Episode 25: Gary Cokins: Mythbusting Performance Management

What this episode covers

CPAs and finance leaders have to start asking some really painful questions like, according to Gary Cokins, an internationally recognized expert in performance management, in this interview with Steven Sacks for CPA Trendlines. Questions like: • Do we know where we make or lose money, reasonably accurately? • Do our managers understand the strategy? The executives? • Are we measuring the right things? KEY TAKEAWAYS  There is confusion, a lack of consensus about what Enterprise Performance Management and Corporate Performance Management is. Many think both are a process and a system. They are actually the integration of multiple methods.  An effective EPM and CPM method depends on good high-quality source data that needs to produce facts and cannot just depend on opinion.  EPM is much broader than a CFO initiative. It's all about giving CFOs better information so they can have the insights to make better decisions. It is for any type of organization in any type of industry.  Three major issues in operations: strategy, execution, failure, flawed measures of costs and profit of products, service lines and customers. It's all about aligning the behavior of the employees and managers with the strategy of the executives.  Activity-based costing is just standard that is basically full absorption costing done correctly. This is management accounting information. With external reporting, if the numbers are wrong, you go to jail. Management accounting, you get the numbers wrong, you don't go to jail.  When people are defining key performance indicators, they need to use a technique called correlation. You can look at a KPI and how it goes up or down and its impact on the next KPI that it influences. If it's poor correlation, it means that is it not a particularly good KPI.  EPM and CPM can be applied to customer or client profitability. Consider high maintenance customers; always changing schedule; never buying standard, always special. Always calling the help desk. Always returning goods. Low maintenance customers are preferable because they only buy standard. Never changed schedule. Never call help desk. Never return goods. If those two customers bought the same volume, same mix, same price, they're not equally profitable. Because the high maintenance one is really, really eroding a lot of work.  For CPA firms, they have to look at their clients, their revenues, and their billable hours. And basically, if they use activity-based costing principles, they're all based on work activities. It differentiates what causes high client profit high, very profitable client from low profit clients.  Activity-based costing is necessary to get the true cost of products, service lines, etc. When it comes to strategy, execution, leaders have to understand the strategy. It is important to get measures. That's where the KPIs come into play. You get what you measure. If you can't measure it, you can't manage it. If you can't manage it, you can't improve it.  The impact on robotic process automation and artificial intelligence on the CPA profession, will eliminate a lot of jobs, and not just in the area of audit, but also transactional areas like payroll clerks, invoicing and purchase orders.  Everyone should go to the YouTube video: “Humans Need Not Apply." The audit is not just sampling, because through AI, it’s going to be 100%. Gary Cokins is an internationally recognized expert, speaker, and author in enterprise and corporate performance management improvement methods and business analytics. He is the founder of Analytics-Based Performance Management, an advisory firm located in Cary, North Carolina at www.garycokins.com . Gary received a BS degree with honors in Industrial Engineering/Operations Research from Cornell University in 1971. He received his MBA with honors from Northwestern University’s Kellogg School of Management in 1974.