The next problem with overhead cost allocations is that excessively broad- brush average cost rates are applied to calculate costs. Worse yet, the cost allocations usually rely on a sales-related, volume-based factor or basis, such as direct labor hours or department expenses. It may be an inputs-used or outputs-produced basis measure, but the basis usually will not accurately measure the segments of the total. This flawed basis for allocating costs rarely reflects the specific cause-and-effect relationship between the indirect overhead expense and the work output, part, product, service, channel, or customer (i.e., the cost object) that is actually consuming the cost. Many managers are tired of “allocation foodfights.”

The result of inaccurate cost allocations, because allocating is a zero-sum error game, is that some cost objects are over-costed while the remainder are under-costed. In other words, as a consequence of unquestioned formula cost allocations, traditional financial accounting can grotesquely distort the true cost of products and service lines, which in turn can wildly distort their individual profit margins. Some refer to traditional cost allocation methods as “spreaders.”

The ABC/M logical assignment of expenses and costs obliterates the use of simple averages as the basis for tracing costs. In practice, one discovers that the under-costed products are substantially under-costed because these products may be low-volume with small lot sizes, require more technical attention, consume more handling, or need extra inspection. ABC/M removes the distortions from simplistic cost allocations. An allocation-free cost system is like a smoke-free environment: no pollution. In short, don’t allocate, prorate. In the end, ABC/M is like bringing in the “myth grenades” that blow up the old flawed beliefs and replace them with real facts.

In some cases, the idea may even lead to tremendous value. However, there is generally a huge amount of transformation between the idea generated in an event and its realization. At a more sophisticated level, innovation is more than an event and becomes part of a process. That is, the organization has a structure in place to define problems, generate and evaluate ideas, and develop action plans to implement those ideas. The result is a realistic, deliverable solution based on an organizational problem. However, the problem with both of these is that innovation is reactionary and discrete. It only occurs when someone decides it is time to innovate.

Innovation as a capability, however, creates exponential value. In the innovation-as-capability world, people innovate not only to solve the problems that are presented to them, but in everything they do. They continuously or even radically improve their products, processes, and organization. Innovation as a capability is comprised of the five components that make up all capabilities:

Strategy and Customers. A strategy is needed to decide when, where, and how innovation will be used within the organization. Some companies use innovation when in crisis mode only. “We have a major customer who is threatening to leave us if we cannot get him his shipment today. What are we going to do?” Of course this level of reactive innovation does little to differentiate a company from the competition, and just delays the sinking of the ship. Innovation must be pervasive and perpetual: everyone, everywhere, all of the time. Innovation must be seen as the key currency within the company.

Measures and Performance. Innovation, as with any capability, needs to be measurable. But what is being measured? Should innovation be measured in a negative way, such as scapegoating for failure to solve a complex problem? Or should innovation be a core measure, one which determines career progression and compensation for everyone in the company? What kind of measures are used? Are they focused on business outcomes and results?

Process. Is innovation random and subject to divine intervention, or is there a standard model used for targeting, generating, and selecting innovative ideas? Is divergent thinking encouraged before converging on best ideas? Is the physical environment stale, businesslike, and siloed, or is it conducive to innovative thinking and collaboration?

People. Is the culture one of “praying that it will work,” or is it one that values innovation and deems it necessary for success? Is innovation viewed skeptically as “phony-creative,” or is innovation done without thinking about it? Is innovation led by the “last one to step back,” or is everyone accountable? Are innovation skills regarded as being the property of a select few who show curiosity, or are innovation skills valued above all others within the organization?

Technology. Are groupware tools used to help enable collaboration among employees, customers, and suppliers? Are decisions made based on gut feel, or are they supported by real data? Are ideas lost in the ether of the organization, or are they maintained in idea banks to facilitate the capture and dissemination of innovative thinking?

At issue are three very critical problems:

• Eroding passenger safety. Airline-owned and FAA certificated contract repair stations must adhere to specific standards. For foreign FAA-certificated repair facilities, however, critical exceptions are made in personnel and security standards such as background checks, workshift time limitations, and alcohol and drug testing.

• Home land security risk. With respect to background checks, drug and alcohol testing, and access to aircraft, there is one standard for airline-owned maintenance facilities and FAA certificated repair stations in the United States but none for foreign repair stations.

• Dwindling skilled work force. Cost-cutting pressures on the industry and government regulation related to aircraft maintenance outsourcing are decimating a vital national infrastructure: highly skilled aircraft and avionics technicians. Once it is so reduced, this missioncritical work force will be virtually impossible to rebuild.

At Stake

As such, our aviation system is vulnerable to accidents and incidents, delays and cancellations and potential attacks. Consequences could be billions of dollars in negative U.S. economic impact, drug smuggling, and pollution from flying empty aircraft to and from foreign repair stations.

The root of the problem: an outdated FAA model for oversight of outsourced maintenance, a dysfunctional FAA culture and a counterproductive budgeting approach.

The Department of Transportation’s Inspector General has documented these problems and Congress has held numerous hearings. Yet, a sense of urgency is missing at the regulatory level proportionate to the growing risk to passengers, citizens and the U.S. economy, should terrorists exploit our increasing vulnerability.

Action Plan

Legislative reforms now are needed based upon the following five principles.

1. A single, high regulatory standard should govern the operations of airlineowned maintenance facilities and U.S. and foreign outsourced repair facilities.

2. FAA inspector oversight of both domestic and foreign repair facilities should be increased to a level commensurate with the volume and complexity of current outsourcing practices.

3. Airlines that choose to outsource to foreign repair facilities should assume the fully burdened costs of FAA inspections and audits.

4. Both U.S. and foreign repair facilities should have adequate safeguards regarding personnel background checks and access to aircraft and parts inventories to prevent terrorists from exploiting an opportunity to harm the U.S. or other countries.

5. Airlines that outsource to foreign repair facilities should hold these facilities to high environmental standards with respect to disposal of toxic wastes and other processes.

To press Congress on these issues, the Business Travel Coalition and the International Brotherhood of Teamsters have joined forces to form the Coalition to Legislate Aircraft Maintenance Outsourcing Reform, or CLAMOR. Clearly, it’s time to make some noise.

Source: T&E 2008 06

In their paper, entitled Acting Globally but Thinking Locally? The Influence of Local Communities on Organizations, they try to redirect theoretical and empirical attention back to understanding the determinants and importance of local influences. They review classical and contemporary research from organizational theory, sociology and economics that have focused on geographic influences on organizations–adapting Scott’s influential three pillars model, including regulative, social-normative and cultural-cognitive features to conceptualize an overarching model of how communities influence organizations.

Their approach thus runs counter to the idea that globalization is a homogeneity-producing process and the view that society is moving from particularism to universalism. With globalization, not only has the local remained important, but in many ways local particularities have become more visible and salient, and so understanding these dynamics will be helpful for researchers addressing institutional isomorphism and change.

The scorecard allowed companies to track financial results while monitoring progress in building the capabilities needed for growth. The tool was not intended to be a replacement for financial measures but rather a complement – and that’s just how most companies treated it.

Some companies went a step further, however, and discovered the scorecard’s value as the cornerstone of a new strategic management system. In their article from 1996, the authors describe how the balanced scorecard can address a serious deficiency in traditional management systems: the inability to link a company’s long-term strategy with its short-term financial goals.

The scorecard lets managers introduce four new processes that help companies make that important link.

The first process – translating the vision – helps managers build a consensus concerning a company’s strategy and express it in terms that can guide action at the local level.

The second – communicating and linking – calls for communicating a strategy at all levels of the organization and linking it with unit and individual goals.

The third – business planning – enables companies to integrate their business plans with their financial plans.

The fourth – feedback and learning – gives companies the capacity for strategic learning, which consists of gathering feedback, testing the hypotheses on which a strategy is based, and
making necessary adjustments.

Source: Harvard Business Review July–August 2007

In his article, Saffo demythologizes the forecasting process to help executives become sophisticated and participative consumers of forecasts, rather than passive absorbers. He illustrates how to use forecasts to at once broaden understanding of possibilities and narrow the decision space within which one must exercise intuition.

The events of 9/11, for example, were a much bigger surprise than they should have been. After all, airliners flown into monuments were the stuff of Tom Clancy novels in the 1990s, and everyone knew that terrorists had a very personal antipathy toward the World Trade Center.

So why was 9/11 such a surprise? What can executives do to avoid being blindsided by other such wild cards, be they radical shifts in markets or the seemingly sudden emergence of disruptive technologies?

In describing what forecasters are trying to achieve, Saffo outlines six simple, commonsense rules that smart managers should observe as they embark on a voyage of discovery with professional forecasters.

Map a cone of uncertainty, he advises, look for the S curve, embrace the things that don’t fit, hold strong opinions weakly, look back twice as far as you look forward, and know when not to make a forecast.

Source: Harvard Business Review July–August 2007