Systems for Hindsight, Insight & Foresight

MISStruggle in generating insight for CFOs / CXOs into understanding “How well are we doing on what really matters ?”

Broadly – problems that arise here can be categorized into

  • The Logistical problem – getting the right quality data needed, at the right time and granularity spread across different siloed systems
  • The Logical Problem – the “costing model” – traditional costing / ABC / TDABC ?

Help is at hand.

Solving the “Logistical Problem” entails getting deep into the various systems employed in the organization, mapping the data flows to the data requirements – including the frequency and granularity of data, analysis of the processes that generate the data, identifying the “weak-links” in the chain and filling the gaps etc. A “champion” inside the company needs to “own” this exercise while the measures work. Often – this may lead to either re-implementation of some applications and some process redesign – with additional controls so that the needed inputs are not by-passed and missed. This is where the “heavy-lifting” needs to be done.

Further – if any analytics or visualization tool does not exist – a suitable tool would need to be put in place, configured and tested.

The “Logical Problem” – on the other hand – entails looking at the financial (or costing) model that is in use to calculate the actual costs, or forecasts future costs. Most models – even decades after the introduction of Driver rate  based ABC and Time Driven ABC – still rely on the old traditional methods of cost allocation – seldom going below the Gross margin – even for strategic decision making.

An examination of the prevailing cost structure, including percentage increases in costs – would reveal the extent of damage being done by this “peanut-butter-approach” to cost allocation. A deeper and focussed examination of cost trends would also reveal which cost groups need to be immediately transitioned to either ABC or TD-ABC methods of allocation – to reveal the true profitability – an accurate “hindsight” that explains “what happened” and “why it happened” – ie hindsight and insight.

The final model that brings in the “reported costs” more in line with “true costs” – can then be extended to forecast for the future – this is when hindsight and insight are leveraged to generate “foresight” – providing actionable  intelligence.

 

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