Beware "accounting logic"

Strategy and strategic thinking is about the future, not the past. What is likely to happen, how the environment will look, what we need to be aware of and therefore what decisions should we be making. It is frequently written that we are in a period of fast paced change and we need to be able to lead and plan in a complex environment under conditions of uncertainty. Therefore, the future is unlikely to be an extrapolation of the past so we need to ensure our thinking isn't dominated by projections based on the past.

In my travels as a manager and as a consultant I have often come up against a phenomena which I have labelled 'accounting logic', the use of primarily historical financial information as the basis for decision making. I have nothing personal against accounting and accountants but they have managed to obtain a place in the business world many grades above their ability. I use the analogy of a tennis match - accountants are the umpire and line judges - not the players. If you want to play better tennis, you would surely get advice from the players not the umpires.

Hello, World!

Your staff are the people you need to listen to, not your accountants, if you want to understand what's happening and what's changing. Some accountants charge hundreds of dollars an hour to provide advice they are simply not competent to provide. If you are getting strategy advice from your accountant, you may as well get your legal advice from them as well! 

Accounting logic creates a number of problems including organisation and managerial inertia. If the financial numbers are okay then we don't need to change our strategy course despite what new information about the environment is known.  Management becomes wedded to the success of the past, falls asleep at the wheel and misses the turn off to the future.  The following picture sums up the logic of relying on the past!

accounting logic.png

History is littered with examples of company's failing to see past their success. One of the most famous being IBM's reluctance to embrace PCs as the mainframe market was just so lucrative. More recently, video rental stores and CD manufactures are soon to be extinct no matter how strong their past cash-flow and what will the arrival of Amazon in Australia and New Zealand mean?

The key point is you can't rely on financial information to paint the future. It simply tells you what has happened. If you rely on 'accounting logic' (and accountants) when making decisions, well you're OK so far..............