Jotting Number 81, by Joe Podolsky:
From: joe_podolsky@hp.com
Date: September 21, 1998
Subject: Outward Ho!
I just wrote a fan letter to Robert N. Anthony, one of the preeminent accounting thinkers of this century. Dr. Anthony taught at the Harvard Business School until his retirement in 1983, and, according to the Worldwide Web search tool I used to find him, he is living and still working in Hanover, New Hampshire. Dr. Anthony is in the Accounting Hall of Fame (I didn't know they had one.) at Ohio State University. I remember him, however, not for his work in accounting theory but for a small book he wrote in 1965 that clearly explains the different types of management work done within organizations.
In that book, Planning and Control Systems: A Framework for Analysis, Dr. Anthony defines three levels of management activities: operational control, management control, and strategic planning.
"Operational control is the process of assuring that specific tasks are carried out effectively and efficiently."… "Management Control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization's objectives."… "Strategic Planning is the process of deciding on the objectives of the organization, on changes in these objectives, on the resources used to obtain these objectives, and on the policies that are to govern the acquisition, use, and disposition of these resources."
These definitions seem clear, but some of his findings about the nature of the work in these categories are not intuitive. For example, he points out that, at the management control level, we make decisions about all or large chunks of the organization, while, at the strategic planning level, executives usually look at one issue at a time. That is, managers lower in the company operate across a broader range than higher level executives do! Management control decisions cause things to happen now, while strategic planning decisions are much longer term and usually generate policies and precedents, with action coming later.
Directly to the point of this jotting, however, is Dr. Anthony's comment on the nature of information. He says that, at the management control level, information is "integrated, more internal and historical." At the strategic planning level, however, information is "tailor made for the problem; more external and predictive; less accurate."
I thought about all this when I read Peter Drucker's article, "The Next Information Revolution," in the August 24, 1998 issue of Forbes ASAP. Dr. Drucker notes that "… For 50 years, the information revolution has centered on data… It has centered on the 'T' in IT. The next information revolution asks, What is the MEANING of information, and what is its PURPOSE? (his emphasis)… For top management tasks, information technology so far has been a producer of data rather than a producer of information - let alone a producer of new and different questions and new and different strategies."
Dr. Drucker blames all this on our traditional accounting systems, specifically cost accounting. He says that this accounting method was designed only "as the guardian of assets," to help make decisions to minimize costs. But, he points out that cost management is an operational task, not one of the primary tasks of top management. "… Business success," he continues, "is based on something totally different, the creation of value and wealth. This requires risk-taking decisions: on the theory of business, on business strategy, on abandoning the old and innovating the new, on the balance between the short term and the long term, on the balance between immediate profitability and market share. These decisions are the true top management tasks." (I can hear Dr. Anthony applauding.) No wonder so many IT functions still and (sigh) appropriately report to the financial function!
Instead, Dr. Drucker urges us to adopt "economic-chain accounting," a process that looks at costs "throughout the entire economic chain, from supplier to ultimate customer." This is a methodology invented 80 years ago by William C. Durant, the man who founded General Motors, and it is used today, primarily in retailing, most notably in Wal-Mart.
Offshoots of economic-chain accounting have become popular in some internal systems. In particular, activity-based-costing methods and economic value added methods are both ways of showing how to increase value rather than merely to minimize costs.
But, to the extent that even these methods, and the information systems that support them, are used only inside rather than across the entire economic chain, Dr. Drucker sees them as almost dangerous. "They have aggravated what all along has been management's degenerative tendency, especially in the big corporations: to focus inward on costs and efforts, rather than outward on opportunities, changes, and threats… The more inside information top management gets, the more it will need to balance it with outside information - and that does not exist yet."
Dr. Drucker sees this problem as being completely analogous to what happened in the 16th century when printing technology took hold. "By 1580 or so, the printers, with their focus on technology, had become ordinary craftsmen … Their place was soon taken by what we now call publishers … people and firms whose focus was no longer on the 'T' in IT but in the 'I'. This shift got under way the moment the new technology began to have an impact on the MEANING of information, on the meaning and function of the 16th century's key institutions such as the church and the university."
Since then, the gatekeepers of information have grown to include not only publishers, but also journalists and the media empires in which they work. And now, ironically, the printing capabilities of the Internet are bypassing the gatekeepers (e.g., the Independent Counsel report and videotape of President Clinton), and we're again on our own in our search for meaning among the data.
We can build in several ways on this base of understanding that Dr. Drucker and Dr. Anthony have given us. First, we can acknowledge the often-discussed issue that data on the Internet should be implicitly labeled, "Unedited bits. Use at your own risk." We need to evolve the cyberspace equivalents of publishers, journalists, and trusted advisors (e.g., Consumer Reports). Some of these folks can just transfer their skills from print and video to the information superhighway, but most of them are used to taking hours or days to study raw materials and verify facts. That's way too slow. The cyberinformation age requires something that looks more like an on-line chat room host to mediate the real time flow in cyberspace.
But we can take this discussion in another direction. Let's assume that there is still a need for an IT function that processes transactions and provides reports to decision-makers (This is a debatable assumption, but I'll save that for another Jottings). How can we address Dr. Drucker's concerns about being too inwardly focused? After all, most large organizations have spent decades building, by design and by accident, complex knots of internal systems to operate and manage their companies. What do we have to do to get the information our executives need about what's happening outside the company?
Outside is harder than inside for two reasons: first, even when we want just routine, operational and management control data about things that happen outside, we have to go to places that we don't control. All the types of data structures (e.g., charts-of-accounts) and processing rules (e.g., month-end cut-off dates) that we can dictate inside are going to be different outside the corporate pale. And, if we really want to meet the needs of what Dr. Anthony defines as the strategic planning process, then we need to figure out how to gather, really fast, whatever we can find out there to help answer questions we didn't know we had.
Here are a few principles that might help point us outward:
Regards,
Joe