Lean Accounting meets Integral Operations Finance

Connecting the ‘C’ Suite to the people doing the work

Note: This column is the first of a three-part series that examine how Lean Accounting and the emerging practice of Integral Operations Finance can converge into a whole-systems approach that provides the business advantages of the Toyota Production System, making it fully operational for business and organizational leaders. It is provided by Jahn Ballard, currently the chief process officer of Vinovation Inc. Jahn is founding director of the Performance Management Institute Inc. (PMI), creator of the Financial Dashboard and developer of Integral Operations Finance and Accounting Practices.
By Jahn Ballard

CPA Vision for 2011 and Beyond emerged from the National Future Forum, attended by delegates from the entire CPA profession. What they grappled with was the need to be competitive in a new economy, especially by transforming accounting data and practice to add more value for clients and colleagues.

As chair, Tom Hood spent several years in the late 1990s assessing the tools available to the profession and searching for one tool that he had used in the past called the Mobley Matrix. Named after its engineer-inventor, the late Louis R. Mobley, founder of IBM’s Sands Point Executive School and one of the fathers of executive leadership education in America, the Matrix was discovered in 1959. Primarily, Lou was a key internal architect of the IBM leadership culture from 1950-70, among a small team working for Tom Watson Jr., overseeing the creation and execution of two of the most successful decades of business performance ever seen.

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Starting in 1980, Lou used the Matrix and his personal clout to single-handedly create the momentum for codifying the concept of operating cashflow as a part of generally accepted accounting practices (the GAAP). This was intended to codify more than two decades of rigorous cash management experimentation across the whole marketplace into a requirement to disclose what Lou called a "pure" cash statement, which Lou was certain was the missing link to the bank account that undermined all business leaders’ use of accounting data.

To the incalculable cost of all businesses, when FASB rule No. 95 was passed in November 1987, what is called the "direct cash statement was made voluntary and, to this day, remains perhaps the greatest unused and un-leveraged management tool in the GAAP.

Also in the 1980s, Mobley partnered with the late Chuck Kremer, a CPA and co-author of Managing by the Numbers, to codify Three-Bottom-Line Performance, applying the Matrix mathematics to support interdisciplinary business decision-making in a tool called the Financial Scoreboard.

Tom Hood began partnering with the Performance Management Institute (PMI) in 2001 when he found that the Financial Scoreboard incorporated the Mobley Matrix, which he had used successfully, when in industry, to engage operating managers in cashflow management (see case overview here). He used that tool with his operating leaders to pull off a highly sophisticated, multi-year challenge of connecting operations to cashflow management. He immediately began using the Financial Scoreboard in 2001 to work with the MACPA’s challenges because it enabled a shared finance conversation and effective problem-solving among the senior team and the line operating people.

Tom has also been assisting PMI to evolve new software and practices and to create a one-day class called "Executive Finance for Operating Leaders: Engaging Management, Associates and Your Clients in Cashflow, Return and KPI Development," which has been delivered to more than 900 CFOs, controllers, CPAs and CPA-CEOs over the last 10 years.

PMI’s understanding of the Mobley analysis is in the form of "The Transparency Postulate," which states:

The single greatest driver 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 objective facts of property, contract and financial performance.

PMI asserts that this is the underlying driver of the disconnect between the finance / accounting functions and all Lean efforts. Among numerous problems it generates is a fundamental barrier to clear and effective communication and cooperation between the CEO, CFO and their direct reports. Solving this problem is the key to generating the interest, involvement and effective support of the CEO and CFO for Lean initiatives.

What rationale can demonstrate the truth of Lou’s assertion that non-transparency of the operating cash in the bank account can have such a broad and devastating impact? Leave it to "Doc" Hall to come up with perhaps the most incisive analysis of this question. He sights the seminal work of applied anthropologist, Edward T. Hall (no relation), whose classic book, The Silent Language, many of us were probably assigned at some point in school. Edward Hall described the distinction of what he called high-context and low-context cultures. He noted that every culture falls on a context-generating continuum, which defined 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 — subtle action messages, as well as their sense of time and relationships.

Japan falls highest on the continuum for industrialized countries, with America and Europe lower on the scale. In high-context cultures, trust is a much higher value for fundamental working relationships. The fact is that financial statements are missing the most fundamental coherence – it is virtually impossible to see how the direct cash statement (the operating dimension of the bank account) relates to the P&L and the balance sheet – creates a fundamental fracturing of context. This creates an environment in which everyone must rely on the language of their disciplines and views of the world, forcing a situation where people use the same words for different things, and different words for the same thing. No shared language means no shared context; no shared context means everything goes to the lowest common denominator, condemning everyone to controlling each other "for their own good" in a low-context world.

The Mobley Effect shows the solution to this dilemma: Build what Chuck Kremer called a shared "sacred glossary," beginning with a simple picture and language around the highest levels of strategic finance, among everyone from the "C" Suite to the folks carrying out marching orders on the floor (Integral Operations Finance). Create an effective set of conversational heuristics (learning loops) so the folks responsible can see that there is a common language of the whole system. This builds a rock-solid shared language that continuously builds trust and coheres context. To quote "Doc" Hall, “If the observer(s) cannot connect the numbers with activity — with knowledge of what is happening to produce the numbers — the numbers have no context, like a set of statements with no description of what the company is or does.”

Lou’s approach was simple: Give the whole team a shared and comprehensive picture and language of the whole system, and then assure that they continuously capture every shred of new learning at every level of context, process and content. That way, everyone involved has the experience of both seeing the system continuously evolve, and knowing that they have, and will, be as significant a contributor as they possibly can, as long as they are in the game.

In future columns leading up to the third Lean Accounting Summit, and in topic-focused conference calls, we will explore how use of IOF to engage the CEO and CFO in creating the best meeting ground for accountants who want to provide value to Lean initiatives and practitioners who want the full confidence and support of their senior leadership team.

Jahn Ballard, founding director of the Performance Management Institute Inc. (PMI), spent more than 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 MACPA and other state CPA societies through the continuing education seminar "Executive Finance for Operating Leaders: Engaging Management, Associates, and your Clients in Cashflow, Return and KPI Development." He is doing three events within the Lean Netwirk, two at the Lean Accounting Summit with Tom Hood — 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. The third is "Measures which Matter for Innovation and Growth," an accounting innovation "skunkworks" with Scanlon Leadership Network.
PMI delivers MBA-level executive briefings for finance and operations executives, building a common language across departmental silos and customizing the Financial 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 and PMI’s 12-Step Path to the development of Integral Operational Finance.

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