Gary Cokins
Gary Cokins
![Gary Cokins - The Strategic Controller](/2/images/280_0_5719195_737949.jpg)
Gary Cokins, CPIM
(gcokins@garycokins.com; phone 919 720 2718)
Gary Cokins (Cornell University BS industrial engineering/operations research) 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in enterprise and corporate performance management (EPM/CPM) systems. He is the founder of Analytics-Based Performance Management LLC www.garycokins.com . He began his career in industry with a Fortune 100 company in CFO and operations roles. Then 15 years in consulting with Deloitte, KPMG, and EDS (now part of HP). From 1997 until 2013 Gary was a Principal Consultant with SAS, a business analytics software vendor. His most recent books are Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics and Predictive Business Analytics.
All of my books are at:
https://www.goodreads.com/author/list/47692.Gary_Cokins
Linkedin.com contact:
https://www.linkedin.com/in/garycokins
Contents
26. A Unified Field Theory For Accounting
25. Cokins Excuses and Barriers Preventing EPM + a Pleasant Brief Chat
24. Historians versus Futurists – Who is More Valuable?
23. Interview of Gary Cokins describing EPM
22. Who Are the Animals of Corporate Performance Management (CPM)?
21. The Many FP&A Rooms of the Organization Mansion
20. The Long Arc Bends Toward Justice
19. A Primer Lecture on Activity-Based Costing (ABC)
18. CFOs – Are They Vanguards or Villains?
17. Profitability Analytics as a 'West Side Story'
16. Beethoven’s ‘Eroica Effect’ and Corporate Performance Management (CPM)
15. The Strategic Cost of Quality
14. Measuring and managing patient profitability
13. Are Accountants Homo Accounticus?
12. Management Accounting 101, 102 and 103 Courses
11. Identifying and Measuring the Cost of Error and Waste
10. Why Use ABC
9. Movie Sequel – “Accountant Pirates of the Caribbean”
8. Some Accountants are the Blind Leading the Blind
7. The CFO’s Expanding Role – Reality or Delusion?
6. How Many Types of Key Performance Indicators (KPIs) are There?
5. Does Accounting Undermine Managers' Ability to Make Good Decisions?
4. A Passionate Appeal for Activity-Based Costing (ABC)
3. Put Your Money Where Your Strategy Is
2. How Marketing and Finance Think differently
1. Measuring and managing customer profitability
26. A Unified Field Theory For Accounting
Although my career has primarily been involved with enterprise and corporate performance management (EPM/CPM) methods, including management accounting and books that I have authored on EPM/CPM, I have always had an interest in cosmology, astronomy, and physics. It is breathtaking for me to think of the universe as infinite in length. Where is its external boundary? There is none! How can that be? I think of questions like: What happened before the Big Bang? What are black holes? What is dark matter? Is time travel possible?
In this PACE article I am going to make the case and describe there is a parallel “quest” in the accounting profession as with the physicists. That quest is for “a unified field theory”.
Please be patient. The first 3/4ths of this article is about the physicists’ quest. Then I conclude with the accounting profession’s quest.
The Universe and Physicists
Let me introduce my essay with a discussion about physics. I marvel at the size of the universe. Cornell University’s renown professor Carl Sagan (and I am a 1971 Cornell University BSc alumnus) was known for often saying “billions and billions” of stars in his popular television series Cosmos and with late night television host interviews. Stephen Hawking gave visibility to physics with his theories on black holes.
The universe is on the macro scale. I also like the micro scale of physics, especially subatomic physics that include the building blocks of the universe.
The Quest
A desire with the physics community is to develop a framework that unites all the forces of the cosmos and will choreograph everything from the motion of the expanding universe to the most minute dance of subatomic particles. The challenge is to write an equation whose mathematical elegance encompasses the whole of physics.
This quest is referred to as the “unified field theory”.
For centuries physicists have been discovering and identifying forces like gravity and magnetism and attempting to measure them. Each new discovery adds to the body of knowledge and utility to civilization. For example, Isaac Newton’s discovery of the laws of motion ang gravity laid the groundwork for the machine age and the Industral Revolution. Physicists Michael Faraday and James Clerk Maxwell’s explanation of electricity and magnetism paved the way for the illumination of our cities and gave us power electric motors and generators as well as instantaeous communication via TV and radio.
More examples. The famous Albert Einstein’s E = mc (squared) explained the power of the stars and helped reveal the behavior and properties of subatomics nuclear forces. Later physicists Erwin Schrodinger, Werner Heisenberg, and others unlocked the secrets to quantum theory which led to high-tech revolutions like super computers, lasers, transistors, the internet, and cell phones (that some of you might now be reading my article on).
The Greeks
I am 100% Greek-American (both my mother and father) raised in Chicago. Let’s go further back in time to understand what my Greek ancestors theorizerd. The philosopher Democritus believed that everything could be reduced to tiny, invisibe, indestructable particles he called “atoms”. Later Aristotle believed that everything could be reduced to a mixture of four fundamental ingredients: earth, air, fire, and water. The mathemetician Pythagoras had insights to apply a mathematical description to music with vibrations.
The Renaissance
In the seventeeth century a batch of scientists introduced new ideas and discoveries. Johannes Kepler was one of the first to apply mathematics to the motions of the planets. Galileo left a lasting legacy with his telescope. Isaac Newton then began to write about the universal laws of the heavens and apply new mathematics he invented to study the forces. This new math is called calculus. Newton initiated this concept of a unified field theory led by the force of gravity. Next the astronomer Edward Halley, famous for Halley’s comet, recognized that comets fly in ellipses, not in perfect circles.
Modern Physics
The next big breakthrough came from the study of electricity and magnetism. Michael Faraday showed that if you take a magnet and move it inside a hoop of wire, then electricity is generated in the wire. He observed the reverse that a moving electronic field can create a magnetic field. Hence, giant hydroelectric dams where the river pushes against a wheel that soins a magnet that then impacts a wire that sends electrcity to the sockets in your home. Moving on, a Cambridge mathematician, James Clerk Maxwell, created equations that involve waves as the underlying phenomenom of magnetism and electicity. He applied this to measuring the speed of light from the sun and demonstrated that light is an electromagnetic wave. The “unification” of foreces was expanding.
The next insights came from Thomas Edison and Nikola Tesla – the electric age with direct current (DC) and alternating current (AC). Then came Albert Einstein leveraging the math from Newton and Maxwell’s equations. He realized that time slows down the faster something moves. This led to the theory of special relativity. He wondered about the involvement of matter and energy. This led to his famous E = mc (squared) equation. The “unification” now involved space, time, matter, and energy that by adding gravity became the general theory of relativity.
Quantum Theory and Quantum Mechanics
Something was missing with the “unification” described above – the nuclear force with atoms. This advance began with Dmitry Mendeleyev. He mapped how the properties of natural elements could be located in table of columns and rows – Medeleyev’s Table. Marie and Pierre Curie followed by Ernest Rutherford delved into this nuclear world with experiments of radiation. This led to the discovery that an atom is actually a nucleus with tinier subatomic particles: protons (positive charge), neutrons (no charge), and electrons (negative charge). More knowledge came from the physicists Niels Bohr, Werner Heisenberg, and Wolfgang Pauli.
The German physicist Max Planck advances the quest. He theorized that instead of energy being continuous and smooth that it came in discrete packets that he called quanta. He was able to measure the size these packets of light energy. The measures complied with Maxwell’s equations. So, we have now arrived at understanding a beautiful relationship between particles and the fields that surround them. The Austrian physicist, Erwin Schrodinger, expanded on this knowledge by focusing on the electrons that provide explanations for Mendeleyev’s Table with columns and rows patterns of the chemical elements. This knowledge halped James D. Watson and Francis Crick discover DNA. They used X-ray crystallography to examine the wave lengths of molecules. So, the unification of the laws of quantum physics not only revealed the secrets of the universe, it also unified the tree of life.
The final steps involved Ernest Livermore, the invntor of the cyclotron to split atoms and see their remnants. Then Richard Feynman, Murray Gell-Mann, Stephen Hawking, and Robert Oppenheimer (did you see the Oscar winning movie about him?) advanced our understandings.
Thanks for being patient. Now we move on the accounting profession’s quest.
A Parallel Quest for the Accounting Profession
Some in the accounting profession are also seeking a similar unified field theory of accounting. They know there are lots of moving parts. How do they all fit together? Many of the “moving parts” include:
- Product, service line, channel, and customer profitability (using activity-based costing [ABC] );
- Strategy management using strategy maps, balanced scorecards (with strategic KPIs) and dashboards (for operational OPIs);
- Process improvement using lean management with lean accounting;
- Process improvement using quality management with the cost of quality (COQ);
- Capacity-sensitive driver-based budgeting and rolling financial forecasts;
- What-if scenario analysis and sensitivity analysis with alternative input variables (e.g., forecast sales volume and mix)
- Enterprise risk management (ERM); and
- Data science and analytics.
Once this is solved, will it be an evolution of thought or a revolution like the Renaissance?
A challenge to achieve the quest is that many CFOs, accountants, and even university accounting faculty are still in the 1970s. And many do not have the holistic and all-inclusive wide breadth of thinking to embrace this unification theory. This disturbs me. It presents a cautionary tale. Most accountants once learned about some, or even all, in the bulleted list above, but they have sent what they learned, including at their university or some earning a CPA, down the memory hole. It is like amnesia.
When all of us, including the accountants, were young we thought we would grow up to be wise. But have we?
Accounting 101
Imagine if I was a university professor teaching Management Accounting 101. My lecture would describe how to resolve the “overhead cost allocation” problem. It involves activity-based costing (ABC).
But first as background, there has been a slow adoption by CFOs and accountants to apply ABC as a replacement for the flawed and misleading traditional “cost allocation” methods for indirect expenses (commonly referred to as “overhead”) from standard cost accounting systems. They allocate indirect expenses like spreading butter across bread using non-causal and broadly averaged cost allocation factors. Examples are the number or amount of direct labor input hours or currency, units produced, sales volume, headcount, or square feet/meters. None of those reflect the true consumption of expenses that unique and diverse products and service lines consume of the end-to-end processes and the work activities that belong to the processes.
After ABC decomposes the single and typically large indirect cost pool into multiple cost pools – the work activities – and traces and assigns them based on a cause-and-effect relationship there is no surprise to those managers who have always been suspicious. What is discovered, compared to the traditional costing, is that some of the products and service lines are being over-costed and the others must be under-costed because cost allocations have zero-sum error. It is true that traditional costing does exactly reconcile the indirect expenses in total into the product and service line costs. That satisfies the auditors for external financial regulatory and statutory reporting, but the costs are wrong in the parts. This means that CFOs and accountants are providing their managers and executives those flawed and misleading costs I mentioned which means the profit margins are also wrong.
The benefits from applying ABC in comparison to traditional cost allocation methods that violate “costing’s causality principle” are numerous. Key benefits are: (1) extremely more accurate profit and cost reporting of outputs, products, services, channels, and customers; (2) transparency and visibility of the “drivers” for work activities and their magnitude; and (3) past period calibrated cost consumption rates that are essential to multiply against future forecasted demand volume and mix that determine resource capacity requirements – workforce headcounts and spending amounts. These rates are needed for what-if scenario analysis, make-versus-buy decisions, and capacity-sensitive driver-based rolling financial forecasts and budgets.
The causality principle is at the heart of ABC as well as with the other bulleted items above. They involve modeling the “digital twins” – physical flows and their digital twin in software. Executives and line managers deserve better from their CFO and accountant to support their decisions.
Unified Theory for Accounting
Like the quest by physicists, astronomers, and cosmologists there must be a way that a unified theory of accounting can be created. I previously wrote above “There are lots of moving parts. How do they fit together?”
There is a way! To understand the way learn about the PACE Analytics Framework (PAF). Also, consider researching articles and blogs (and books) that I have authored on enterprise and corpotate performance management (EPM/CPM) methods. All of those “moving parts” can be seamlessy integrated just like the gears in a well-tuned machine.
(Some of the text in this article came directly from the book The God Equation by Michio Kaku published by Doubleday, a division of Penguin Random House, 2021.)
25. Cokins Excuses and Barriers Preventing EPM + a Pleasant Brief Chat
Many often question why organizations are hesitant or slow to move forward with implementing systems and adopting progressive methods including analytics.
Below are two categories that I have accumulated for my field of enterprise and corporate performance management (EPM/CPM) methods with advanced analytics. The two categories are Excuses and Barriers.
Excuses for not implementing EPM methods
We are profitable, so why does it matter?
We will purchase software that will fix our problems.
We already know our “true” costs from our general ledger financial reporting system.
We have done it this way forever. And we don’t do that here. We already know everything. It is in our heads.
We are a small organization. We’ll worry about better methods when we get larger.
All this hype is just made up stuff from highly paid consultants.
No one looks at the reports I create, so there is no point generating better reports.
We cannot afford better software to fix our problems.
We are way too busy doing other things.
We don’t know where to start or how to get started.
Barriers: Reasons for the slow adoption rate of methods and systems
Dirty or low quality data.
Disparate hardware as data sources.
The perception that implementing EPM/CPM methods is too complex, and not worth the effort.
Human nature’s resistance to change.
Fear of others knowing the truth … or its flawed truth.
Not wanting to be measured and held accountable.
Excel Hell.
Insecurity and confidence deficiency – obsession to know “who else has done it” rather than judge if it just makes sense to do. (The ROI dilemma.)
Confirmation bias – starting with preconceptions to be validated.
Stove-pipe rivalries.
Misalignment of incentives. Poor KPI metrics and targets.
Not realizing that line managers have less interest in historical reporting and greater interest in predictive outcomes.
Inflated expectations that analytics is the magic pill … to cure all problems.
Lack of or weak leadership (which is not the same as management).
Gary Cokins, CPIM
(gcokins@garycokins.com; phone 919 720 2718)
http://www.garycokins.com
A Pleasant Brief Chat
April 24, 2024
Carlo Attademo:
"Gary,
Just read.
I believe that all those reasons are true but in my opinion the excuses are predominant in reality.
I explain why.
My Linkedin contacts that take part in my poll are generally of a high-medium profile with regard to Education and Experience.
As a result if most of them (now 65%) find ABC techniques as their favorite costing methods, I believe that it means the main reasons consist of "internal" factors that have little to do with the technical issues concerning the ABC adoption.
One above all, the Finance managers' conviction not to get many business's people to buy into ABC.
The lower employees/workers in the hierarchical ladder (generally not very educated) in the real business life will oppose the ABC implementation since they see it like a further ERP implementation plus an unknown new costing method.
All this will translate in the eyes of the finance managers into a strong opposition and a waste of time,
In my opinion, the opposite to what I had before doing the poll, It needs to focus not only on CFOs an managers but also on the other employees through formation/persuasion courses.
If you want to, I will post your article on my website in your page.
Gary Cokins:
"Carlo …I agree with you.
The resistance and barrier to adopting ABC has little or nothing to do with technology, systems, or software. It is due to people.
24. Historians versus Futurists - Who is More Valuable?
Some analysts dig deep into historical information to glean insights once hidden. Other analysts are obsessed with predictive analytics and Big Data to foresee the future. Are these in actuality the same person or are they two different rivals with their own ideology?
Crystal ball versus a rear-view mirror
Futurists enjoy taking out their crystal ball and projecting future innovations. They are typically wrong. George Orwell’s book 1984 that was published in 1949 did not come close with its projections. In the 1960s I recall a Walt Disney television show describing automobiles that required no driver and were guided by some form of magnet-like strip imbedded in the street’s or highway’s roadbed. Nice try.
In contrast, historians research the past to determine what lessons might be learned that can be applied today. For example, historians examine the judgments, policies, and actions of past USA Presidents and international government leaders to assess what actions may best serve citizens today.
Do futurists or do historians provide relatively more valuable information? Futurists make us think by being provocative. Historians through their rear-view mirror allow us to reflect on what worked or did not work in the past.
Why is this “more valuable” question relevant for today’s organizations? It is because many organizations fail to successfully execute their executive team’s plans and allocate an appropriate mix and level of resources to complete those plans. This involves strategy and budgeting – two disciplines that are widely criticized today.
Historical lessons applicable to strategy execution and budgets
In the author Stephen Bungay’s book, The Art of Action, he reflects on lessons from war and military campaigns that apply to leadership skills and planning. He specifically addresses how an organization can implement and achieve the formulated strategy and plans of its executive team. In his book he draws on battle tactics of the 19th century Prussian army.
Bungay’s premise is that the leaders of almost all organizations can define reasonably good strategies. Where executives often fall down is leading their organization to implement their strategy. Bungay describes this problem as gaps and advises how to close the gaps.
His assertion is that similar to military campaigns in war when a strategy encounters the real world then three types of gaps appear. He describes gaps in terms of expected results and reality: outcomes, actions, and plans. Gaps result from complex and difficult to predict environments that all organizations deal with and are made more severe with globalization – the reduction of international borders for commerce and information. The three gaps are:
1. The knowledge gap - the difference between what we would like to know and what we actually know.
2. The Alignment Gap - the difference between what we want people to do and what they actually do.
3. The Effects Gap - the difference between what we expect our actions to achieve and what they actually achieve.
Based on Bungay’s deep knowledge as a historian of military practices, he observes that a key to successful strategy execution is delegating more decision-making authority to managers and employee teams.
Empowering managers and employee teams
Bungay describes lessons from the 19th century Prussian army in this way. Following an unexpected military defeat the Prussian military’s tactics were reformed. Lower-level officers were given more flexible command to make decisions. What mattered is that they fully understood the battle mission. By providing more decision rights to the officer corps, this resolved a problem that the higher the military leaders are from the battlefield, then the less they are aware of the current situation. Officers could pursue local actions as they saw fit.
The Prussian army solution following its prior defeat was the institutionalization of military genius with centralized and elite generals and increased accountability of the field officers with rewards based on their performance and outcomes. This reform was successful, and the army conquered other countries.
In today’s terms of managerial methods, the parallels of the Prussian army reforms are applying the balanced scorecard methodology and adopting the participative budgeting concepts.
The balanced scorecard’s primary feature is the development of a strategy map that visually displays on a single page a dozen or more cause-and-effect linked strategic objectives. Using four sequenced components (referred to as “perspectives”) the linkages move from employee learning, growth and innovation to process improvement initiatives to customer loyalty objectives which result in the financial objectives’ outcomes. The key performance indicators (KPIs) reported in the balanced scorecard are derived from the strategy map. The KPIs monitor the progress toward accomplishing the strategic objectives, and by each KPI having targets assigned, the foundation for accountability is established and alignment of managers’ actions with the executive team’s mission and strategy are achieved.
The participative budgeting concept views the annual budget as a fiscal exercise done by accountants that is disconnected from the executive team’s strategy and is usually insensitive to forecasted demand of volume and mix. It acknowledges that budgeting annual line-item expense limits are more like shackling handcuffs for managers who may need to justifiably spend more than was planned and approved many months ago in the past in order to capture benefits from newly emerged opportunities. The participative budgeting method advocates abandoning the annual budget that quickly becomes obsolete. It proposes replacing the budget’s controls by giving managers the freedom of decision rights. This includes hiring and spending decisions without requiring approvals from superiors. It invokes controls by monitoring non-financial key performance indicators (KPIs) against the targets defined by the executives in the balanced scorecard’s strategy map. Managers do not escape the need to be held accountable with consequences. The time frame is not annual but rather dynamic.
Historians versus Futurists
The message here does not mean organizations should not be researching emerging and imminent new technologies and methods, like analytics and Big Data. The message is that granting decision rights to managers but holding them accountable with consequences is effective at closing the three gaps. And this a lesson learned from historians.
The takeaway from this message is germane to understanding PACE’s Profitability Framework. While some seek a step-by-step instructional manual, the problem with these is that they take a one-size-fits-all approach, and the real world is more complex than that. In contrast, the Profitability Analytics Framework gives you a methodology to find the answers and knowledge you seek. It helps you investigate your company through several lenses including formulation, validation and execution of your strategy focusing on costs, revenues, and investments. It enables clear thinking to systematically investigate answers to critical questions and provide the wisdom you need to move forward in a profitable way.
If you are a seeking to close the three gaps, isn’t it time you looked more into the Profitability Analytics Framework and what it can do for your organization?
Gary … Gary Cokins
gcokins@garycokins.com
"This content may be found also on https://www.profitability-analytics.org/"