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October 22, 2005

How to Spend Money

Managing money well always has the twin peaks of using a little to get a lot. The big aggravation comes from finding that standing on one peak so infrequently gives a clearer view of the other peak. And naturally, we find it difficult to be in two places at once.

Forced to choose? Most managers would say "no"... but mainly because the rule, not the exception, is that you lower costs first. This makes investment seem like a mindset you get to only as a reward for cost reduction -- literally, an afterthought. Other managers might say that the investment attitude (flirting as it does with innovation and uncertainty) is too frequently incompatible with their responsibilities to ensure efficiency and quality. Finally, it is not always yet too often true, that the issue of investment is boxed into the idea of research and/or development, under an umbrella of expectations where "losses" are decreed "acceptable" because they haven't reached "live" operations...

But daily management is not best simply cleaved into incompatible philosophies or unrelated departments in detente. Managing the relationship of cost to investment can be organized by starting with what they have in common, then proceeding with what their differences contribute.

The common operational aspect of cost and investment is that they are both a type of "expense"... The challenge is to have each type of expense translate into performance for the organization. While the expense perspectives are cost and investment, the performance perspectives are planning and operating.

As shown in the picture below, there are basic forms and subjects of management attention that could, but may not, characterize the translation in most organizations. Among them, the most important point to note is the general emphasis on assets that typifies cost issues, versus the emphasis on resources that typifies investment issues. From there, it is easy to recognize that the cost perspective works on an operating objective of minimizing the risks of asset availability; investment, meanwhle, works on maximizing the benefits of resource capacity. Naturally, this is expressed through a concern for cost recovery on the one hand, and investment returns on the other -- which sets up different viewpoints on the common significance and use of any "income"... But here, the more direct observation is that the expense objectives are operationally defended, proactively or even preemptively, on the cost side through allocations and on the investment side through assignments.

Management normally proceeds with an assumption that operations are directed according to plans, and this directive effort initiates with objectives of its own. Our framework shows that sensitivity to assets and their allocation is incorporated quite differently from sensitivity to resource assignments.

But this visibility offers some diagnostic advice regarding a rational relationship of cost and investment. For example:
- In general, moving expense management from planning to operating stages means anticipating impacts, while moving from cost to investment expresses productivity.
- When assets are placed into service as business resources, managing their service (responsibility to assignment) is the primary point of view on establishing their value. Accounting will not be an appropriate mode of analysis for validating benefit, and authorizations will not "cause" a benefit increase even though they may be a prerequisite of it.

By presenting a more carefully distinguished view of the forms and subjects of management attention to expenses, this framework also suggests a very careful re-examination of common notions in the organization like "cost justification" and "approval authorization" in order to determine whether their accepted use and meaning is really logically effective for managing expenses to the current strategic objectives.

Posted by Malcolm Ryder at October 22, 2005 4:30 PM

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