Financial decision support and managerial costing is a high thought exercise. Even from highly capable ERP solutions vendors, most of the “ready-made” solutions will do little more than meet the requirements for financial reporting.
A common finance initiative for integrating enterprise information is implementing an Enterprise Resource Planning (ERP) solution. I’ve noticed that I didn’t hear much enthusiasm for ERPs at the manufacturing events I’ve attended, even when there is great interest in manufacturing enterprise solutions. While I don’t know all the reasons for manufacturing personnel’s skepticism, I find it well placed. I’d like to offer a perspective on the problems encountered when integrating financial and operational information, and help you obtain a better outcome for your company.
At a management accounting conference recently, the moderator asked an ERP presenter: “Do you believe it was true that when system implementation began, thinking stopped?”
You can imagine the presenter’s surprise at the question, especially in a room full of accountants. But I found it an interesting perspective, given my observations of manufacturing personnel and ERP systems. I’d like to propose a slightly different question: “Is it more effective to shop or to think when it comes to decision support solutions that cross operations and finance?”
Of course, this isn’t an either/or question. You can do both. But the hunt for software has a way of diverting people—they stop analyzing their organization’s needs and focus on thinking about hiring the best software or solution provider to identify and solve their problems. Most ERP solutions lead you down a fairly narrow path when it comes to costing. That path leads to the financial statements, and the path isn’t much wider than traditional cost accounting. Even a software vendor such as SAP, which is fully capable of sophisticated managerial costing like Resource Consumption Accounting (RCA), won’t present this option…at least to the average ERP customer.
Managerial costing solutions require deep thinking about your company’s strategy, operations, decision making needs, and approach to cost information. Without deep thought and extensive research, you will get the solution an ERP vendor best understands and has the most experience implementing—which will almost certainly be a financial-statement-based cost accounting solution. It’s low risk, low complexity, and they can always point to meeting financial reporting requirements to demonstrate “success.” Software solution providers get paid for implementing a system and lay claim to years of follow-on license fees, upgrades and maintenance. They may have the best intention of understanding your business operations in unique and creative ways, but it’s not their primary motivation.
Linking operations and cost information requires knowledge of fundamental decision support and costing principles and thoughtful planning. For example, with RCA, the first step is to understand an organization’s strategic objectives and the types of decisions managers need to make throughout the organization. The second step is to understand how the resources and operations, both production and support, interact to create value. This conceptual design phase is all about thinking—designing an operational model followed by a financial model of the organization that provides managers with the information they need to make informed decisions. The conceptual design applies the principle of cause and effect to design a model and to accumulate the necessary data. Once a conceptual design exists, you can search and apply the best software solution. The entire organization will be in a much stronger position to evaluate solutions because it will have a very clear picture the final model and the decisions it will support.
Financial decision support and managerial costing is a high thought exercise. Even from highly capable ERP solutions vendors, most of the “ready-made” solutions will do little more than meet the requirements for financial reporting. The economics of the software business are not your friend if you rely on a software vendor’s implementation team to do the thinking when addressing your organization’s costing solutions.
By Larry White,
CMA, CPA, CGFM, [email protected], is the Executive Director of the Resource Consumption Accounting Institute (www.rcainstitute.org) which seeks to advance management accountants’ ability to contribute to improving business performance.