Are Your Firm's Financial Reports Like the Federal Government's?

Here's a thought experiment:  If you believe the cover story in the current issue of Business Week, the torrent of numbers coming out of the federal government measuring, sizing, and describing nearly every facet of the US economy are in many ways obsolete.  What if the numbers coming out of your finance department to describe your firm's performance suffer from the same problem?

Here's the issue in a nutshell:

"The statistical wizards at the Bureau of Economic Analysis in Washington can whip up a spreadsheet showing how much the railroads spend on furniture ($39 million in 2004, to be exact). But they have no way of tracking the billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today's global economy. That means that the resources put into creating such world-beating innovations as the anticancer drug Avastin, inhaled insulin, Starbuck's, exchange-traded funds, and yes, even the iPod, don't show up in the official numbers."

The "statistic set" the federal government tracks and publishes was essentially created in the 1930's and '40's when—surprise—the economy's composition bore little resemblance to today's.  Buildings, machines, and inventory were counted as investments in the future, but training, education, and R&D were all viewed as current expenses. 

Business Week performs the useful calculation of comparing the growth in R&D spending and capital spending since 2000 of the 10 biggest US companies:  +$1-billion (2%) in capital spending, +$11-billion (42%) in R&D.  But 11/12ths of that investment doesn't appear in BEA statistics.

Now to your firm:  Ask your CFO where on the balance sheet the expenditures for the following items appear (and while you're at it, ask if they're current cash expenses on the income statement, dollar-for-dollar subtractions from profit, or if they're capitalized as investments with an expected non-negative return):

• knowledge management systems, and the care and feeding thereof;
• associate development and training;
• executive coaching for partners in business development or other skills;
• client relationship management systems, and their support;
• the cost of developing new or enhanced practice specialties.

You get the point.  Those things are all critical, indispensable ingredients if you care about the future health of your firm, and yet the accounting department will list them as pure cost or, at best, as billable-hours-foregone. Yet what factors are more "real" than those to assessing the level of your firm's commitment to next year and beyond?

In December, Intel announced it would be building a new wafer-fab plant in Israel.  To cost accountants, the value of that foreign investment will be its book value—the cost of erecting and fitting out the building.  But imagine on opening day the plant could be turned over to trained and experienced Intel workers, or to an equal number of Israeli's picked randomly off the street (OK, go with an equal number of works from AMD or Texas Instruments).  Which team would actually make the plant productive?

Indeed, every time Intel launches a new fab facility, it relies on a program it calls Copy Exactly! which requires the new fab to be an absolute duplicate of an existing one that works well, down to what color the ventilation ducts are painted and what wattage the lightbulbs are.  Moreover, the workers-to-be at the new fab are put through a minimum of six months immersive training in Oregon, to pick up "tribal knowledge" about how Intel operates.  Not captured in the financial statements.

So next time you pick up your firm's financials, imagine that it's the 21st Century, not the Great Depression.  And if you believe that "you can't manage what you can't measure," how would you measure, and manage, differently?