Lean Accounting from the University Perspective

Lean Accounting is now finding its way inside Italian Universities. We have asked his opinion to Roberto Chiavaccini, Professor in Business Management and Information Systems at the University of Pisa

What are the aspects of Lean Accounting that seem to you particularly interesting?

The first is simplicity. Costs and revenues are posted by “value stream” and each value stream is like a company with a single product.

The second is reliability. Costs are allocated directly to value streams thus avoiding arbitrary, complex and confusing allocations of these costs to cost centres and products.

The third is completeness. It provides all the information needed: financial information as well as performance measures.

In your opinion what makes Lean Accounting different and better than the traditional approach based on product cost accounting?

Standard product cost has at least three problems:

It is an estimated information and, however sophisticated the process to determine it, we know that “the future is not ours to see”. (especially 12 months in advance!).

It is a costly information obtained through a complex and time consuming calculation process.

It is unrealistic because it soon is made obsolete by reality. Furthermore, to use the words of Jack Welch (CEO of General Electric), the fact that standards are used to evaluate, reward and punish people make them even less realistic

L.A. overcomes the above mentioned problems. Its logic is to support the decision making process providing actual costs and revenues and using estimated costs and revenues not as dogmas but as reasonable short term objectives to be revised as soon as they appear unrealistic.

Do you think that L.A. can be applied only by companies which have completed their lean transformation or that it can also be applied at least in part to all companies?

• Value Streams are “End to End processes” that flow from customer (desires, orders…) to customer (product design, delivery, ..). As such they should have dedicated and autonomous resources. Lean Accounting could be applied wherever one can identify value streams

• But sometimes this identification is not so easy because in a company there can be resources shared by various value streams. In this case a compromise is needed and a method (normally based on ABC) should be identified to allocate these resources to the value streams. Obviously the more the resources to be allocated the more the complexity of the allocation process and the less the advantages of L.A.

• In such a situation, even more important than the complexities involved is the difficulty to fully delegate responsibilities to Value stream “owners”, which is one of the basic principles of Lean Thinking and one of the paradigms of the so called “Empowerment Age”

In what contexts is L.A. applicable?

Lean Thinking is a paradigm based on principles, techniques, best practices, but above all on a different mentality. It works at three levels:

o Processes which should be properly designed and managed

o Human Resources assigned to processes who should be competent, motivated, autonomous and responsible

o Accounting Systems inspired by the “Beyond Budgeting” logic, based on: Financial and non financial measures, Rolling budgets instead of fixed yearly budgets, Delegation of responsibilities in line with the logic of the “Empowerment Age”

If the company does not have the right mentality, it is possible to use some of the Lean techniques to get short term cost reductions but it is highly improbable to achieve all the advantages of L.A. and Lean transformation.

What are the main problems in implementing a L.A. system?

The main obstacle can be the hierarchical mentality of management as already mentioned

Another problem is the typical “conservatism” of CFO’s and Controllers who always complain about the complexity of traditional systems but are often opposed to any change.

Let us talk for a moment of Italian University: is it already familiar with L.A. ? As far as you know are there university courses on L.A.?

I have never heard of such courses. I think I am one of the few teachers to talk of Lean Thinking during the courses I give at the “facoltà di Ingegneria” of Pisa University. I guess that many colleagues of mine think it more academically correct to “go beyond Lean”. As for me I would rather that many more companies would “come into Lean”.

Do you think that the existing publications on L.A. are sufficient or that it would be necessary to write something more? In this case on what aspects of L.A. should these new publications concentrate?

Surely any new publication can be useful. In particular we should concentrate on case studies and examples through which it is possible to learn more and even to improve our theories.

In my opinion an aspect that should receive more attention from a scientific point of view is the “Box Score”. I think that the Box Score of each value stream should be a BSC (Balanced Scorecard) of that value stream linked to the BSC of the whole company. In that case the Box Score should be in line with the strategic objectives of the company. This in my opinion is a line of research of particular interest.

Professor Chiavaccini, thank you!