The bottom line is not the bottom line

Relevance Regained, From Top-Down Control to Bottom-Up Empowerment
by Tom Johnson

Undoubtedly one of the most wrenching changes CEOs face is to realize that goals formulated from accounting information no longer permit them to manage companies effectively,” writes Tom Johnson is the first chapter of this astute book on what it takes for business to succeed globally.You may be aware that I view accounting as archaic and dysfunctional. Accounting is useful for reporting purposes, but it easily tricks managers into overlooking the importance of intangible assets, devaluing workers’ contributions, manipulating numbers instead of managing the business, making poor decisions, and gaming the system.

A manager need not be the sharpest tool in the drawer to appreciate that employee know-how, healthy relationships with customers, and reputation with suppliers are valuable; to the accountant they are worth nothing. “Financial engineering,” the manipulation and repackaging of investments to enrich financiers and lawyers while producing zilch that improves the world, is obscene. Is it right to benefit from trickery instead of reality?

The idea that accounting should be used to control a business didn’t come into favor until the early 50s. Before that, you managed a business by knowing the business and walking around. Even DuPont, which more or less invented financial management, didn’t try to use accounting to run the business. Then came the M-form organization, i.e. the multidivisional organization, which used ROI in an effort to control apples and oranges with a common yardstick.

The problem comes when managers think they can manage operations by controlling the accounting numbers, even though the numbers never tell the whole story. The result is what Johnson calls “remote-control management.” This is where we get the myth of the professional manager who can help any business, even those she knows nothing about. A remote-control tennis player might try to win the game by manipulating the scoreboard because he doesn’t really know the game. A remote-control strategic planner believes that past performance guarantees future success.

A remote-control management consultant looks at lines of business as securities in a financial portfolio. Her goal is to optimize profitability by milking cash cows, acquiring stars, and divesting dogs. What really results from this is akin to an orchestra where every instrument competes to be loudest and fastest in the pit. As Russell Ackoff observed, “If each part of a system, considered separately, is made to operate as efficiently as possible, the system as a whole will not operate as effectively as possible.”

In Today and Tomorrow, Henry Ford wrote “Business must be run at a profit…, else it will die. But when any one attempts to run a business solely for profit and thinks not at all of the service to the community, then also the business must die, for it no longer has a reason for existence.”

As networks shrink the world, business priorities change. Efficient production used to call the shots. Make lots of stuff, gain economies of scale, and sell, sell, sell, even if what you were selling wasn’t quite what your customers were asking for. But now customers can buy whatever they want from anywhere in the world, whenever they want to. Customer satisfaction replaces price as the primary factor in making buying decisions. Rapid response to customer needs becomes more important than cost control. Allegiance to accounting as a control system focuses management attention on yesterday’s variable.

Where’s the best place to stay abreast of changing customer desires? At the point of contact with the customer. (Duh.) Johnson writes, “People left to their own devices produce better results. But people cannot move a company toward competitive excellence if they are rewarded for meeting top-down accounting-based targets, not for continuously seeking better ways to satisfy customers, internal and external.”

In a nutshell, business should manage people, not finance. Employees are the eyes and ears of the company, not costs. Successful businesses exist to create and maintain relationships with customers, not solely to sell them something.

Business schools have not helped. MBA programs require PhDs as professors, and when the MBA market began to boom after World War II, the available faculty had doctorates in economics or psychology. The result is MBA programs that deal with the usual academic conundrums but teach little about business; MBA programs consist of “second-rate economists dealing with third-rate questions.”

So long as American companies benchmarked their performance against other American companies, top-down remote-control management appeared to be working. Everyone’s performance was in the same ballpark. Then global competition revealed American companies to be less flexible and more wasteful—less competitive—than many of their competitors. Just think : Toyota.

Any manager worth his salt has disproved the old canard that “You can’t manage what you can’t measure” by managing such inherently immeasurable things as people, uncertainty, and image. The challenge is to share control with the entire organization, for the workers at the “bottom” of the organization are the first to learn from customers. The remote-control manager fails precisely because she only manages what she can measure.

The bottom line is not the bottom line.

Johnson tells us,

“Forty years of emphasizing accounting-style control over things has seen American businesses do little or nothing to develop the capabilities of people. Works have been viewed as a source of energy and cost, not as a source of ideas. It is time for American top managers to stop viewing a business as a mechanical contrivance, somewhat like a Swiss watch, where the determination of optimal output comes from outside, from above. … The global economy compels companies to recognize that their most important asset is the power of people—workers, managers, suppliers, and customers—to remove constraints that impede flexibility.”

“The absence of bottom-up ownership and learning is what stops most American businesses from making the final leap to competitive excellence.”