An exclusive interview with the World Renowned Management
Accounting Guru Professor Robert Kaplan of Harvard Business School. Professor Kaplan is a world renowned accounting academic, and Emeritus Professor of Leadership Development at Harvard University, he is known as the co-creator of the Balanced Scorecard and Activity Based Accounting together with David Norton. He was educated at Massachusetts Institute of Technology (MIT) and Cornell University USA
Interview done in Colombo Sri Lanka in 1998 by Dinesh Weerakkody (reproduced)
Q: This being your first visit to Sri Lanka, what are your impressions of Sri Lanka?
A: I have not seen much of your country. However, I noticed that Colombo is a very busy area, very crowded and lots of traffic.
Q: In what areas do you teach, consult and research?
A: My research, teaching and consulting focuses on new cost and performance measurement systems, mainly Activity Based Costing (ABC) and balance scorecard. Also, I teach at Harvard Business School and have authored and co-authored many books and papers.
Q: Was it you who pioneered the Activity Based Costing model?
A: Yes, myself and Professor Robin Cooper at Harvard Business School. We are the people who developed the theory and made it accessible to business people. The actual development was done independently at different organizations. We studied those organizations, wrote cases and then wrote papers on those experiences. We are still actively involved in promoting activity based costing in both manufacturing and service organizations. We are finding a lot of financial institutions, banks, investment companies, mutual funds, etc. making efforts to understand the true costs for their different products and services, also to find what their customers actually cost to their businesses.
Q: You addressed 84 of our business leaders, what did you tell them?
A: I talked of the new corporate management system that we developed at Harvard, the balanced scorecard and how it complemented the traditional financial measurement system to include the drivers of long term financial performance, which focuses not just on financial measures but on customers, internal processes, people and systems.
Q: What was your topic for the CIMA 10th anniversary lecture?
A: I covered this area but I also discussed activity based costing, another management accounting technique that I helped to develop over the last 15 years. The main purpose of activity based costing is to give you a more accurate cost model to make business decisions.
Q: How different is Activity Based Costing (ABC) model from the traditional costing models?
A: Well, the main difference is the way it deals with indirect support expenses that traditional cost systems call -overheads. Traditional costing systems only do a very good job at capturing and measuring the cost of direct labour and material, the overheads are just allocated arbitrarily. For companies today, what traditional costing defines as overheads has become a huge cost that has been increasing rapidly and often these overheads are a very large component of the products and services they offer to the consumers. So ABC in effect dissects this overhead pool to understand the real drivers of costs within that overhead cost pool, then it is possible to drive those cost down to individual products and individual customers.
Q: In a business world where customer has many choices, pricing becomes key to competitive success. In this context, how beneficial would the ABC model be, to a company?
A: In two ways. Benefits will come if its overheads costs, indirect cost and indirect support expenses are big, relative to direct labour and material. Secondly if the company is doing a variety of different things that is, it has a diversity of products and diversity of customers. Our experience is that when you have high variety of products they make very different demand on the limited organizational resources. Traditional costing systems average the indirect overhead costs among products regardless of their complexity. So the companies with significant amount of overheads or indirect supporting expenses and high diversity in the type of products it produces and types of customers it serves would benefit by having actual cost data for their pricing decisions and managing key channels.
Q: So what you are saying is that the traditional costing systems have lost its relevance?
A: ABC sprung from the realization that traditional costing systems had lost much of their relevance and could produce misleading data. Traditional costing systems emphasized simplicity; due to lack of sophisticated IT. That is now changing with the use of technology.
Q: By adopting the ABC model, can companies identify the real drivers of costs and price effectively?
A: ABC can be used by managers to identify the areas in their businesses where improvements are likely to have the greatest financial pay off. So, as ABC is used to direct their improvement efforts, they must be prepared to take action to translate improvements into profits. So we are talking of either reducing the spend on resources or increased output. Only then would profits flow.
Q: So what are you saying is the ABC model provides many variations for cost data to be presented and analyzed for better and improved business decisions?
A: Yes, that is the purpose.
Q: How popular is activity based costing in the UK and USA?
A: It is being used throughout Europe and US and other parts of the world. Australian companies have been using it very widely. The problem is that companies are still struggling with the right kind of software to implement this system. Currently ABC is being implemented on standard software that sits on a personal computer, now they are developing software on ABC that can work with the new enterprise resource planning systems.
Q: You have also developed the ground breaking balanced scorecard. Can you explain what it is?
A: Well, a balanced scorecard is the balance between the financial and the non-financial indicators and we go on the basis that you can’t use financial measures by themselves. You can think about a pilot of an airplane. He would not want to use one type of instrument; he would need multiple instruments to guide the plane’s journey. So companies also need a multiple kind of instruments to guide their journey through competitive spaces. So the idea is to retain finances, but be prepared to use finances to ultimately measure how well you do in your revenue and the economy of your expenses. For that also you need to look at the drivers of your costs. Then, what do you have to do to generate good financial results in the future? So that introduces measures about customers, who are our customers, what do they value and how do we create value to them? Based on that understanding, we can decide where we want to go as a firm. Then we can identify our most critical internal business processes. Once that is identified we have to develop measures for those, if the processes include normal production processes and normal operating processes. It can also include innovation, developing entirely new products and services and developing new markets. Innovation is very important for creating that. So once a balance scorecard is developed it must be used as strategy to achieve the end goals of the business.
Q: So is ABC complementary to your Balanced Scorecard concept?
A: Yes, if ABC tells you about the cost structures in your business, then the balanced scorecard tells you what generates revenue for your business.
Q: Has the Balanced Scorecard been successfully implemented in companies in the US?
A: Yes, in companies like Mobil and Chemical bank. Mobil, which was one of the least profitable petroleum, companies in the US, after the balance scorecard was initiated with the company, it became the most profitable petroleum company for three years in a row.
Q: What is your involvement with CIMA, UK?
A: I am not an active member of the United States branch, neither am I an accountant, but I won a medal from CIMA, UK in ’94 for my research and contributions to management accounting. In fact, CIMA invited me to give this anniversary lecture. I have not been to this part of the world before. So, I am glad that I got this opportunity to visit this beautiful country.
Q: There is an argument that management accounting has lost its relevance? Please comment.
A: That is wrong. A manager needs to have good information that the management accountant can provide, you have to understand your cost structures, your performance measures which include aspects of quality, aspects of cyclical items to see whether improvements in operations and quality is being translated into financial performance. Many companies that try to ignore their financial information and have pursued issues of quality and cycle time reduction have not translated that into increased revenue and ultimately into profits.
Q: So what you are saying is that the management accountant has an important strategic role?
A: Yes, but we must move away from being a score keeper of the past to providing guidance and inputs to a firms strategy and then also help the business to pro actively take decisions.
Q: How popular is the Harvard MBA? People are saying that the MBA curriculum is now outdated.
A: We continue to see strong demands for our MBA programmes. I think an MBA gives powerful theories and framework on how business should operate. As business gets more and more complex you need even better frameworks to understand the impact of global competition and in managing global enterprises. Increasingly, we find that we are training students to become entrepreneurs. So we have more entrepreneurs graduating from Harvard Business School today than we had 20 or 30 years ago. The MBA is a great course because our students say that it is very helpful to them to run their businesses.
Q: How do you see businesses operating in the next millennium as competition extends beyond borders?
A: The financial crisis in East Asia, which is spreading to other parts of the world undoubtedly, indicates big challenges. I think one of the major challenges to all companies would be how they deal with capacity. We seem to be having all the capacity in the world in a lot of areas. So I think people need to be cautious about this, consumers are getting more demanding. So I think market research is necessary to tailor their products and services to suit different markets. Certainly, IT will become more and more increasingly important. We also see a lot of businesses shifting to the east, shifting away from normal types of retail outlets even into direct selling and Internet selling. The Internet is going to have a profound effect on world business.
Business therefore is going to be very different to what we see today.
