Not All Costs Exist To Be Reduced

Taiichi Ohno declared, “Costs don’t exist to be calculated, costs exist to be reduced.” His point was that traditional accounting can fool us into justifying inefficient operations, building up inventory or acquiring assets because the numbers look good. Instead of being creative with accounting, Ohno advocated reducing cost by being creative in how we look at our work to find ways to make it easier, better and faster.

Today there are Lean accounting methods that allow us to reflect the reality of costs more accurately in a lean operation, where traditional cost accounting does not. Lean operations also faces criticism for focusing on improving existing process performance at the cost of innovation. To some degree the Lean Startup and Agile Development communities are demonstrating that scientific management principles apply to launching new products, services or businesses. All costs can be reduced, such that the same value is delivered for less. Activities such as launching new ventures, products or building new capabilities deliver great return on investment, and focusing on costs can limit opportunities for value creation.

“Good costs create value. As long as we can afford it, we want more good costs.” These sixteen words from a 2014 speech presentation by Bjarte Bogsnes titled Beyond Budgeting: An Agile Management Model and Case Study made me reexamine how we talk about cost in the context of Lean management. We need to recognize that just as there are two types of work (value-added and not) there are good and bad types of cost. Whenever we identify bad costs we should work to reduce them, as Ohno says. On the other hand, whenever we identify good costs, such as investments in people or assets which create value and pay off, we should increase them, budget or no budget. When corporations face tough financial times, training budgets are often the first to be cut, even when training is proven to improve performance.  

Bjarte Bogsnes is Vice President of Performance Management and Development at Norwegian oil & gas giant Equinor. He is also Chairman of the Beyond Budgeting Institute, author and popular speaker. He begins by asking, “How can organizations be big and agile at the same time?” His presentation covers the story of transition to a self-regulating management at Statoil (now Equinor), reviews the 12 principles of Beyond Budgeting, an introduction to what other companies are doing with Beyond Budgeting, and offers some guidance and advice on getting started. His message is that we must build a self-regulating management model, and that the traditional budgeting and performance management processes do the opposite. 

He likens budgeting to a traffic flow problem. The traditional budgeting process works like a red-yellow-green traffic light system. It is difficult to time traffic lights perfectly. Sometimes you will wait at a red line when there is no cross traffic and it is safe to keep going, while at other times an irresponsible driver may run a red or yellow light, even when it is green for you. The Beyond Budgeting approach is compared to a traffic circle in that there are situational rules, rather than absolute red-vs-green ones. It is self-regulating. It allows people at each level to take advantage of opportunities to create more value, even when there is no traditional budget to do so. To paraphrase a key message of the speech, Beyond Budgeting is “Making decisions at the right time at the right level based on the right principles”. This sounds like the definition of just-in-time.

This 85-minute video including Q&A is worth watching even if the idea of starting on the Beyond Budgeting journey is not on the horizon for your organization. It is filled with ideas, lessons learned and wisdom on performance management that apply broadly. To end with a rhyming quote from Biarte Bogsnes, “Measurement can be a great servant but as a master it is a disaster.”

2 Comments

  1. JAY BITSACK

    February 11, 2019 - 9:32 pm
    Reply

    Hi Jon,
    Very good piece…

  2. Jon Miller

    February 12, 2019 - 1:11 am
    Reply

    Thanks Jay!

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