Ageless Wisdom
by Tom Pryor

Alan Vercio, strategic cost manager for Bank of America, recently asked me, "If you're a Christian, would you ever join a church that has a pastor who does not read the Bible?"

"Absolutely not."

"Then why would you ever work for a manager who does not read Peter Drucker?"

"If leaders don't refer to their instruction manual, I believe any follower has a right to be concerned with their direction", I responded.

As he did with me, Alan posed these two questions to grab attention and elicit discussion. Interestingly, Alan also uses them to segue Bank of America employees to ABM/ABC training.

Drucker is the father of modern management. Scholars (1) credit Drucker's pioneering use of transactional analysis during the 1950's as one of the early building blocks for Activity Based Costing. His books are bibles for business. Bibles, however, are unfortunately forgotten and overlooked until people are confronted with a crisis. The current recession is a crisis for many. Possibly for you and your organization.

Peter Drucker will be 94-years old this year. His wisdom and experience is of particular relevance, for he's lived through many recessions. He's been there, done that. WWDD… what would Drucker do? His advice is proactive, not reactive. He approaches recessions like an energetic entrepreneur, not an empty-handed embalmer.

In Peter Drucker: Shaping the Managerial Mind, author John Flaherty says, "Drucker asserted that it was possible to improve performance in the existing business by using the entrepreneurial approach of converting problems into opportunities and thus neutralizing resource misallocation and modifying vulnerabilities. In the long run he (Drucker) thought that the model of activity accounting might be the best approach to entrepreneurial management."

You may not be an entrepreneur, but it may help to think like one. Drucker recommends three thought-provoking actions to convert business problems into opportunities. Each action uses information created by or available from Activity Based Cost Management:

1. Reduce the sales staff.
   Drucker is not only innovative, he's controversial. A pervasive theme in Drucker's writings is his belief that too much time and money is spent on selling. "Indeed, selling and marketing are antithetical rather than synonymous or even complimentary. There will always, one can assume, be need for some selling. But the aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself."
   
   Drucker contends that most organizations allocate too much resource to the Sales Department and not enough to the Marketing Process. Viewing marketing from a process angle makes it impossible to perceive as an independent function. The Marketing Process, defined and measured in an Activity Based Management system, "is the whole business seen from the point of view of its final result, that is, from the customer's point of view." (2)
   
   On which customers should we focus? Like an entrepreneur, Drucker says, "the great reservoir of potential demand lies in the category of noncustomers." (2) To grow or re-grow a business, align products and processes to the category of non-customers.
   
   Which of these two beliefs does your organization hold?
   a. Our sales department will sell whatever the business produces; or,
   b. Our business will produce whatever the market needs.
   
   
2. Manage the pieces to improve the whole.
   Typical P&L's report what happened during the recession, not why it happened. Decisions based solely on an aggregate corporate P&L leads to "distorted impressions and misguided conclusions." (2) To turnaround or improve asset productivity in an existing business, Drucker recommends digging below the P&L aggregate's surface to analyze the pattern of sales and cost transactions.
   
   Proponents of Lean Manufacturing argue transactional analysis, such as Activity Based Costing, is non-value added work. Drucker and ABC experts, such as Gary Cokins, take an opposite view. Cokins states in Activity-Based Cost Management: An Executive's Guide, "A major tenet of lean thinking is that as the processes and value streams become more simplified, there is less need for financial accounting, control, and measurement systems. In fact, the reverse is true. The margin for error is getting slimmer, and teams need greater not less proficiency in using financial data." (3) Even if ABC is used as a one-time project to analyze product and customer profitability, Drucker sees value in the data.
   
   As a case in point, Drucker uses this example: "$1 million in volume produced in one order - or in one product - carries the same cost as $1 million in volume produced by 1 million individual orders or by 50 different production runs." (4) Drucker considered it intolerable that so many managers were ignorant of how some of the key business segments and products contributed to total revenue results, and were unaware of the cost burdens of those parts of the business that were making little or no contribution to financial results.
   
   Using transactions named activities, output measures and cost drivers, Activity Based Costing (ABC) dissects an aggregate P&L into individual product, service and customer P&L statements. ABC helps managers dissect and act to improve the parts, thereby improving the whole.
   
   Are you managing an aggregate of unknown pieces that don't add up to what you want?
   
   
3. Abandon nonproductive activities, products, services, customers, projects and mission statements.
   Give up to go up during a recession. "There is only one way to make innovation attractive to managers; a systematic policy of abandoning whatever is outworn, obsolete, no longer productive, as well as the mistakes, failures, and misdirections of effort." (5) Abandonment frees up time, talent and resources for working capital.
   
   Drucker uses two methodologies for diagnosis and removal of things that need to be abandoned - the aforementioned ABC transactional analysis and the Bernoulli theorem.
   
   ABC identifies marginally successful products and customers or outright clinkers. Drucker asserts that repeated attempts to revive a marginal product or customer are exercises in futility.
   
   To support his contention, Drucker offered the Bernoulli theorem… in any series of endeavors, the chances of succeeding were reduced 50% with each new effort. If test results don't match expectations, good scientists don't redouble initial efforts nor question results. They begin a second diagnosis or abandon the project altogether. If Drucker were a Texan, the Bernoulli theorem of abandonment would be summarized in five words: "When your horse dies, dismount."
   
   Do you have any candidates to apply the Bernoulli theorem in your organization?

Conclusion
Breaking routine is often necessary to rise to a higher level of performance.

World champion athlete Victor Martinez says, "I used to do all my training by the book - a certain way and schedule. Then I noticed my progress plateaus quickly. When I change out of the routine, my condition changes faster than ever. This is known as the 'Confusion Principle' of training, but in actuality it is not 'confusion' at all. It is the shock of breaking routine that has allowed me to go past my limitations, and to succeed at ridiculous levels." (6)

Troubled times may be new to you, but it's familiar territory to those who have walked through the valley before. Implementing teachings of the Bible and Peter Drucker may initially confuse, confound or confront. But they're guaranteed to take you on a journey to a higher level. Happy trails!

E-mail your comments on this article to Tom Pryor at TomPryor@icms.net.

(1) Relevance Lost: The Rise and Fall of Management Accounting, Robert Kaplan & H. Thomas Johnson, Harvard Business School Press, 1983.
(2) Peter Drucker: Shaping the Managerial Mind, John E. Flaherty, Jossey-Bass, 1999.
(3) Activity-Based Cost Management, Gary Cokins, Wiley Press, 2002.
(4) "Managing for Business Effectiveness", Peter Drucker, Harvard Business Review, June 1963, p. 56.
(5) Innovation and Entrepreneurship: Practice and Principles, Peter Drucker, Harper-Collins, 1985, p. 151.
(6) "The Un-Confusion Principles", www.YourKingdomCome.com, May 2003.

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