The Value of Smarter Accountants

by BILL WADDELL

"Think simple as my old master used to say - meaning reduce the whole of its parts into the simplest terms, getting back to first principles."       - Frank Lloyd Wright

Just about a year ago to the day I extolled the virtues of In-N-Out Burger, and their success founded in simplicity and focus.  Seems appropriate to re-enforce the point by extolling the same virtues - and same level of success - at Southwest Airlines.

A great article appeared in Slate the other day describing Southwest's keys to 39 successive years of profitability.  "How does Southwest do it? In part, by keeping operations simple. Simpler operations mean fewer things that can go awry and botch up the whole process."

It takes a particularly smart accountant - and a rare one - to realize (1) the truth in VP of Ground Ops Chris Wahlenmaier's statements:  “When you charge people to check bags they try to carry more on, sometimes more than can fit in the overhead bins. That results in more bags being checked at the gate, right before departure. And that wastes time.”; and (2) "... we only make money off our planes when they’re in the air."

One kind of airplane - most certainly sub-optimizes the unit cost of lots of individual flights - but it is more than offset by the benefits of standardization.  "We only need to train our mechanics on one type of airplane. We only need extra parts inventory for that one type of airplane. If we have to swap a plane out at the last minute for maintenance, the fleet is totally interchangeable—all our on-board crews and ground crews are already familiar with it. And there are no challenges in how and where we can park our planes on the ground, since they’re all the same shape and size," says Wahlenmaier.

That sort of holistic thinking - holistic accounting - is what really sets Southwest apart and drives their success.  It is really very, very lean thinking.  Wahlenmaier says they only make money when the planes are flying.  True enough, but more important they are only creating value for customers when the planes are flying.  Southwest's industry leading turnaround time translates into industry leading value adding ratios.  All of that standardization is akin to SMED. Their set-up times - the time it takes to change over from one flight - one set of passengers, one set of luggage and often one crew - to another is industry leading.

It is ironic that, on the same day the Slate article was written United announced another increase in baggage fees.  I'll bet the accountants at United who figured that one out didn't take into account the cost of delay and complexity.

Airlines live and die - mostly die - with their equivalent of standard costing.  They calculate cost per passenger, profit per passenger, profit per flight, and live mired in that detail.  All of those figures depend on an assumption of accuracy of a lot of allocated overhead costs, and cause the companies to lose sight of those same overheads which really drive success a lot more than the direct costs.  They cannot see, manage or optimize the whole as a result.

The same thing is true at In-N-Out Burger.  While the other fast food guys stare at margins for individual menu items - depending also on allocated overheads In-N-Out recognizes the huge driver complexity has on total cost, ability to control quality, and ultimately, on customer satisfaction.

While United, McDonalds et al think they make money per passenger, more and more they foul things up, incur huge costs and drive customers to the likes of Southwest and In-N-Out Burger where customers get what they want, fast and consitently. 

It takes a wise accountant to pay scant attention to unit costs and their silly allocations and convoluted assumptions and see the whole.  Ford said, "Profit is the inevitable conclusion of work well done."  Work is better done when people can do the work through simple, consistent processes, and the accountants who can figure that out are precious.

Original: http://idatix.com/manufacturing-leadership/the-value-of-smarter-accountants/

Comments

[Robert Drescher]

Hi Bill

I agree with you that it takes a good accountant to figure true costs in an operation. Part of the big problem I see constantly is the backgrounds of accountants business hire. With rare exception the vast majority of accountants come from the training programs of public accounting companies.

The problem with that is that public accounting companies only train their people in certain areas; auditing, creating financial statements, and tax accounting. Although important none of these teaches them how results relate to business activity, which is the base of true cost management accounting. It doesn't take a genius of an accountant or one with added letters behind their name to do real cost accounting it takes someone that understands what business is and can relate that to cash flows.

We would see far fewer business problems if universities and colleges would start teaching real management accounting, instead of just financial and tax accounting. Businesses everywhere need people who truly understand cost, revenue generation, and wealth creation, something I have yet to see many accountants or executives understand. Focusing your accounting activities on the past doesn't help you make any money, it only adds to your cost.

Good management accounting requires you to be able to understand what activities drive your expenses and revenues, being able to attach accurate true cost to each of them, instead of allocating standard costs. After that you can actually create systems to control those activities that will signal problems while corrective action can be taken, as opposed to waiting for the financial results, when all you can do is spin them and explain them.

Personally I feel that your two examples have accountants that understand what true Activity Based Accounting is. ABC if done right is a simple system that puts most activities employees, equipment, and their related facilities perform into a small set of activity groups that allow for easy recognition and control. Simplicity is its key, unlike the excessively complex world of financial accounting.

You can probably guess that poor management accounting practises are a real issue with me.

[Ari Krause]

Well written. Reminds me of the quote: “Complexity is a crude state; simplicity is the end of a process of refinement.” – Pascal Dennis. Too often complexity is seen as a highly evolved state even though complexity is inefficient. Complexity makes employees' jobs more difficult, so that employees have to perform at their absolute best for merely sufficient results. For example, the point about bags being checked in at the gate because passengers attempted to carry on too many or too large of bags to avoid baggage fees makes the employees' job of pleasing customers much more difficult. I had not contemplated the relationship between accounting and complexity in organizations. Thank you for enlightening me!