Sunday, September 1, 2013

Cost Accountant: Gap analysis Identification of strategic initiatives

Gap analysis to achieve targets is often a key aspects of the  Balance score card focuses on gap analysis since that helps to develop the whether current initiatives will help achieve these ambitious targets, or whether new initiatives are required. This is one of the key area where cost accountants needs to focus since laying the new strategies would be fruitful only when proper gap analysis has been done. While deriving the new strategies one needs to keep in mind that what previous strategies have been taken for previous achievement of targets etc. This will help the current scenario planners to design a healthy strategy for achievement of new stretched targets.

Well this is in continuation to the previous article. Efficient gap analysis would help an cost accountant to derive the right strategy for an organization. Organizations already have total quality management, time-based competition, employee empowerment, and re-engineering in place but they fail to align them towards target achievements. Moreover these systems lead inner competition within the various departments which leads to scarcity of resources and half achievements of targets. This is the place where balance score card comes into play and cost accountant develops the strategy which focuses n achieving the organizational objectives, measures, and targets. Gap analysis is a type of measurement so that one can manage it. The missing measures indicated that managers were not currently able to manage several critical processes, now considered essential for strategic success.

For example the current customer support system might not be sufficient enough to achieve the stretched targets over the next 3 to 5 years. If a continuous improvement approach is adopted, a rate-of-improvement metric should be used to track whether near-term efforts are on the right trajectory to achieve the ambitious long-term target. The 3rd level of financial and organizational engineering is identification of strategic initiatives to achieve the targets. After a efficient gap analysis is being done its time to identify the strategic initiatives. While designing the strategic initiatives cost accountant needs to develop the score card. Score card would help to measure the long term stretched gap analysis. The scorecard approach provides the front-end justification and focus for organizational re-engineering and transformation. The score card helps to avoid the death trap of traditional cost cutting measure analysis. The targets for the strategic initiative can be dramatic time reductions in order fulfillment cycles, shorter time to-market in product development processes, and enhanced employee capabilities. 

These possible since the balance score card metrics have been implemented and the score card reflects the real results aligning with the long term stretched targets to be achieved. When the power of the scorecard is used to drive re-engineering and transformation programs, the organization can focus on the issues that create growth, not just those that reduce costs and increase efficiency. One of the biggest benefits goes to the investments decision and the successful outcomes from such investment projects from the score card numbers. priorities. The justification for most capital investments remains tied to narrow financial measures, such as payback and discounted cash flow and these financial metrics are not necessarily linked to developing strategic capabilities, or even tactical improvements in non-financial variables, such as quality, customer satisfaction, and organizational and employee skills. NPV and IRR gets a real effect after implementing the score card metrics. I find in my research that organizations do not, in practice, link their investments to long-term strategic priorities.

Balance score card can be used to identify the feasibility aspect of choosing investment projects A relative weighting can be placed to the measures of giving significant emphasis to financial measures, such as return-on-capital and profitability, but also to the drivers of future financial performance, such as quality, service, and customer retention. Individual investments are ranked on their overall impact on the scorecard formula. The top-ranked investments that fit within the available capital budget are selected.

For example  a company decides for strategic objectives which would be linked  to programs which must be initiated, having each focused on a different but related factor. A traditional capital budgeting approach would evaluate each program independently where as balance score card approach links several factors together. Many might be considered discretionary expense programs that would require funding from current year operating budgets, not from a budget dedicated to achieving long-term strategic objectives. 

Managers, operating under a traditional evaluation process, would be unlikely to see the cumulative impact from investing in the entire package of linked initiatives, and, indeed, many of the individual programs would fail in the operating and capital budgeting review process. first part of the planning process, all capital budgeting and discretionary expense programs were identified. Only those that supported a strategic initiative were approved. This leads to more focus on the principles of balance score card. This also leads to identification of gaps which further leads to funding of several small initiatives for the broader scenario. Cost Accountants have to figure out these factors while deriving which project to be funded.


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