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Business is going to be different in the next millennium - Kaplan
An exclusive interview with the Management Guru Professor Robert Kaplan. Kaplan teaches leadership at Harvard Business School.
By Dinesh Weerakkody
Q: Professor Kaplan, welcome to Sri Lanka, this being your first visit. What are your impressions of Sri Lanka?
I arrived this morning. So I have not seen much of your country. However, I noticed that Colombo is a very busy area, very crowded and lot of traffic.
Q: What areas do you cover in your teaching, consulting and research?
My research, teaching and consulting focus on new cost and performance measurement systems, mainly Activity Based Costing (ABC) and the Balance Scorecard. Also, I teach at Harvard Business School and have authored and co-authored many books and papers.
Q: Was it you who pioneered and ABC model?
Yes, myself and Professor Robin Cooper at Harvard Business School.... We are the people who developed the theory and made it accessible to business people. The actual development was done independently at different organizations. We studied those organizations wrote cases and then wrote papers on those experiences. We are still actively involved in promoting these activity based costing in both manufacturing and service organizations. We are finding a lot of financial institutions, banks, investment companies, mutual funds are making big efforts to understand the costs for their different products and services also to find out what their customers actually costs.
Q: I am told that you would be addressing our business leaders. What will you be telling them?
I will be talking to them about the new corporate management system that was developed at Harvard called the Balance Scorecard and that it is an extension of the traditional financial measurement system to include the drivers or long term financial performance, which focuses not just on financial measures but on customers, internal processes, people and systems.
Q: Would this be the same topic you will be covering when you deliver the keynote address at the CIMA 10th anniversary lecture on Cost and Performance Management?
I will be covering this area but I will also be discussing activity based costing, another management accounting technique that I had helped to develop over the last 15 years. The main purpose of activity based costing is to give you a more accurate cost model for an organization.
Q: How different is the Activity Based Costing (ABC) model from the traditional costing Models used to capture the true cost of a product or service?
Well the main difference is the way it deals with indirect support expenses what traditional costing systems call overheads. Traditional costing systems really only do a very good job at capturing and measuring the cost of direct labour and material, the overheads are just allocated arbitrarily. For companies today, what traditional costing system define as overheads, has become a huge cost that has been increasing very rapidly and often these overheads are a very large cost component of the products and services they offer to the consumer. So Activity Based Costing in effect decomposes this overhead pool and understands what are the drivers of the costs within that overhead cost pool then it is able to drive those costs down to individual products and individual customers.
Q: In a business world where consumer has many choices pricing becomes key to competitive success. In this context, how beneficial would the Activity Based Costing model be to a company?
A: In two ways. Benefits will come if its overheads costs and indirect support expenses in quite large, relative to direct labour and material. Secondly if the company is doing a variety of different things that is, it has a diversity of products and diversity of customers and our experience is that when you have high variety of products some are high volumes and some are low volumes some are branded products some our customer specific products they make very different demands on the limited organizational resources. Traditional costing systems average the indirect overhead costs and allocates the costs among products regardless of their complexity. So the companies with significant amount of overheads or indirect supporting expenses and high diversity in the types of products it produces and types of customers it serves would benefit by having actual cost data for their pricing decisions.
Q: So what you are saying is that the traditional costing systems has lost its relevance?
Activity Based Costing sprung from the realization that traditional costing systems had lost much of their relevance and could produce misleading data. Traditional costing systems emphasized simplicity. Which was at a premium then due lack of sophisticated IT.
Q: By adopting the ABC model can companies then start by looking at translating improvements into profit?
ABC can be used by managers to find the areas in their business where improvements are likely to have the greatest financial pay off. So as ABC is used to direct their improvement efforts, they must be prepared to take action to translate improvements into profit. So we are talking of either reducing the spending on resources or produce more output. Only then would profits flow.
Q: So what you are saying is that the ABC Model provides many opportunities for cost data to be used, effectively for superior strategic business decisions?
Yes, That is the purpose.
Q: How popular is Activity Based Costing in the UK and USA?
It is being used throughout Europe and US and other parts of the world. Australian companies have been using it very widely. The problem is that companies are still struggling with the right kind of software to implement this system. Currently ABC is being implemented on standard software that sits on a personal computer, now they are developing software on activity based costing modules that can work with the new enterprise resources planning systems.
Q: You have also developed the ground breaking Balance Scorecard. Can you explain what a Balance Scorecard is?
Well a Balance Scorecard is the balance between the financial and the non-financial indicators and we go on the basis that you can't use financial measures by themselves. You can think about a pilot of an aeroplane. He would not want to use on type of instrument he would need multiple instruments to guide the plane's journey. So companies also need multiple kind of instruments to guide their journey through competitive space. So the idea is to retain financials, but be prepared to use financials to ultimately measure how well you do in your revenues and the economy of your expenses, for that also you need to look at the drivers of your financials. Then what do you have to generate good financial results in the future? So that introduces measures about customers, who are our customers, what do they value and how do we create value to them? Based on that understanding, we can decide where we want to go financially? What do the customers want? Then we can identify our most critical internal business processes. Once that is identified we have to develop measures for those, if the processes include normal production processes and normal operating processes it can also include innovation developing entirely new products and services developing new markets. Innovation is very important for creating that. So once a balance scorecard is developed it must be used as a strategy to achieve the goals of the business.
Q: So is ABC complementary to your Balance Scorecard Concept?
Yes, if ABC tells you about the cost structures in your business, then the Balance Scorecard tells you what generates revenue for your business.
Has the Balance Scorecard been successfully implemented in companies in the US?
Yes, in companies like Mobil and the Chemical Bank. Mobil which was one of the least profitable petroleum companies in the US, after the Balance Scorecard was initiated within the company, it became the most profitable petroleum company for 3 years in row.
Q: What is your involvement with CIMA UK?
I am not an active member of the United States Branch neither am I an Accountant, but I have won a medal from CIMA UK in 94 for my research and contributions to Management Accounting. In fact, CIMA invited me to give this anniversary lecture. I have not been to this part of the world before. So, I am glad that I got this opportunity to see this beautiful country.
Q: There is an argument that management accounting has lost its relevance? Please comment.
I think that is wrong. A manager needs to have good information that the management accountant can provide, you have to understand your cost structures you to understand your performance measures which includes aspects of quality, aspects of cycle time to see whether improvements in operations and quality is being translated into financial performance. Many companies that try to ignore their financial information and have pursued issues of quality and cycle time reduction have not translated that into increased revenue and ultimately into profits.
Q: So what you are saying is that the Management Accountant has a strategic role?
Yes, but he must move away from being a score keeper of the past to providing guidance and inputs to a firms strategy.
Q: How popular is the Harvard MBA? Since people are saying that the MBA curriculum is now outdated.
We continue to see strong demands for our MBA programs. I think MBA gives powerful theories and framework on how business should operate. As business gets complex you need even better framework to understand the impact of global competition and in managing global enterprises. Increasingly we find that we are training students to become entrepreneurs. So we have more entrepreneurs graduating from Harvard Business school today than we had 20 or 30 years ago. The MBA is a great course because our students say that it is very helpful to them to run their businesses.
Q: How do you see businesses operating in the next millennium as competition extends beyond borders?
The financial crisis in East Asia, which is spreading to other parts of world undoubtedly, indicates big challenges. I think one of the major challenges to all companies would be on how they deal with capacity. We seem to be having somewhat all the capacity in the world in a lot of areas. So I think people need to be quite cautious about this, consumers are getting more demanding, so I think market research is needed to tailor their products and services to suit different markets. Certainly Information Technology will become more and more increasingly important. We also see a lot businesses shifting to the West shifting away from normal types of retail outlets even into direct selling and Internet selling. The Internet is going to have profound effect on world business. Business therefore is going to be very different to what we see today.
Exchange Rates The Central Bank's Spot Rates for transactions with Commercial Banks announced on the morning of December 16th, 1998 were as follows:
Buying Selling 100 US Dollars Rs. 6680.97 Rs. 6815.93 The approximate middle exchange rates of following currencies calculated on the basis of cross rates quoted by Gulf International Bank, Bahrain as it appeared in Reuters Financial Information System on December 16, 1998 were as follows:
Saudi Arabia Riyal Rs. 17.98 Bahrain Dinar Rs. 179.02 Kuwait Dinar Rs. 223.87 Qatar Riyal Rs. 18.54 UAE Dirham Rs. 18.38 Oman Riyal Rs. 175.30 Average rates at which the following currencies were quoted by Commercial Banks in Colombo for Telegraphic Transfers at mid-day on December 16, 1998 were as follows:
Buying Selling 100 US Dollars Rs. 6783.40 Rs.6822.00 100 Sterling Pounds Rs. 11390.09 Rs. 11518.16 100 Deutsche Marks Rs. 4068.41 Rs.4131.58 100 French Francs Rs. 1207.21 Rs.1236.56 100 Japanese Yen Rs.57.93 Rs. 58.94 Average Weighted Prime Lending Rate (AWRP) and Lowest Prime Rate (LPR)
The Average Weighted Prime Lending Rate (AWPR) during the week ended December 13th, 1998 was 15.5 per cent for all banks. The Lowest Prime Rate among banks during this week was 12.0 per cent.Average Weighted Deposit Rate of Commercial Banks (AWDR)
The Average Weighted Deposit Rate (AWDR) of Commercial Banks for the month ended November 30th 1998 was 9.2 percent.
* Unit Trust Prices
National Equity Fund
Manager's Selling Price Rs. 7.73 (per unit) Managers Buying Price Rs. 7.26 (per unit) Namal Growth Fund
Manager's Selling Price Rs. 8.97 (per unit) Managers Buying Price Rs. 8.39 (per unit) Namal Income Fund
Manager's Selling Price Rs. 10.54 (per unit) Managers Buying Price Rs. 10.43* (per unit) * After deducting exit fees Ceybank Unit Trust
Manager's Selling Price Rs. 5.82 (per unit) Managers Buying Price Rs. 5.45 (per unit)
Ceybank Century Growth Fund
Manager's Selling Price Rs. 8.15 (per unit) Managers Buying Price Rs. 7.98 (per unit)
Eagle Growth Fund
Manager's Selling Price Rs.8.36 (per unit) Managers Buying Price More than one year 8.03* Less than one year 7.95* Eagle Gift Edged fund
Manager's Selling Price Rs.11.04 (per unit) Managers Buying Price More than one year Rs.11.03 (per unit) Less than one year Rs. 10.92* (per unit)
Eagle Income Fund
Manager's Selling Price Rs.11.04 (per unit) Managers Buying Price More than one year Rs.11.03 (per unit) Less than one year Rs. 10.92*(per unit) * After deducting exit fees applicable for the first year
Pyramid Unit Trust
Manager's Selling Price Rs. 5.68 (per unit) Managers Buying Price Rs. 5.29 (per unit)
* Ex Dividend Price
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