.
Effectively implementing rolling projections requires
leaders and middle managers to communicate much
differently than they usually do — which in turn requires
a transformation in thinking. It is not easy, but the key
benefit of succeeding at this is that middle managers
become fully responsible for developing operating
metrics and driving business performance — with full
trust and support from senior leaders.
The culprit of this misguided football game is the
difference in mindset between executives and operating
managers — i.e., figuring out what to do, as opposed to
figuring out how to do it; and the use of standard
financial measures to determine how well it was done.
Tying KPIs with forecasts to create financial statements
requires ongoing collaboration and refinement, creating a
common mindset.
One way to implement rolling projections is known as
“driver-based” planning, which can be done using a
number of CPM (corporate performance management)
software packages, and which, when successfully
implemented, has a big impact on improving or
transforming the relevance and efficiency of the entire
budgeting process. Driver-based planning is defined by
Rand Heer, creator of Hyperion’s Pillar, and now of
Alight Planning, as “a best practice where financial plans
are structured based on models of underlying business
activities [which drive financial data].”
This practice connects the operational elements of a
business and its financial plans — but only when the
operations employees are actively engaged in building
and refining the models. Doing this requires use of
proper tools supported by a shared vision. A company
creates such a shared vision with a collaborative thinking
process. Rolling forecasts can provide a framework for
this process because they require ongoing and frequent
collaboration — as opposed to one “budget season”
followed by a series of give-and-take negotiations for re-
Copyright © Lean Accounting News, 2007
Above we have a CEO who has come from marketing
and sales (M&S) and developed finance acumen through
an executive MBA. He used to run M&S several years
ago, but the company has grown a lot. A CEO who
comes from finance or operations may be fuzzy in M&S.
Ongoing collaboration and transparency with all five
areas is the only way that everyone can develop an
integrated worldview.
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Looking at results (financial statements) in isolation from
behavior (KPIs), or vice versa, condemns both to
marginal relevance, and therefore the people who use
them in different functions or responsibilities to
confusion, fragmentation, and isolation (silos). One way
we can see this is in the many fully implemented data
warehouse and BIS (business intelligence system)
environments, where the tendency is for everyone to
focus on, and own, only the data they understand and
feel some power to control and/or influence. In these
cases, you might have the best technology solution
available but are merely automating a broken process, so
people continue to do what they have always done.
which tells operating cash impact in the bank account for
every dollar of revenue.
For everyone to be aligned in their thinking about the
most basic fundamentals of how a business works, it is
critical that cashflow and balance-sheet relationships are
integrally linked with the profit-and-loss picture. This
can be accomplished with the Mobley Matrix (see March
Issue of Lean Accounting News), and also is enabled by
understanding the fact that there are only 12 key
financial drivers (see strategy screen above) that create
overall financial results (three primary bottom lines —
operating cashflow, a profit, and a return-on-asset
measure), making it possible to link any KPI with only
one or two drivers. In any particular business, there will
only be a few key drivers that really matter, so the math
piece of evaluating and refining KPIs becomes quite
simple in most cases.
Starting To Create A Shared Language and
Vision
Involving an enterprise-wide collaborative team in bigpicture forecasts combined with focused operational
planning combats this. As is done through the practice of
value-steam mapping, collectively agreeing on a picture
of the current state and creating an agreed-upon picture
of a future state creates an evolving language, or
vernacular, for the whole system. Integral Operations
Finance practices (see April Lean Accounting News)
provide an entry point and tools for doing the
comprehensive thinking, with the focus on enabling
those that will be the internal customers to be integrally
involved, and in fact leading the process every step of the
way. (See Performance Management Group Huddle
Agenda for a sample meeting agenda from a company
using Operations Finance Practices).
Here we see the flow of some drivers to financial results.
The total of all organizational behavior becomes overall
financial outcomes. Refined KPIs link a customer
(internal or external) result with both a measurable
behavior and numerical result, which then link to
financial drivers, which in turn link to one or more
bottom lines. The most useful KPIs simultaneously affect
more than one of the three primary bottom lines.
Ties to Lean Processes
The creative thinking that builds a foundation of shared
business acumen — and therefore higher levels of trust
and confidence — also involves everyone understanding
and leveraging the cash-to-cash cycle by hard-wiring
both their individual and collective activities to operating
cashflow impacts. The often-unused power of the direct
cashflow statement can be harnessed very effectively
when linked directly with lean-process KPIs that have
been refined by ongoing peer interaction and review.
Both these dimensions need to be added if we are going
to have a whole picture to work with as each company
journeys to meet, and attempt to exceed, the standard set
by the Toyota Production System.
Here is a sample of shared language translated into
strategy. This sample data screen shows the core
information that gives meaning to the financial statement
data. On the top are the first five ratios of the DuPont
formula (see February Lean Accounting News for more
detail and graphic representation). From left to right are
the basic expense drivers — turnovers; direct and
indirect cashflow statements; and, in the lower right, is a
possible new bottom line: operating cashflow over sales,
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Making this connection well understood, consistently
communicated, and actionable will take many cycles of
creating, testing, and refining assertions and hypotheses,
scientifically using empirical data until the ideas and the
results are consistent with each other, and the company
cash story is transparent. That can provide the solid base
from which to continuously refine the collaboration
among the executive, financial, and operational mindsets.
About the Author
Jahn Ballard, founding director of the Performance
Management Institute Inc. (PMI), spent over 10 years
with Louis Mobley and Chuck Kremer, helping to
develop the Financial Scoreboard and adding additional
value through multi-level systems analysis, plus
additional visualization and educational tools. Jahn
delivers Integral Operations Finance and Accounting
practices training for the Maryland Association of
Certified Public Accountants and other state CPA
societies through the class Executive Finance for
Operating Leaders: Engaging Management, Associates,
and your Clients in Cashflow, Return and KPI
Development. He is leading two events at the Lean
Accounting Summit (www.leanaccountingsummit.com)
with Tom Hood and Doc Hall: A half-day pre-conference
called “Executive Finance for Operating Leaders:
Aligning the Whole Leadership Team through
Operations Cashflow and KPI Development” and a
breakout group called “Vision and Cash Accounting
Linked By KPI Development.”
PMI delivers MBA-level executive briefings for finance
and operations executives, building a common language
across departmental silos and customizing the
Scoreboard to fit each organization’s current business
mandates.
For additional information, and to read a full history of
the Mobley Matrix, see www.financialscoreboard.com
and www.financialdashboard.com.
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