The Cost War: Why Is Financial Management Like Combat?

Cost management and combat have a number of similarities. First both represent a struggle to achieve a mission. All organizations exist and are funded for a purpose: a mission. Second both strive to accomplish that mission in an environment of constrained resources. There are never enough resources. Creative, intelligent people can always think of useful ways to use more resources in the accomplishment of their missions.

Do combat commanders think about cost?

Of course they do. They are extremely focused on potential casualties whenever planning operations. Strategic war gaming is often used to evaluate the costs/casualties of various options and various enemy responses. This process allows commanders to plan the most cost efficient battle plans from the myriad of possible alternatives. (This is a cost/benefit aid to decision that we will talk about later.)

However, once a battle is joined the enemy gets a vote and can do unexpected things. Weather and other uncontrollable forces can intervene. The process must be managed continuously by the combat leader. Personnel must be trained in their jobs and the most competent put is positions of greatest responsibility. An effective system of hierarchy must be established as the most senior commander cannot possibly make all decisions.

How do combat commanders manage the battle?

Imagine a combat commander planning a battle, allocating troops and equipment and then ignoring the battle for a long time (think annual budget process) as long as cost/casualties do not exceed the initial projection (think budget management goal). This would be unacceptable. Commanders must engage the hierarchy continuously in order to assure that effective responses are made at all levels to changing conditions. Their organizations use a command and control process that asks three key questions:

1. What was expected to happen?

2. What actually happened?

3. What explains the difference?

This is an after action review. These three questions are designed to learn “ground truth,” encourage a constructive, non-critical, evaluation of the situation, and develop logical responses that further mission objectives. This is an extremely valuable process that we will further develop in future postings.

The process is distinctly different from the cost benefit process that occurred when war gaming strategic alternatives. That was a decision support process. This is an ongoing management process.

What is the Role for Accounting in Combat?

Accounting has a critical role in combat and it is called “intelligence” and G2 is the military slang for the intelligence branch. Not all accounting is useful in cost management and not all intelligence is useful in battlefield management. A company’s annual report has little relevance or value to the foreman on a manufacturing line and a government department’s annual budget is likewise irrelevant to most daily financial decisions occurring within the organization.

The form of accounting useful in financial management is “managerial costing.” Like battlefield intelligence managerial costing must inform leaders on the information relevant to their needs. (We will be providing significant blogs on the development of effective managerial costing.) Senior officers in the military are training in their role in developing the intelligence. In fact it is referred to as IPB: Intelligence Preparation of the Battlefield.

The IPB process drives combat leaders to consider what is essential to their mission. It is simple impossible to know everything, everywhere, at all times and, moreover, there are always constraints on intelligence resources. Leaders are taught that it is their role to determine the EEI: the Essential Element of Intelligence.

Why Bother?

Perfection is seldom cost possible and even less likely cost effective. Improvement, however, is almost always possible. Management is fundamentally about making the best of what you have. It is simply smart to manage the resources available for the best possible benefit. It may even be your job to do so. Why not use the techniques described here to improve your or your organization’s welfare?