Lean accounting from a company perspective


We presently are at Athena Headquarters in Alonte (Vicenza) at the foot of the beautiful Berici Hills. Athena, like many other companies in Veneto, is a multinational with a number of locations in Italy as well as in India, Brazil and The United States. It has started a lean transformation process three years ago and in particular has implemented a Lean Accounting system. We are here to interview Lorenzo Oboe (CFO), Barbara Ramazzotto (Controller) and Gianfranco Pellizzari (Operations Manager). It goes without saying that the theme of our interview is their experience with Lean Accounting.

Good morning. Let us give priority to the ladies. Barbara how was your approach to Lean Accounting?

Barbara: well, it is a rather long story. A few years ago we went through a radical reorganization of the whole company which brought us to merge a number of factories we had in this area and to revise our management accounting system. Totally ignoring that we were implementing one of the pillars of Lean Accounting we decided to split the company into a number of streams, one for each product line.

At that time we called them still “departments” but they were real “Value streams” i.e. business areas with their own products, spaces, equipment and people.

At the same time we started a new management accounting system with the objective to produce monthly financial reports by department.

Gianfranco: In order to make the most of the reorganization process we started applying lean methods in our production processes. In particular we redefined our lay out and we worked to reduce setup times which for us are something really critical.

How was then your management accounting system and what were its problems?

Lorenzo: Before that moment we had very little, basically accounting data and quarterly financial statements. Our new system was a great leap forward, but we still had problems!

Barbara: Yes, indeed! Our reports were not easy to read and understand for people outside the accounting area. We perceived a gap between the data we provided and the needs of those who had to use these data to measure the results of their work.

Lorenzo: in other words it was difficult to perceive the link between actions and results. Financial reports gave us messages but they did not clearly indicate the effects of our actions and did not provide indications for future actions.

Gianfranco: I fully agree. The problem was to be able to use the information to make decisions. I confess that I always waited for the monthly reports with some anxiety and always hoping they showed good results! But if they did not it was definitely too late to take action not only for the previous month but for the current month too. There definitely was also a problem of timeliness.

What did you decide to do?

Lorenzo: We made three decisions: two of a technical nature and one organizational.

Barbara: Let us start with the latter. We realized that management accounting should be “open” which means that it is necessary to involve the persons who manage a value stream not only in the interpretation but also in the definition of the information needed to evaluate the performances of their value stream.

Gianfranco: Involving value stream people in the definition of their performance measures proved to be a very good move because it allowed them to understand the number they receive and how to use them to improve performances.

We added to financial measures also performance measures on the basis of the assumption that performance improvement sooner or later brings better financial results.

Lorenzo: We also worked in order to provide more timely information. So we started to produce financial data and performance measures for each value stream a few days after month end. Thus value stream managers can make quick decisions and start immediately the necessary actions.

Interesting! But could you explain how your management accounting system works today?

Lorenzo: Our company is divided into value streams, each with its own product families and its management. For each value stream we produce within ten days after month end economic as well as performance reports which are analyzed by a team made of people from the value stream and people from management accounting.

Barbara: Data are compared with objectives and after deciding about an action plan new objectives are set and, in case of significant new events value stream budget is revised.

You said V.S. budget is revised? I image that will take a lot of time!

Gianfranco: As a matter of fact here in Athena we have two budgets.

What we call “canonical budget” is made once a year and is used to set the overall objectives of the next year. But beside this we have a rolling budget for each value stream which is revised every month if needed. The revision process is quite fast, a matter of hours.

Lorenzo: About 20-25 days after the end of the month we provide the official reports which normally are not very different from the ones we provide at the beginning of the month.

Timely and reliable information by Value Stream about profitability and performances, rolling budgets by Value Stream: all this seems really interesting. But what kind of effort is required to get to this point?

Barbara: Since the very beginning we have chosen a gradual approach. We studied and implemented the model in a pilot value stream, the one we call “metalli”.

We spent time with the persons assigned to the value stream in order to share our objectives, to define the proper performance indicators, to create a motivated team. But this has not been for us a problem, but rather a great opportunity of professional growth.

Lorenzo:After this first experience the extension of the model to other value streams has been relatively fast and simple. The whole process took about a year to be completed.

So far so good, but you certainly had to face problems and difficulties as in any other process of change. What can you tell about this?

Barbara: we did not have to face difficulties of a technical nature, but rather problems concerning people’s motivation and involvement. No management accounting system is really effective without a strong motivation of all the people involved.

Lorenzo: Lean accounting, or Lean management accounting as I like to call it, helped us a lot. Numbers are not the exclusive property of the CFO or the Controller but they are understood and used by the people who work in the value streams and are the first to need those numbers to make decisions and to pursue continuous improvement.

Gianfranco: I think this is the keystone of the whole construction : people’s involvement. But this is true not only for Lean Accounting but for the whole lean transformation process. Basically lean means people’s involvement .

One final question: What are your ideas for the future?

Barbara: I think that in 2011 we will work on the “canonical” budget process in order to make it leaner. As it is now it takes too much time and too many resources and its effectiveness is quite limited.

Lorenzo: We have a number of ideas to improve our work during 2011, but I prefer not to disclose them for the moment.

I would certainly like to be able to close the canonical budget process before the end of November, something that has never happened in our history.

Barbara, Lorenzo, Gianfranco, thanks for your kindness and best wishes for your job!