Integrating Operation Finance practices, the Mobley Matrix, Financial Scoreboard and Lean Accounting into a complete system

Note: This column is the third 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

Non-functional financial statements are the underlying drivers of the disconnect between accounting and all other business functions, especially operations and including other finance functions. They generate a fundamental barrier to clear, effective communication and cooperation between 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 approaches.

Additionally, as long as goals are presented in only dollar terms and have no relation to the reality of operations, they will not translate to the people whose responsibility is producing long-term results, or connect those results to long-term financial performance.

This column provides an approach to integrating the needs of operational people with the needs of company leadership. Starting with the internal leadership practices pioneered at IBM, I propose how they relate to the challenges of creating a complete system that links continuous improvement goals with the strategic plan.

Lou Mobley was one of Tom Watson Jr.’s corporate leadership architects at IBM 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 the concepts, then act rapidly and effectively by doing live planning for their business case, which they then would implement. (See part 2 in this series for more details on the Matrix, and February’s for the ROA Chart.) I was privileged to be mentored by Lou, who was also a friend and colleague from 1980 until his death in 1988. Integral Operations Finance and Accounting Practices are based on what I learned with Lou and Chuck Kremer, the CPA who developed the Financial Scoreboard over the two decades he worked with Lou’s concepts.

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. The article was accepted but Lou was not allowed to publish it because Watson felt there was too much value to be lost in disclosing the leverage IBM enjoyed over the rest of the marketplace. IBM had a significant competitive advantage, due in part to its use of an internal financial leadership system that virtually eliminated power games in annual budgeting and the typical wars between corporate departments.

Lou’s system also provided a market-intelligence tool of unheard-of power (during the 1960s 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 was also taught this chart as an intelligence tool to assess their marketing targets and their suppliers.

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 percent return on resources (return on assets or net / assets) are distinct in 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.

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 15-year study demonstrates the economic performance boost that occurs when ESOPs are combined with communication of the financial picture to all employee-owners.

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.

Drucker says, “…. (M)ost 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 the 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.

This situation is the hidden source of the core disconnects we all experience in business, all but invisible unless you are looking for them, which many lean organization are now recognizing, hence Lean Accounting.

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 cashflow with return and operational metrics. This common language will provides 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 (thank you, Doc Hall) that translates into constructive behavior change.

I am personally conducting pilot implementations in which we begin by agreeing among the team on 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 practices by doing rolling financial projections, which relate to day-to-day to 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 anyone to engage together in understanding and using the scientific method of observation, i.e., creating hypotheses, testing them and drawing conclusions.

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 PMI has seen have used the most crucial financial driver 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.

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 his or her 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 the Maryland Association of CPAs and the Integral Operations Finance (IOF) Performance 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 “C” 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, 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.

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.

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 their people have an animated conversation that they could only have inside their own heads before, seeing their people independently grasping the complexity, trade-offs and ambiguities, and then addressing them in ways that are operationally compelling and competent.

Once the IOF practices begin to take hold, 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 (IOFA) 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, 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, more than 90 percent implemented) found in Toyota’s business and supply chain.

PMI has found that this transformation can start in a one-day 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.

In closing, 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 work 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.

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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