Many managers, whether new or established, recognize the reality of our markets and the meaning of competition in the context of this new environment. Survival demands that managers apply the credo of "adapt, adapt or die".

Interview of El Comercio newspaper to Paul A. Sharman

Based on your experience on diverse companies, do you consider that new managers generation is prepared to deal with new management challenges? How many managers easily take your theory about ABC and ABM?

We find that new managers are willing to investigate innovative solutions to business problems because they are unhampered by the limitations of tools and methods of the past. It is not so much that established managers are not willing to change, it has more to do with the fact that they are using methods that were designed for different circumstances. And they worked. So established managers have to be prepared to discard something that has been effective for them. Also, established managers are busy people, and it takes time and energy to learn new things. So, the conditions for established managers are quite challenging.

Meanwhile, the world is changing rapidly to an environment that is dominated by telecommunications and computing technologies. In this environment, knowledge doubles frequently and competitive organizations metamorphose in response. But it is the people who make up the organization that must behave differently. We need to use today’s tools to solve today’s problems. Many managers, whether new or established, recognize the reality of our markets and the meaning of competition in the context of this new environment. Survival demands that managers apply the credo of "adapt, adapt or die".

In the modern organization, more now than ever before, each human being must take responsibility for their own performance and the way in which they adapt to changing circumstances. That means that they must be willing to learn about new ways of doing things. We find that financial people are more likely to take training to learn about ABC than non financial people. This may be because the name ABC includes the word "costing". People who attend our seminars typically rate the training highly and many go on to apply the lessons. Managers in other functions, however would be well advised to learn about ABC, because ABC actually has little to do with cost accounting and everything to do with operations analysis and simulation modeling. It is designed to understand the economic performance of the organization and it is operating managers who are accountable for performance not accountants. If anything, operations managers are better equipped to understand and promote ABC than financial managers because they are concerned about optimizing performance while finance managers are concerned with reporting on performance. But it is the combination of the financial with the non-financial perspective that offers the biggest opportunity for change.

In your perception, in Latin America there is more or less managers acceptance of your theories on cost technology, compared with developed countries as USA? What characterizes Latin America managers?

Our experience is that Latin American managers have similar problems to those faced by managers in North America and other parts of the world. Local economic circumstances create conditions that cause priorities to be different. However, managers every where are concerned with managing cost. It does not matter what industry, whether public or private. We have found that managers in Latin American are very willing to listen to new ideas. If anything, managers in Latin America feel a greater need to learn and apply new methods, because they are less well established than their counterparts in developed countries.

You are working with several Peruvian companies, one is on the supermarket business and is well known for its good customer service. What type of innovations have you had to introduce in this supermarket company?

It is too early for us to discuss innovations in the client you refer to, however we anticipate learning’s that will initiate interesting and meaningful change.

In other organizations, we have seen substantial re-alignment of business to better address certain market segments. For example, new processes have been introduced to serve low volume (low revenue) clients because the cost to serve them is too great. For example, the cost to deliver a small order to a customer may be the same as to deliver to a large one. Often organizations process orders in the same way, irrespective of size, meanwhile it is likely that they are losing money on small customers. A solution suggested by ABC is to create a different, low cost process for small customers. Another common outcome is the identification of low/non value adding activities in order to facilitate their removal.

You are also advising a banking service company. In the context of fusion and changes in financial businesses (not only in Peru, but also in Chile and Spain), what changes are needed in this company? How to avoid personnel reductions after fusion to reduce operational costs?

Often, clients are reluctant to discuss what they actually do as a result of the analysis of their business because the actions are very strategic. To us, cost cutting is legitimate response to competitive imperative. Usually, these are related to a specific need at a point in time. Our objectives in ABC are quite different from downsizing. We perceive ABC as tool designed to support growth. It is very much like pruning a rose bush. You may choose to cut of some of the branches just to shrink its size, or alternatively you might be very selective and understand what aspects of the bush are to be encouraged to drive growth. ABC is designed to provide information to managers in order to help them manage on an ongoing basis. Business grow when people grow, effective and efficient use of resources is imperative. ABC is designed to help managers focus on what is important.

You propose that it is needed an strong interrelation between managers and employees to reach company goals. Nevertheless, Peruvian managers follows the idea that the employee must only comply with commands and not make questions? How to change this reality?

Command and control management style is effective in an environment where both change and competition are limited and there is plenty of room for error (high profit margins). Such is not the case in the age of computing and communications. In today’s environment, things change very quickly and profit margins are reducing. In addition, more things are happening on a continuing basis. Because of the speed at which things change, it is important to push decision making down in the organization to the level that has all of the information at the time when a decision must be made. This calls for a very different management attitude, it demands a democratic and flexible point of view and off course accountability has to be delegated.

The only way that managers will be willing to change is because they experience success when they try it and they find that their employees are making appropriate decisions. They must have confidence in the ability of their employees to deliver in a consistent and predictable way. That means managers must have mechanisms in place to do two things:

1. to reduce risks from incorrect decisions (properly designed processes, role/responsibility definition, policies)
2. to monitor the performance of their employees (measurement and monitoring systems, ABC, Balanced Scorecard, Best Practices)

Will you return to Lima in October? What kind of results do you expect to find in your customers? How many they are? At your seminars, what kind of questions are more frequent? What do you answer?

I will return to Lima. I expect to see our new customers moving ahead with plans to implement Activity Based Costing. Customers who have already implemented ABC will be taking advantage of ABC work done so far to focus change initiatives and drive productivity improvement though process improvement.

The most important question asked at our seminars is: "Why should we implement ABC?" The answer is very simple. When making decisions, managers collect data and consider the options available to them. Decisions based on traditional accounting information are often very risky because the data is wrong. The information provided by ABC is significantly different from traditional measurement systems, it is designed to provide substantially greater insight than they have had before.

Paul Sharman is president of Focused Management Information Inc.

Interview published in El Comercio, newspaper of Lima - Perú