Strategic cost management: Sophia Aluko, Jonathan Mayhall, Melanie Wauquiez and Alan Vercio report on their financial transparency project at Barclays.
| Author | Aluko, Sophia |
| Position | Technical matters |
When Ernst & Young surveyed more than 23,000 senior members of the US Institute of Management Accountants on cost management and measurement in 2003, it elicited a number of confusing results. Although 80 per cent of the respondents rated cost management as strategically important, 98 per cent admitted that their current practices in that area were leading to cost distortions. Three-quarters reported that they weren't significantly constrained by a lack of in-house technical accounting skills, while nearly 80 per cent agreed that the introduction of new management accounting initiatives was no more than a medium priority for their organisations.
If so many respondents were reporting that cost management (and, by extension, measurement) was important, that their current methods were flawed and that they had in-house skills to solve the problem, why were so few doing anything about it? We believe that many of the companies covered in the survey had already tried--and failed--to improve their cost measurement methods. The rule of thumb is that 70 per cent of such projects do not achieve their long-term objectives. Most are abandoned within two years as a result of "death by detail" and a lack of involvement from the operational side of the organisation.
Operational managers often ask for "better financial transparency, so we know which levers we can pull that will have the most beneficial effect on the business". Because the word "financial" is used in such requests, they tend to be passed to the CFO. Unfortunately, these levers (drivers of activities) are not found in the general ledger, chart of accounts or cost-centre structure. They are found in the operational data.
All these factors were on our minds when the CFO of Barclays UK Retail Bank asked us to create financial transparency, including end-to-end process capacity and cost measurements differentiated by product and channel, across the organisation. We knew that doing this would depend on achieving operational transparency (1), so that was our starting point. We duly found a reasonable customer segment data structure; a product family data structure; an organisation data structure captured by cost centres; and a resource data structure captured by the general ledger chart of accounts. But, although a process data structure was key to the CFO's end-to-end process cost requirement, we were unable to find one.
Stage one: data structure
Some people refer to a data structure as a taxonomy...
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