The popular press is filled with caterwauling that bemoans a lack of technological innovation in the U.S. The idea that seems to have taken hold in the public’s imagination is that entrenched corporations often squelch novel ideas. According to the popular narrative, corporate managers look like either dunderheads or villains. They spout bromides about the short-term bottom line to a degree that somehow blinds them to spending money on promising new ideas that take time to blossom.
The manager obsessed with short-term results is a convenient stereotype to explain why businesses don’t invest in more cutting-edge technology. There’s also reason to believe that it is also completely wrong. The real culprit, surprisingly, might be the way industry does its accounting.
This insight comes from Peter Martin, a vice president and Fellow at Schneider Electric. Martin describes his role at Schneider as that of a futurist who discerns trends and then helps his employer get in front of them. Martin’s experiences have led him to conclude that a key obstacle preventing many industrial firms from innovating is their own bookkeeping methods. To understand why, consider this scenario:
Suppose your engineering team has come up with an idea that makes your production line super productive. But the improvements involve new technology that costs money. Being prudent, you pick one particularly troublesome station as a test case. The changes get made. Big success! Your team figures that over a year, they can add a half-million dollars to the company bottom line for each station that incorporates this innovation. With proof in hand, you approach upper management about going plant-wide.
And that’s where the trouble begins. “There may be 40 process points in the facility and you’ve fixed one of them. But cost accounting systems are often set up to look at entire plants, not at individual process units. Moreover, they only look at them monthly,” said Martin. “When you examine the operation through the eyes of the cost accounting system, you might see an improvement, but you won’t be able to tell the improvement is in the unit you fixed. The accountants will look at the whole plant and say it has improved a little bit, but they don’t know why.”
This isn’t just a hypothetical example. Martin says he’s seen it unfold numerous times during the 40 years he’s been working with clients in industry.
“The accountants who study the books will say they can’t attribute anything explicitly to specific improvements that have been made. The best they can say is that the plant had a good month, but that could have been because of better feed stock, a more competent machine operator somewhere, or from any number of other causes,” he said.
The picture that emerges from Martin’s observation is that stubborn managers are less of an obstacle to spending money on technological innovations than accounting schemes rooted in the last century. “You need accounting software that shows the specific financial performance of individual units. And managers need to see it in real time, not monthly. Do that, and you’ll know how each single improvement drives the bottom line,” Martin said. “Fortunately, there is accounting software today that gives that kind of visibility.”
And with this visibility, we might add, could come the end of the cliché of the dunderhead manager.