Motorola's financial closings: 12 "nonevents" a year.
After the audience of mostly CPAs absorbed the statement, Johnson added matter-of-factly that within a few months most of the operating sectors would be doing the job in one and a half days, with a few even getting the work done in a single day. And as if that weren't enough, he told the financial managers, who were there to learn Motorola's re-engineering secrets, that the final financial reports were nearly error free.
How does Motorola do it?
"Our secret," explains Johnson, "is that there are no secrets. No tricks. No complex companywide management strategy. In short, no silver bullets. Instead, we look for hundreds of 1% improvements. It's the old-fashioned way: an awful lot of hard work."
By streamlining the closings and through other re-engineering improvements, Motorola is able to save a substantial amount of money. For a perspective oil the savings, consider the history of its efforts.
In 1987 Motorola was spending 2.4% of total revenue to operate its many financial departments. That year monthly financial closings took eight tortuous working days - leaving little, if any, time for analysis. A good part of those eight days was spent finding and correcting sizable errors.
That same year the company won the prestigious Malcolm Baldrige National Quality Award for corporate excellence, and management decided that although it certainly was doing some things right, maybe it could do even more. It believed its companywide quality standards could be higher. Likewise, the financial department felt its financial reporting cycle time could be faster and the results more reliable.
In mulling over how to address this goal, Motorola's top management figured if production costs for payroll, payables and receivables were cut by 20% to 30%, which didn't seem unreasonable, it could save as much as $35 million a year.
Listing goals is easy; accomplishing them is something else. Could the corporate culture withstand a massive re-engineering, which in a typical company would be planned and enforced from the top down? As one Motorola executive put it: "We have an entrepreneurial corporate setup that can best be described as a loose conglomeration of warring tribes. It may not work for others but it works well for us."
Recognizing that, management decided against imposing top-down solutions. Instead, it allowed the natural competition between the business sectors to work its magic. The logic is simple: No one wants to be on the bottom. So the manager at the bottom calls the manager at the top and asks for advice. Likewise, managers are encouraged to look at other companies with "best practices" and to adapt any world-class ideas that seem compatible with their operations.
"IT CAN'T BE DONE"
The immediate goal was to get people to stop saying, "No, it can't be done." Instead, they were inspired to look for ways to change what they were doing - not for the sake of change, but to improve it.
Each department was encouraged to look at its own functions and figure out how to do them better. No one was told how to do the job; all they were told was to get it done. For example, the corporate finance department didn't dictate what kind of accounting software to use. All that was required was that the data sent by the sectors (that's Motorola's term for an operating business unit) to corporate be compatible with the headquarter's system.
Once a hands-off management style, with a heavy dose of competition and oversight, was instituted, the goal was to figure out how this would affect the financial department. What could the department improve? Speeding up closings was easy to measure. But what about all the steps that went into improving the process?
"Errors became the clear target," says Johnson. The time spent finding and correcting errors was a major factor in slowing not just the closing but much of the work of the financial departments, which included internal audits. He figured the worst way to tackle errors was to wait until the closing, ferret them out and correct them. Instead, he wanted either to eliminate them at the source or to make
Before they could begin, some groundwork was necessary: They had to count the mistakes and determine their sources. "We decided to count errors entered into the general ledger. To do that we needed a definition of an error: a wrong digit, a whole input, an account number? Only then could we count them and determine what was being done wrong and what could be improved."
The corporate finance managers spent a lot of time on the definition before they finally realized they just had to settle on a workable one and start the meaningful tasks. They agreed that if one wasn't working, they'd change it.
The next step was to quantify the improvements the company was seeking. Not only did each financial department have to count its errors, it also had to set a measurable goal for improvement. That's when someone with a statistical background suggested the idea for 6 sigma.
THE BIRTH OF 6 SIGMA
In mathematical jargon, the term 6 sigma indicates that a statistical sampling in an enhanced standard deviation is at its best. In other words, from a statistical standpoint, a 6 sigma sample is essentially free of errors - or, from a mathematician's point of view, no more than 3.4 errors per million opportunities. (When Motorola started counting errors companywide, it was recording about 10,000 a month out of about 700,000 opportunities.) The goal for the company, not just the finance department, was to achieve 6 sigma for its products and services.
Initially, many of the sector's financial managers resisted counting errors, figuring it was a waste of time. But the corporate finance managers thought otherwise. "Unless we can count errors, we can't fix them," was the oft-repeated refrain.
Where is Motorola's finance department now? "We're at about 5 sigma, or 1,000 errors per 2 million to 3 million, and constantly improving," says Johnson. In one recent month the department set a record: only three errors in a closing.
Today, Motorola's cost to operate its corporatewide finance activity has tumbled from 2.4% of annual revenue in 1987 to 1%.
SPEEDY ANNUAL REPORT
Aside from saving money, these enhancements have benefited Motorola in other ways. Financial closings typically are high-anxiety times at most companies, and Motorola was no exception. Now, with closings speeded up and errors reduced, not only is there less anxiety, but the financial managers have time to focus on more important duties: analyzing trends and using that information to advise operating management.
Aside from saving money and reducing anxiety, what are the benefits of such fast closings? As a public company, it's to Motorola's advantage to get data to the marketplace as quickly as possible. In addition, operating managers use this information to determine the pace of ordering raw materials, assess excess inventory and make decisions that affect production and marketing.
Says Johnson: "We're not yet at 6 sigma - but we're getting there."
He replies, "One percent improvement at a time."
To Share or Not to Share?
Smart companies, according to today's conventional wisdom, should be eliminating redundant service operations and striving for shared services. But Motorola doesn't agree. Most of its worldwide sectors staff their own financial service departments.
Does it work? As this article shows, it seems to work very well.
Kenneth J. Johnson explains, "The shared service idea may work in some companies, but we found it's not for us. We're able to produce best-in-class results even though we maintain some redundant systems."
That's not to say Motorola rejects the concept out-of-hand. Adds Johnson: "We have some shared services in a few locations. But I believe that cost savings from shared services is vastly overrated. If you have common businesses, it may work, but if you have five different businesses with five different kinds of customers, it's hard to believe you'll see significant savings."
Johnson's advice: Resist jumping on the bandwagon of voguish management theories. Check first to be sure they fit your business and management style.
* MOTOROLA SPENDS only two days each month closing its financial books - despite the fact that the $22 billion company has six operating sectors, each containing multiple divisions scattered over 30 nations and each generating hundreds of profit and loss statements by product and as many as 40 balance sheets. In a few months the company believes it will be able to do the job in one and a half days.
* AS A BYPRODUCT, the final financial reports contain nearly no errors.
* WHAT'S MOTOROLA'S SECRET? There are no secrets and no silver bullets. It's done the old-fashioned way: an awful lot of hard work.
* THE COMPANY FIGURED if it could cut production costs of payroll, payables and receivables by 20% to 30%, it could save as much as $35 million a year. But the managers wondered whether such re-engineering would upset the smoothly functioning corporate culture - best described as entrepreneurial and a loose conglomeration of warring tribes.
* MANAGEMENT DECIDED AGAINST imposing top-down solutions. Instead, it allowed the natural competition between the business sectors to work its magic.
* AS A RESULT, MOTOROLA'S finance department costs fell from 2.4% of annual revenue to about 1% - a savings of millions of dollars a year.
The Low-Tech 1% Solution
How does Motorola improve the efficiency of its financial department?
"We use the 1% solution: hundreds of 1% improvements," says Kenneth Johnson.
When pressed to explain the process Motorola's financial managers use to identify their 1% improvements, Johnson smiles broadly and says the secret is low-tech yellow Post-it notes.
"We examine a process (performed in the accounting area). Each step is listed on a yellow Post-it and the paper is stuck up on the wall. When we've flow-charted the entire operation, with maybe a hundred Post-its on the wall, we ask, "Why is that step there? And why is that step here?' If no one can answer the question adequately, we remove the note. Each time we pull one down, it's like finding gold - less work, fewer steps. It may not be very sophisticated - but it works."
How much does Motorola invest in such cost-saving ventures? Johnson smiles again: "Nil." Then he adds, "That's not counting the cost of yellow Post-its."
For specific steps, we turned to Stephen Monaco, a vice-president and controller of Motorola's land mobile product sector.
For example, he explains, for years Motorola's nonexempt employees filled out time cards, which had to be keypunched into the accounting system's payroll system. Such a practice was not only time consuming, it was error prone. By eliminating the paper cards and having staffers enter their own data directly into computers (supervisors checked on overtime entries), the entire keypunching cycle was eliminated. The bottom line: The payroll function was trimmed by two full days.
Billing was another area Motorola streamlined. It recently introduced barcoding for all shipments from vendors - virtually the only paper in the transaction is the initial purchase order, which can be eliminated if the vendor is connected via computer. When a shipment arrives at Motorola, the merchandise is recorded by "wanding it" - scanning it with a barcode reader (similar to the devices at supermarket checkout counters - see "Barcoding: Reading Between the Lines," JofA, Aug.94, page 59). The signal triggers payment approval based on the price established in the original purchase order. In many cases, payment is not made by paper check, but by electronic funds transfer - another substantial savings.
Monaco says Motorola has saved a lot by re-engineering its travel and entertainment process. Until recently, reimbursements were made monthly after employees filed detailed expense reports. Now, employees are issued corporate Visa cards sponsored by the company's credit union. In addition, rather than issue separate reimbursements checks, the company direct-deposits funds into the employees' accounts.
For Still More
Management accountants who want to learn more about Motorola's streamlined financial closing and re-engineered auditing efforts can attend one of its half-day briefing sessions at its headquarters in Schaumburg, Illinois.
The briefings are scheduled every quarter and are very informal: shirtsleeves, nicknames and plenty of time to ask questions. A $100 fee is charged.
STANLEY ZAROWIN is a senior editor on the Journal. Mr. Zarowin is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
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|Publication:||Journal of Accountancy|
|Date:||Nov 1, 1995|
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