by Glenn Cheney

A survey of management accountants conducted by Ernst & Young and the Institute of Management Accountants has found that financial managers are not taking advantage of modern cost management tools. This finding was in curious contrast to respondents reporting cost management as the highest priority in their companies.

The survey was distributed to over 23,000 members of the IMA. Nearly 2,000 corporate accountants responded, making this the largest survey of cost management practices that has been conducted in North America. Almost half the respondents were chief financial or executive officers, vice presidents of finance, or controllers.

The authors of the survey, Ashish Garg, Ph.D., and Debashish Ghosh, Ph.D., both Ernst & Young strategic costing leaders, and James P. Hudick, Ph.D., IMA managing director for professional development, said that they were surprised at the gap between the tools that financial executives indicate they need and the tools they actually work with.

“We have presented our results at various internal and external venues and found that everyone agrees there is significant distortion in the type of cost information that is available,” Ghosh said. “There are many dimensions to good information. It should be accurate, detailed and timely. Everyone agrees there is a lack of good information. But we’re finding that companies are not moving to adopt new tools and techniques to get better information.”

Over half of the respondents said that cost management was “very important” to their company, and another 30 percent ranked it as “important.” Generating cost information was seen as a top priority - more crucial than cost reduction, improving processes or reducing risk.

“The need for information is paramount,” Ashish Garg said. “It’s more important than the actual task of cost reduction. That was the real ‘a-ha’ for us from this survey.”

Respondents were almost unanimous in reporting “some distortion” of cost visibility, and 38 percent reported “significant distortions.” Overhead allocation was see as the most widespread distortion (30 percent), followed by shared services (20 percent) and greater product diversity (19 percent).

CPA Steve Player, managing director of The Player Group, a performance management consulting firm, recognizes the dichotomy of management that is in need of better information yet is reluctant to acquire the necessary tools.

“It’s almost like financial executives are looking at a target through a scope but there’s dirt on it; it’s cloudy,” Player said. “They know they’ve got a dirty aiming mechanism but, in the current economy, they aren’t doing much to improve the situation. People think it’s important, but they’re working around it. They have a propensity to keep hanging on to tools that we know don’t work very well. We see management accountants who know there are better ways out there, but they’re stuck in old modes and old methods. Until we find a cost-effective way to change, that’s where we’re stuck.”

Despite the importance of cost management and the prevalence of cost distortions, 80 percent of the respondents said that implementing new management accounting tools initiatives was of low or medium priority for them. Seventy-two percent preferred “homegrown” solutions, while only 14 percent adopted “best of breed.” Another 14 percent used ERP modules.

Garg and Ghosh have been contacting some of the companies that participated in the survey, 200 of which indicated that they would participate in a detailed interview on survey-related issues. The researchers found several explanations for the apparent reluctance to adopt the most up-to-date costing tools.

The researchers found that many companies had rushed into high-tech software solutions in the 1980s and 1990s, only to find that the solutions failed to directly address their companies’ needs. In other cases, management did not know how to effectively exploit the software packages that they had acquired.

These experiences, the researches say, may explain the preference for homegrown solutions, which tend to be more accurately targeted to the specific problems of the implementing companies.

Ghosh cited the case of a major financial institution that bought into a multi-million dollar costing tool, then went about trying to fit it into existing systems. After years of agonizing effort, not to mention the resignations of two chief financial officers, the company realized that simply dropping the whole project would be more cost-effective than seeing the project through to the end and reaping the benefits of full implementation.

The survey revealed that in large corporations, management commitment was the most important trigger for the adoption of new management accounting tools - even more important than adequate technology or better enterprise resource planning tools.

Through their one-on-one interviews, Garg and Ghosh are learning that neither the providers of cost management tools nor the management accountants who need them are adequately justifying that need to upper management.

“Financial executives are not making their cases as they should,” Garg said. “The techniques [of cost management] are all there, and it’s not rocket science to make a case, but until now, they’ve never had to go through that kind of sharper-pencil approach to justifying their IT buying decisions.”

Garg also said that software wasn’t really the answer to the problem.

“In this industry, the moment you mention a ‘tool,’ people start thinking of a software package,” Garg said. “Our point of view is that it’s not about tools. It’s about logic and business decisions you can make with the tool. People should not look for a shrink-wrapped point solution and think that it will solve all their cost-management needs.”

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