LEAN ACCOUNTING: A Strategic Approach to Cost Management

Conventional accounting process – recording, classifying, summarizing business transactions – despite advances in technology – is a complex process, let alone the execution, even the understanding. The entire process is non-value adding and ends up to a wasteful expense.

Lean Accounting refers to the process of managerial accounting and control systems of an enterprise by applying lean methods. Lean methods are drawn from technological innovation called – “lean manufacturing” by Toyota and other Japanese companies in the 1980s. The objective of lean method is to eliminate waste, free up capacity, speed up processes, defect-free, clear and understandable processes. It was in the mid of 2000s that a Lean Accounting Summit was organised in Detroit to propose Principles, Practices and Tools of Lean Accounting.

The objective of this article is to discuss in brief few selected approaches of lean accounting to highlight the benefits of the same:

Value Stream Costing

Value stream costing suggests the manufacturing company to create cost sheets on a weekly basis by recording all the direct costs associated with the production and sale. For instance, every time a payment towards purchase of materials is made, it is recorded in the value stream. Every time a payment towards wage is made, it enters into value stream, irrespective, whether it’s direct or indirect. Overheads need not be allocated at all, if such process is going to take higher efforts. The weekly summarising ensures a continuous control and also quicker understanding by anyone.

Plain English Financial Statements

Financial Statements must be such that they are understandable by anyone in the company. This ensures minimization of errors in financial statements, misleading window-dressing and allows for meaningful analysis for decision-makers.

Hoshin Policy Deployment

Contrasting the long-term business strategy planning, Hoshin policies are strategic statements which clearly state plan of action for the next year. Be it the resource planning, marketing targets or cost standards at all levels of management. Another differentiator of Hoshin policy is that it develops plans that need to be executed by the plan-makers themselves, rather than the subordinates. (Maskell & Baggaley, 2006)

Target Costing

A cost control mechanism successfully demonstrated by Sony’s Walkman case, target costing suggests to set the target market share that the company wants to acquire, and work in the reverse order to arrive at the maximum cost within which the product needs to be produced and sold. Tata Motors Nano is case for this point.

Box Score

Backflush Costing Box Score acts as a daily/weekly scorecard to display for the information of one and all connected to the production process and adjust the velocity of efforts to match the pace required to march towards the set short-term goals. A typical box score card would contain operational, capacity, and financial goals and easily conveys the distance to cover. (Lean Accounting, n.d.)

Generally used with JIT systems, this approach suggests eliminating the regular cost tracking systems, instead carry out the costing process after the production run. Costs are ‘flushed back’ to cost units using real data. This eliminates the cost of work-in-process and simplifies the costing system.

Above-discussed are only few of the operational strategies that (mostly manufacturing) firms can install into their processes and are bound to yield results. Having said the same, it must also be noted that there are certain challenges that a firm that adopts a lean accounting needs to face – (i) Is this going have its impact on matching compliance requirements – like the accounting standards; (ii) What would be the cost of transforming into the new system and how long does it might take to see the payback? (iii) What would be the potential reactions from different stakeholders?

Despite its limitations and challenges, lean accounting charters continue to be desirable. Organisations across, (specially the advanced economies) have been consistently adopting and at the same time innovating lean accounting practices, in parts, at least.

GETTING YAHOOED: CASE OF STRATEGIC FAILURE

“In 1998, yahoo had the chance to buy Google for $1-2 Mn in its nascent years. They said Google’s PageRank ain’t worth the pennies. In 2002, Yahoo had the might to buy Google for $5 bn. They said Google is overvalued. In 2008, Microsoft proposed to acquire Yahoo for $45 bn. They said they are undervalued. Today Yahoo got sold to Verizon for a mere $4.8 Bn while Google is valued at over $500 bn. Moral: never underestimate others and overvalue yourself. You lose your value in the process” (Source: A forwarded WhatsApp Message). While this is not completely expressive of the loss of wealth of shareholders, one can’t ignore the fact that the brand Yahoo! that had the potential to be a high value adding company to shareholders’ pocket, has failed in achieving precisely that. Yahoo! continues to be operating with its remaining assets, close to $ 50 Bn (including the payment from Verizon) in the form of holdings in China’s Alibaba and Japan’s Yahoo! Japan. Famously described as the demise of Yahoo!, the Verizon’s acquisition of Yahoo for $4.83 billion is presenting an interesting case for evaluating a multibagger and lessons for emerging new-age companies.

The Emergence

Yahoo, started as an in-campus search engine by two college students in 1994, within two years, went public with its IPO. Between 1997 to the mid of 2010s, the dot-com company has operated in almost all hot areas of the business – search engine, e-mailing, audio streaming. Mostly lead by expansion-through-acquisition strategy, Yahoo! acquired a number of companies from different domains ranging from communications, mailing services, messenger services, online games, web hosting and reached its peak performance state just before the IT bubble burst of 2000. Yahoo! was also one of the very few companies who could survive the dot-com bubble burst. Yahoo! had introduced paid search engine listing much before Google had introduced.

Google played an important role in Yahoo!’s slow death. From being a search engine partner for Yahoo! initially, Google went onto become one of the largest used search engine service provider and continued its foray into every other web & IT-based field that Yahoo! had its presence.

The Slow Death

Yahoo!’s downward journey can be traced back to mid-2000s and to various merger options overlooked by Yahoo!’s management. Be it the rejection of Microsoft’s offer to buy-out Yahoo! for nearly $45 Bn, or the failed merger attempt with the then fastest growing Google or another failed attempt to merge with News Corp. There were also discussions in the lines of buying out Facebook that was then still an emerging business. Yahoo! did enter social-networking and blogging space through an all cash deal, popularly perceived to be a costly buy (approx. $ 1 Bn), of Tumblr, but, in 2013, by when Facebook had created enough entry barriers. Throughout these deals, there have been legal battles on patent issues, employee layoff issues and also issues relating to acquisition terms and conditions. Ironically, to highlight how Yahoo! took most wrong decisions when it came to its acquisitions, it let go of options of M&A with companies like Microsoft, Google, Facebook etc., whereas it bought companies like Geocities by paying $4.5 Bn and Broadcast.com by paying $5.7 Bn that too at the peak of dot-com bubble. The only decision that worked in case of Yahoo! can be the entry into China’s e-commerce space through a 40% stake in Alibaba.com, which is still a face savior for the Yahoo!’s top brass.

Officials at Yahoo! claim it not a mega failure as its being projected by analysts. That is only partially true. Because the core business of Yahoo!, that’s in the hands of Verizon will be clubbed with another (recently acquired) fallen star subsidiary of Verizon – AOL and this is expected to create that much required synergy for the ex-brand Yahoo!. When we take a stakeholder perspective, the death is not that of the stake per se, rather the brand Yahoo!, that is more concerning. As Forbes magazine put it – “the transaction ends the independence of one of Silicon Valley’s most iconic pioneering companies”.

What does it mean?

There are certain perspectives we can form taking the curious case of Yahoo!. The corporate was formed at the right time in the right field. Has been there, did all that was required to be the mainstream new-age player (web, mail, mobile, streaming, and all); so much to the envy of traditional product-driven businesses. Yet, it could not optimize its position in the market, as against the giants of the likes of Microsoft, Google or Facebook. How does one explain such failure?

Should we say the lack of innovation? – Yahoo! had access to all the resources across the world. There are other companies, which just imitated a working business model and succeeded. Social Networking was not a fresh idea of Facebook. Search Engine was originally Yahoo’s idea.

Should we say access to capital? – Despite continued wrong calls, Yahoo was always on the watch list of investors. Yahoo! has consistently been considered a strong buy, if not for company fundamentals, but, for the kind of growth phase the industry was sailing through. Yahoo! derived its goodwill more from the goodwill of the industry it operated in. And capital was never dearth.

Or should we say killed by competition? – Google which could be described as one of the major competitor for Yahoo!’s search engine and mailing services, was not the only one on the pie chart. There was also Microsoft’s Bing and Hotmail, and other regional players as well. And it would be inanity to say Yahoo! did not have a competitive strategy in place. Competition was always expected, was always present and was always going to be present.

Or was it due to macro-economic crisis? – As mentioned earlier, Yahoo! was one of the successful survivors of dot-com bubble burst of 2000. Global financial crisis of 2008 did not create the kind of damage to web-based businesses like it damaged the financial services or realty and auto sector.

Yahoo! was operating in an industry that had only one direction – upwards – in the last two decades. Economic conditions were congenial – new economic orders, global integration, opened up market places and embracing customers. There was an abundant supply of capital resources and human talent and also easier access to both. Notwithstanding all this, if a pioneering company of the shining industry fails, after two decades of its operations, to sustain and grow, the fingers can only be pointed towards the MANAGEMENT. Managerial decision-making, (as given by the Value Octagon framework of Dr. Chandra) especially at the top level, starts with devising corporate strategy and business model, percolates into capital allocation decisions, financing decisions, creating organizational architecture, strategically driving the costs, managing the corporate risks, corporate restructuring decisions and extends up until the governance mechanism. Yahoo!’s failure can be assigned to most of the above parameters, specifically, to the corporate strategy, risk management and corporate restructuring.

One of the mind-mapping exercises at an offsite event of Yahoo! employees, asked the delegates from different countries to utter the first word that comes to their mind with different brands. For most brands like Apple, Microsoft, Google, the responses were almost unison as Smartphone, Windows or Search Engine. But, with the brand word Yahoo!, there were multiple responses, some said search engine, some said email, some said messenger and so on. What this proves is the lack of FOCUS in corporate strategy for Yahoo! (as suggested by Michael Porter’s Generic Strategies)

Operating in the business where every moment is so dynamic and the diffusion of innovation is the fastest, it was imperative that Yahoo! had to have identified the risks, measured the risks and had in place a RISK RESPONSE strategy – mitigate, transfer or accept risk. Going by the turn of events in the last few years, it’s anybody’s guess that, Yahoo! chose to accept the risk, while failing to do a cost vs benefit analysis between retaining and transferring the risk.

Yahoo!, when it came to its corporate restructuring decisions failed to view itself as part of the BUSINESS ECOSYSTEM. An ecosystem is a broader and an inclusive concept, which suggests businesses operate in a system where every player/stakeholder is not just related with each other, but also influencing each other. Each element is entangled with each other. Co-evolution is the best strategy to win in such a system. (as suggested by James Moore). Firms must pose competitive yet co-operative challenges to the other elements in the ecosystem. Somewhere, it feels Yahoo! missed out on this aspect. It chose to adopt a combating strategy with the potential big players.

Yahoo! rejected Microsoft’s buy-out offer in 2008 claiming the latter is undervaluing Yahoo!. Truth is that it was always Yahoo! that undervalued itself and every other player’s ability in its ecosystem.