THE BEHAVIOURAL ASPECTS OF

COST MANAGEMENT
 WHAT IS COST MANAGEMENT?

Central record of all predicted expenses.

Prediction of Future expenses and costs.

Control and manage costs related to a project.

Proper corrective actions can be taken.

HISTORY OF COST MANAGEMENT
❑ 1800s – 1900s : Standard Costing
Taylor’s scientific management was the foundation of Standard Costing Model
❑ 1920s – 1970s : Cost-Variance Analysis in mass-manufacturing Cos.
❑ 1970s – 1980s :
(1) Manufacturing firm’s sales boomed, increased focus on cost, process management and quality.
(2) Automation, indirect cost replaced direct ways of production
(3) Service-Manufacturing sector growth, more focus on indirect cost.
❑ 1990s – Present : Evolution of ABC (activity-based costing) , ABM (activity-based management),
Lean Accounting, Value-Based Management etc. - IMA©
MAIN PROBLEMS IN EVOLUTION

Relationship Task
oriented oriented
Leadership Leadership

An healthy organizational culture requires

equal importance to both!
 SHIFT TO INTANGIBLES
❑ Shift from Direct to Indirect Cost
❑ Organisational Value shifted from 80% Book Value & 20% intangibles to opposite.
(Intangibles mainly include Individual Capabilities, Market Brand value etc.)
Problem: Lesser attention to these “Intangibles”

Holistic approach to Cost Management

View organisation as a “system of tangibles and intangibles”
RELATIONSHIP AND COST CONTROL

• Foundations of relationship-building : Trust, Mutual Respect, Awareness, diversity &

Communication.

• Cost-cutting approaches can damage relationships

• Changing supplier without proper communication.
• Not honoring contracts.
• Cutting back orientation and training of Leaders|
• Failing to communicate minor changes
• Reduction in service-staff availability etc.
STRATEGIC APPROACH TO COST EFFECTIVE CULTUTRE

WHY???
❑ Effective cost management requires something more than mere policy
framework
❑ Its essence is required to be imbibed in the culture of the organization
❑ Culture acts as mental programmer of mindsets, hence, cost effective
behavior can be ensured through the appropriate inculcation of HOW???
behavioral sciences in cost management
❑ First of all, the financial managers need to answer two
❑ We need to bring the cost effective culture into the dimensions of questions:
practicality which is possible only by making it a part of strategies. To what extent the values so stated are considered and
involved in the planning framework.
❑ The organization’s missions (which drive desired outcomes) and the
How effective behaviours are coming into shape in the
organization’s values (which drive desired behaviors), need to be in form of different activities.
sync with one another.
❑ Employee surveys and other feedback mechanisms can be
helpful in comparing the expected behaviour with the
operational one.
PLANNING FRAMEWORK

THE RP5 BUSINESS PLANNING MODEL

❑ It presents the core components that should be incorporated in a business planning
framework.
❑ Fi\rst of all, the values reflecting cost effectiveness and constituting culture should
act as base for the organizational tasks(mission and process) and behavior( For
relations, intangibles and values)
❑ Next, the reinforcement of the direction of strategy and the approach to behavior
so defined is ensured through process management and the management of the
relations with the concerned parties. Leadership development and consistency of
management action are necessary.
❑ It is not a single day exercise but needs to be continually improved to ensure
improved performance at each phase.
❑ Role of financial executives:
▪ Adequate attention is paid to all these facets
▪ Provision for leadership development and consistency in management action.
▪ Expected behavior which underlies effective relations should be applied to key
parties.
MOVING FROM PLANNING FRAMEWORK TO COST ALIGNMENT

For effective cost management, each aspect of planning framework should be matched with an aspect of cost management.
THE CORE : CREATING A FOUNDATION OF CULTURE

Culture is essentially a system of beliefs and ideas, thus the existence and development of the culture of an organization is dependant upon
how strongly those ideas and beliefs are held by the organization. Here, we seek to see how the finance executives behaviour has an impact
on the development of culture.

THE FINANCE EXECUTIVES’ ROLE

❑ Getting the shareholders and owners to know the value of intangibles so as to ensure recognition of risk with respect to cost
cutting which may have a negative impact on the value of intangibles.
❑ Strategic approaches with regard to deployment of resources in order to ensure investment continuity, seeking growth
opportunities in new businesses and ventures.
❑ Strategic commitments to the mission and value statements, they need to ensure that the values that drive behavior, should ut also
be restricted to paper and become operational reality.
❑ Focus should not only be on the outcomes but also on the behavioral approaches undertaken to achieve that particular outcome.
❑ The financial manager must ensure that the Key Performance indicators should involve both tangible( outcomes) and intangible
(relations) components.
THE PDCA MODEL

This particular model shows that both

tangible and intangible and acting .
Planning, execution, measurement,
checking and planning to improve are no
more restricted to the tangible aspects
but also the behavioural and intangible
aspects. Intangible assets like the internal
human resource and relationships with
key parties are no longer taken forsaken
and are paid equally importance and are
sought to be properly managed as the
tangible assets.
COLLABORATION

❑ Internal and external stakeholders

need to work together to create
and exploit opportunities that
reduce costs.
❑ Place emphasis on the organisation
as an integrated system rather than
on departmental budgets.
❑ Build a basis for collaboration and
trust that recognises that mutually
shared problems must have
mutually shared solutions.
CARING FOR COST

❑ Finance must ensure that those in

leadership positions buy into the
behavioral values of the
organisation.
❑ Financial commitments to the
development of personnel are a
must.
❑ Front line employees should be
empowered to make decisions that
affect their work directly.
❑ Award bonuses based on ability to
achieve the desired outcome plus
desired behavior.
HOW GE CARES FOR COST
The following statement from the GE 2000 Annual Report shows how GE
adjusted its bonus plans to more effectively align values and performance

“And it’s about the four “types” that represent the way we evaluate and
deal with our existing leaders. Type I: shares our values; makes the
numbers—sky’s the limit! Type II: doesn’t share the values; doesn’t make
the numbers—gone. Type III: shares the values; misses the
numbers—typically, another chance or two.
None of these three are tough calls, but Type IV is the toughest call of all:
the manager who doesn’t share the values, but delivers the numbers; the
“go-to” manager, the hammer, who delivers the bacon but does it on the
backs of people, often “kissing up and kicking down” during the process.
This type is the toughest to part with because organizations always want to
deliver—it’s in the blood—and to let someone go who gets the job done is
yet another unnatural act. But we have to remove these Type IVs because
they have the power, by themselves, to destroy the open, informal,
trust-based culture we need to win today and tomorrow.”
 COMMUNICATION
❑ Effective communication might be a challenge in
many organisations.
❑ Cost information must mirror the structure of the
business.
❑ Cost management system should be such that adds
value to the decision-making process.
❑ it is important to analyse the drivers of cost across
different functions or departments.
❑ Costing information must be available on demand
and be usable by different users of that information.
❑ Financial managers must play an active role in training
line managers to understand financial information and
use it effectively for decision-making.
CONTINUITY

❑ Reinforce Life-Cycle thinking

BCG Portfolio Planning Model

❑ Avoid cost reduction as only “programs:

Costs shouldn’t impact spending

❑ Constantly communicate “business reality” to stakeholders

“Open Book Management”

❑ Identify, track, communication and share cost saving

STEP-BY-STEP IMPLEMENMTATION
 CONCLUSION

• The ultimate cost figures are the result of the actions of human beings which
can't be dealt with by providing a mathematical approach to the policy
framework.

• Cost cutting policies which are framed with utter disregard to the human
resource actually erode the organizational value over time but this process is very
gradual and can lead to huge losses to the organization in Long-Run.

• Behavioral aspects of cost management aren't restricted to discrete policies but

actually involve a proper system and we need to consider the behavioural aspect
of each and every aspect of cost management in order to achieve better results.
THANK YOU
• Naveen Kumar (18348)
• Nidhi Kaushik (18349)
• Nisheeth Nagar (18350)
• Parnika Srivastava (18351)