The world is a changing place. As the speed of change accelerates, fueled by new computing and communications technologies, the world economy has grown, as have the expectations of people everywhere. For example, in France thirty years ago, a vacationing Britainer would take note of the thousands of corrugated metal Deu Cheveaux automobiles with tiny engines grinding slowly past the hordes of cyclists. Each cyclist came complete with 2 french sticks poking from a shoulder bag, and the men commonly wore berets on their heads. The pace of life was slow back then, and a rotary dial telephone was a luxury. Not any more! Today we see BMWs, Mercedes, and every other conceivable brand of vehicle shining brightly, vying for all remaining street space with hardly a bicycle in sight. Everything moves more quickly than ever. Plenty of people using cell phones are visible, and, of course, everywhere you go, people carrying notebook computers. Television and the Internet make everything visible to all who have access to these services. The media provide the mechanism that drives expectations and change as quickly as innovations can be deployed. Billions of people become aware of new ideas, products and services as rapidly as they can be conceived.

In all developed countries, and many that are developing, the Internet has changed the pace of business and knowledge. Knowledge migrates rapidly and power goes with knowledge. "E" anything has machismo. Physical assets are still important, but the possession of knowledge offers the promise of future power and potential cash flows. Indeed, a whole new way to determine stock market values has emerged known as "economic profit". Historic earnings performance is not as critical as future cash flow. Industry has changed too. Manufacturing represents a relatively small proportion of the economy of the developed world, less than 20% of GNP. Service industries lead the way in creating jobs and value for shareholders. Even the accounting firms are not the same. For the big ones that make most of their money from consulting and by offering other services, auditing is a chore that is fraught with liability concerns. Even the accountants want to do something else to make a living, so, too bad for them that recently the SEC has begun demanding the accounting firms go back to being just that.

This is the environment within which cost management strives to make a contribution. It is the opinion of this writer that cost management is more important than ever it was in the past. Along with today’s rapid business pace and global markets comes the intensity and unprecedented competition that demands high performance from any person, company or country that steps up to compete. Success is defined by the effective use of resources to perform activities which convert inputs into outputs that customers are willing to buy. The most valued company is one that has intellectual property that can be highly leveraged into driving significant cash flow.

Cost management in the future

In the changing human environment, we are challenged to think holistically. In the past we have developed management approaches in a functional manner. The quality people developed methods premised on a set of assumptions and their own experiences as do actuaries and accountants as well. However, we now need to ensure that all our measurement mechanisms work together with a common set of principles and a common architecture. In other words, the pieces have to fit and work together. Some characteristics are of notable importance for the future:

1. Emphasis on human behavior
2. Measurement and management methods
3. New mental model
4. Knowledge versus rules
5. Business boundaries
6. Functional boundaries
7. Technology driiven media

It is evident that change is difficult even in the simplest situation. People are attuned to what exists. Change requires that neural pathways in the brain go through a chemical, almost physical, re-structuring. Changing a whole profession is orders of magnitude more difficult than individual change because:

1. Of the number of people involved
2. Of the vested interests of the individuals involved
3. Of institutional inertia

In any event, there are many examples of institutions that have changed or become redundant in history. Inevitably, change occurs as the old ways become redundant and alternative, more attractive solutions arrive. The more attractive solutions are sensitive to the speed of change in the new economy. Society is provided with great visibility on future prospects by telecommunications and computing technologies, leaving historical results to languish as yesterday’s news. Hence, accounting is perceived to be less important than in the past. The new emphasis is on potential and innovation.

Emphasis on human behavior

The industrial revolution treated human beings as an extension of machines. Factories were filled with people who labored long hours, doing highly repetitive jobs in order to enrich owners. Suppression of the human factor of production was a prerequisite to success.

In the new age of communications and computing, we live in the world described by Marshall Macluan, a "global village" where the "medium is the massage". Indeed, the media and new methods we employ increasingly redefine our world. The essence of the Internet is organic, where every person has a voice with which they can communicate to anyone in the world. Education has raised expectations, as well as the degree of sophistication of people in general. Stock markets, electronic trading, pension plans and mutual funds have broadened ownership to the masses. People choose their own solution, while centrist command and control of the unwashed masses for the benefit of few is a thing of the past. That is, if the Internet and computing powers are to survive in a way that benefits the population at large. The new era fosters individualism. It will be interesting to see if our western democratic social structures will survive, or if we will see a marked shift between the have and have-not classes.

Given the changed expectations and degree of wealth provided by the new capabilities of communications and computing, our cost management methodologies must facilitate human behavior in an environment where individualism is respected.

Finally, the only reason to measure anything is to influence human behavior. Therefore, all measurement systems must be designed with the single intent of driving organizational performance to achieve a desired future state. This requires that those responsible for designing cost management and measurement systems must to be educated in the principles of human behavior.

Measurement and management methods

As technology advances, so do the things that we can accomplish with the use of technology. Methods have been defined in the past by the limitations of our knowledge. Initially, cost and management methods were subordinated to the needs of accounting, in order to provide a fair and balanced perspective of the earnings and value balance sheets. However, all of that is changed. Accounting and auditing practices, while still important, are perceived more correctly as scorekeeping, whose purpose is to report on what transpired. Cost management in the context of accounting is retrospective.

In the past, retrospective reporting was "the" important source of information on company performance. Companies were valued on the basis of some multiple of earnings per share, based, on reported earnings. But not anymore. Projections of future cashflow, discounted by the cost of capital have replaced earnings as the method of choice for determining company valuation. Stock market values are influenced by perceptions of whether managers and business prospects are likely to create additional value beyond returning at least the cost of capital employed, and premium prices are awarded to those companies that succeed.

Hence, the emphasis shifts from accounting to planning and executing. Vital interest focuses on the prospective view, rather than the retrospective. Accounting information methods remain important, in order to ensure that organizations are run properly and that discipline is maintained, but our energy is focused on creating value. To do so, our measurement systems will emphasize "value drivers" and analysis of actions that can be taken to increase value. In this context, cost accounting becomes a minor interest, while understanding and managing cost becomes the major issue. Operating profit margin is a very powerful driver of value. Financial specialists, who are responsible for managing all aspects of performance, must also understand other value drivers.

Methods to manage and project value are, therefore, central to the role of organization performance going forward. It seems to this author that the notion of cost management is too functional, relative to historical methods. A more meaningful perspective is that of value management, where understanding and managing all aspects of value creation and value drivers is critical. Value based management (VBM) is the super system of measurement and management, within which cost management is subordinate.

The methods to deploy VBM are very familiar. The trick is to construct them in the right way and to identify the linkages between them. These mechanisms or tools are interesting by themselves, and provide useful outcomes, but in combination with each other, create a natural and powerful structure. The structure also involves a series of decision support software tools, such as web-based information distribution and simulation modeling, in order to facilitate development of the measures, track performance and distribute performance results to managers, whose job it is to manage performance. The analytical tools involve:

• analysis of stakeholder needs and strategy
• risk management
• organization goals - analysis of critical success factors, critical business issues
• analysis of activities
• analysis of processes
• development of measures and collection of current performance
• identification of internal and external benchmark comparisons
• measures development
• simulation modeling of alternate choices / cost benefit analysis
• activity costing and assignment:

a) to processes

b) to cost objects

• analysis of roles and responsibilities of people, with respect to activities they perform within each process
• job definition and organization design
• activity and process-based budgeting
• change management
• information "portals" or web-based distribution of performance data

New mental model

If what has been discussed so far is correct, then we must examine the overall frameworks that are employed by people in their efforts to create value. It is evident that different people have different perspectives, based on assumptions they have made either personally or that are embedded in what they were taught. Law, for example, represents a patina of rules and interpretations that have been made up over years, premised on interpretation of social conscience and shaped by personal bias and intellect. So, too, are business methods used by all functions. Accountants have them, quality specialists have theirs and information technology specialists have theirs, also. Rarely does anyone have the perspective of more than one functional view, however.

The challenge for managers is to operate within this tangle of different perspectives and to develop a more robust and multi faceted model, in which all of the components interact in a logical and designed fashion. Value management (or enhanced cost management) should address the opportunity of integrating all of the pieces into a logical framework, a single multi-functional mental model.

Such a model will require people to examine their existing assumptions and beliefs in a new way. They will need to drop some models and adopt new ones. For example, accountants should re-examine the GAAP model of "fair allocation of overheads to products" in cost accounting. It must be replaced with something far more demanding if accounting is to address the value management needs of service organizations and modern manufacturing. The concept is both archaic and distracts people from reality. Because of the authority of the accounting profession, the concept is perceived to be a fundamental truth, which it is not. It is therefore damaging. In quality management, the base model of standards and conformance must be revised to reflect the vast array of variances that occur in almost every human endeavor, because in the Age of Individuality, it is the differences that define opportunity not the similarities! Indeed, in cost accounting, the concept of standard costing should be reviewed, because it is woefully inadequate in the new environment.

Knowledge versus rules

With the growth of knowledge and the speed at which things change in the new environment, value management specialists (aka enhanced cost management specialists) need to learn to be flexible and open to new concepts. In the past, we have trained cost management specialists how to function within the context of a set of rules (GAAP, Tax, the law, other regulatory devices), and their primary mode of operating has been to apply the rules for the purpose of compliance.

In the new environment, the primary goal of the value management specialist must be to create value. This means that they need to keep on top of many aspects of the world and its changing perspectives. The application of knowledge to create value must be more important than the slavish adherence to "the rules". Legal compliance is necessary, but must not be treated with apathy. Knowledge of the rules is important in order to ensure they are challenged as is appropriate.

Functional boundaries

Within organizations, human performance is enhanced by specialization. Consequently, we organize our people into functional groups such as Finance or Marketing. Functions are defined by capability, language and concepts. The differences between functions are highlighted by huge mental and methodological chasms. Sometimes it seems that departments are fighting each other. Often the problem is more profound, and is due to the lack of an integrating framework and common language.

The people in highly competitive organizations must have accord and focus on common objectives. People must understand how their activities and outputs contribute to the performance of the organization in total. They must also understand how they contribute to performance of consequent steps in the process, regardless of which departments or functions in which they occur.

Value management specialists can contribute to organization performance by using tools, such as process analysis, to create understanding of cross-functional relationships. This approach will be used to define language, measures, expectations of performance and to identify and eliminate disconnects (root causes or cost drivers).

Business boundaries

Boundaries between corporations or government bodies are huge, much greater than those between functions within organizations. Relationships between organizations are defined by roles and responsibilities. Where organizations act as suppliers or customers of each other, they have a vested interest in the performance of each other, even though they have separate P&L’s. For the purpose of driving value, it is to the advantage of organizations to drive efficient interactions between them.

As in the case of functional boundaries, value management specialists can contribute by understanding supply chain relationships and using process analysis and contractual methods to define language, measures and expectations of performance to identify and eliminate disconnects (root causes or cost drivers).

Technology driven media

Finally, back to Marshall Macluan. People behave as they are measured. In the new environment, we are using sophisticated methods with access to vast sources of knowledge. It becomes more critical than ever to establish a common vision, with a consistent understanding of expectations and goals. Individualism will drive people to maximize their own satisfaction, unless mechanisms exist to focus them.

Television has provided a hugely successful mechanism to convey images of desirable concepts, such as wealth, products, and situations. Everywhere in the world we see MacDonald’s restaurants serving up American hamburgers, because television has broadcast the image of this highly successful food chain, using advertising and promotional images, artfully focused on children. Until recently, we have not a possessed an organization communications mechanism with as much power as television. Now, a new information portal exists, which is powered by internet technologies.

Information portals offer organizations a communications vehicle that will provide a ubiquitous interface of the same ilk as television. Information portals can be used to convey consistent images to employees and, at the same time, permit personalization of information. The power of information portals lies within its ability to focus people on what is expected of them and how they are performing.

Value management specialists have the opportunity to influence human behavior with the organizations they serve, by driving the design and deployment of information portals for their organization.

Conclusion

Society and industry are ready for a new style of professional. The new profession framework must deal with measurement and management in a holistic sense. Emphasis should be placed on human performance, driven by measurement techniques grounded in financial performance and empowered by computing and communications technologies.