If you are trying to find the reason why your enterprise struggles to transform itself while everyone admits that it’s a vital need, don’t look further than your accounting department.
No. Your accountants are not incompetent, nor your CFO. That’s the very nature of the rules they apply and enforce that’s going to make you hit the wall.
Let’s start with a widely shared acknowledgement : business struggle to make the most of their intangible assets and is not better at developing them. Bad luck : they represent 80% of their valuation. The consequence is well known : ROA back to 25% of what it was in 1965 while, at the same time, productivity has increased. In other words : the growth engine was not connected to the right tank and the transmission is broken.
Aware of the situation, businesses initiated many programs aiming at fixing this : collaboration, innovation, KM, motivation, engagement, enterprise social networks. With questionable results.
Changing the body and keeping the engine is not the solution
There are two reasons to that. First one is that despite of these programs it was hard to change the logic of day to day operations : arbitration between two options, resource allocation, activity prioritization. Changing the body was not enough : the engine was still turning and working the same way. The second one was more strategic : change had to be decided and sufficiently funded. That’s why many projects ended stillborn because of lack of foreseeable ROI or started but failed because of lack of means.
All these points have something in common : what the project owner (and often many people in the company) see as an investment ends in a less flattering cell when the project is examined closely with an accounting perspective. What’s supposed to be an investment becomes an expense, an asset becomes of risk etc.
Being angry at those who make decisions and arbitrations is useless. They apply universal accounting rules. Rules that were worked out at a time when what matters today was of little importance, rules that don’t reflect the actual value of things today.
Accounting measures everything except what you want to do
But when the wrong things are measured and those indicators used to make decisions, there are little chances that wrong decisions are made and that decisions that are compliant with the norm are aberrations when considering the reality. The accounting system adapted to the industrial era to become a powerful management and decision making tool. Those who applied an industrial accounting model to industrial activities made a difference. Those applied a pre-indusrial model to industrial activities died quickly.
And what about those who apply an industrial model to a post industrial era ? I let you find the answer.
Now, when talking about transformation matters we often mention the human side, sense, engagement but never what makes these actions acceptable and measurable over time. A little bit like filling a tank and measuring another : the action is not bad, the measure is.
Smarter companies are companies that count smarter
What stuns me is that, in what we call today enterprise 2.0, social business, collaborative enterprise or whatever, discussions never involve finance or accounting professionals. They’re never invited to share their views, speak at conferences… But if we want to build organizations designed for today’s context we need today’s indicators, not those that worked in the XVIIIe century like those we’re using today.
When the context changes and one wants to make the best possible decisions in this context he builds a new primary basis through which he’ll make and measure decisions.
Businesses won’t transform without a new accounting model. Period. If not, anything related to human capital development won’t be measured and will look like an accounting heresy.
By the way, anyone interested in this matter should have a look at the excellent Smarter Companies blog.