Here’s a thought experiment: If you believe
the cover
story in the current issue of Business
Week, the torrent of numbers coming out of the
federal government measuring, sizing, and describing
nearly every facet of the US economy are in many ways
obsolete. What if the numbers coming out of your
finance department to describe your firm’s performance
suffer from the same problem?
Here’s the issue in a nutshell:
"The statistical wizards at the Bureau of
Economic Analysis in Washington can whip up a spreadsheet
showing how much the railroads spend on furniture ($39
million in 2004, to be exact). But they have no way
of tracking the billions of dollars companies spend
each year on innovation and product design, brand-building,
employee training, or any of the other intangible investments
required to compete in today’s global economy. That
means that the resources put into creating such world-beating
innovations as the anticancer drug Avastin, inhaled
insulin, Starbuck’s, exchange-traded funds,
and yes, even the iPod, don’t show up in the official
numbers."
The "statistic set" the federal government tracks
and publishes was essentially created in the 1930’s
and ’40’s when—surprise—the economy’s composition
bore little resemblance to today’s. Buildings,
machines, and inventory were counted as investments
in the future, but training, education, and R&D were
all viewed as current expenses.
Business Week performs the useful calculation
of comparing the growth in R&D spending and capital
spending since 2000 of the 10 biggest US companies: +$1-billion
(2%) in capital spending, +$11-billion (42%) in R&D. But
11/12ths of that investment doesn’t appear in BEA statistics.
Now to your firm: Ask your CFO where on the
balance sheet the expenditures for the following items
appear (and while you’re at it, ask if they’re current
cash expenses on the income statement, dollar-for-dollar
subtractions from profit, or if they’re capitalized
as investments with an expected non-negative return):
- knowledge management systems, and the care and
feeding thereof; - associate development and training;
- executive coaching for partners in business development
or other skills; - client
relationship management systems, and their support; - the cost of developing new or enhanced practice
specialties.
You get the point. Those things are all critical,
indispensable ingredients if you care about the future
health of your firm, and yet the accounting
department will list them as pure cost or, at best,
as billable-hours-foregone. Yet what factors are more
"real" than those to assessing the level of your firm’s
commitment to next year and beyond?
In December, Intel announced it would be building
a new wafer-fab plant in Israel. To cost accountants,
the value of that foreign investment will be its book
value—the cost of erecting and fitting out the
building. But imagine on opening day the plant
could be turned over to trained and experienced Intel
workers, or to an equal number of Israeli’s picked
randomly off the street (OK, go with an equal number
of works from AMD or Texas Instruments). Which
team would actually make the plant productive?
Indeed, every time Intel launches a new fab facility,
it relies on a program it calls Copy Exactly! which
requires the new fab to be an absolute duplicate of
an existing one that works well, down to what color
the ventilation ducts are painted and what wattage
the lightbulbs are. Moreover, the workers-to-be
at the new fab are put through a minimum of six months
immersive training in Oregon, to pick up "tribal knowledge"
about how Intel operates. Not captured in the
financial statements.
So next time you pick up your firm’s financials, imagine
that it’s the 21st Century, not the Great Depression. And
if you believe that "you can’t manage what you can’t
measure," how would you measure, and manage, differently?
