The Best Practices Trap (#228)
/In this podcast episode, we discuss the best practices trap. Key points made are noted below.
Problems with Best Practice Installations
Installing every possible best practice is not always a good idea. In fact, it can be a trap if you go too far down the best practices road.
Installing best practices involves a mindset of wanting to reduce costs and be more efficient. And that mindset works great in accounting, because the accounting department is clearly a cost center. That is, the department consumes costs and it really doesn’t create any significant revenues. Therefore, any reasonable controller or CFO is going to want to reduce costs within the department as much as possible. And to do that, they employ best practices, like altering process flows to make them more efficient, or automating the payroll system.
There’s a positive feedback loop that occurs when you install best practices, because costs go down. This looks great to senior management, so there’s a natural tendency to keep looking for more best practices to install. That means controllers and CFOs get caught up in searching the literature and going to conferences to find more best practices. And they spend the rest of their free time supervising best practice implementations.
Cost Eliminations from Best Practices
So what kinds of costs get eliminated from the accounting department as a result of best practices? Look at the department expense report, and you’ll find that most of it is labor. Which is to say, wages, payroll taxes, and benefits. So as best practices are installed, it’s pretty likely that the department headcount goes down.
So let’s work through the scenario as far as it can go. If the department is focused on best practices, there’ll be fewer and fewer employees in the department. Ultimately, there may only be a small number of process experts who oversee a bunch of highly automated processes. What could be better, right? The problem is that the accounting managers are viewing the value added by the accounting department to the rest of the company only in terms of cost reduction within the department.
Headcount Reduction Problems
If this is your viewpoint, then costs can be reduced to a certain point and the department is staffed with process experts who have no expertise in anything else. In essence, the unending focus on cost reduction has narrowed the skill set of the department too much and has eliminated its ability to deal with additional projects. The accounting department no longer has the ability to assist the rest of the organization in any other ways.
For example, there’s no one to provide due diligence work on a prospective acquisition. Or, there’s no one to do a financial analysis of an asset purchase to see if it makes sense. Or, a process is changed somewhere else in the company, and there’s no one left in accounting to provide advice on the controls that should be used for the revised process. In other words, the advisory and analysis roles of the department have been purged.
This is not good, because the decisions made by the senior management team may be the wrong ones, due to the lack of in-house advice. The result is costs being incurred that are much higher than the cost savings that the controller or CFO created by eliminating staff positions. For example, there are too few accounting staff on hand to deal with the due diligence work on a possible acquiree, so the senior management team decides to go ahead with an acquisition without the due diligence – and then incurs massive losses when the acquiree’s sales turn out to have been faked. Which is something that the accounting staff would have spotted.
Problem Mitigation Actions
So what can you do? After all, there’s usually ongoing pressure to cut costs, so it’s not easy to advocate retaining extra staff. There’re a couple of possibilities. One is to make a list of every best practice that you still want to install, and list next to each one the amount of expected cost savings. Then sort the list in declining order of cost savings. There’s a good chance that the projected savings will start being pretty slim once you get just a short ways down the list, so consider pausing the best practices effort after those first few big cost savings projects are completed. It’s a good bet at that point that ladling out advice elsewhere creates more value than continuing to push for more best practices implementations.
Another possibility is to build a case for retaining a core group of advisory staff. You can do this by creating a comparison of the cost of this group to the savings they’ve generated for the company over the past few years.
This analysis is not that easy, since it may involve situations where the accounting department kept the company from making a bad decision – which is difficult to quantify.
In short, best practices are a good idea, but keep in mind the bigger picture of helping out the entire organization before you gut the department to reduce expenditures.