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Rafii, F. and L. P. Carr. 1997. Why major change programs fail: An integrative analysis. Journal of Cost Management (January/February): 41-45.

Summary by Lori Meister
Master of Accountancy Program
University of South Florida, Summer 2003

Balanced Scorecard Main Page | Change Management Main Page | Quality Related Main Page

The purpose of this article is to show why most companies that attempt to make performance improvements often fail. This failure is most often caused by inadequate managerial accounting and financial budgeting systems. This article provides examples of major improvement programs and explains why they need to be modified.

The biggest problem with most managerial accounting and budgeting systems is that they fail to differentiate adequately between recurring costs and one-time investments (p. 41). These systems do not provide adequate information to support the new projects. They are focused too much on the short-run and financial improvements.

The first example is related to total quality management. The TQM philosophy promotes zero defects, but most major companies strive for an “acceptable quality level” instead. Companies do this because they feel that eventually the costs of pursuing zero defects will exceed the benefits of the higher quality level. This is due to their belief that the costs of quality, such as inspection, prevention, and failure costs are recurring costs (p. 42). The authors feel many costs such as training, skill-building, process improvement, and tooling are one-time expenditures that have a long-term impact and should be considered investments instead of expenses (p. 42). However, the managerial accounting systems do not make a distinction between these prevention-related investments and inspection related expenses.

Another example is related to business process reengineering. While reengineering can be successful in reducing non-value-added processes, problems arise when employees are found to be redundant resources. Since this is normally the case, most employees are not cooperative when it comes to process reengineering. This resistance by employees tends to reduce the potential savings from such programs. The problem with these changes is the inequity in the outcomes: employees face a major burden by losing their jobs while the company as a whole benefits (p. 42). The performance measurements used today are not capable of showing these inequities.

Companies today are no longer concentrating on new product developments. The major problem is with the upfront investments that are required. These expenditures might actually break-even early in the product life cycle, but the accounting systems today show that new product development is not beneficial in the short-run.

The final example is related to R&D where companies assign key employees to multiple projects in order to fully utilize their capacity (p. 43). The problem is that humans can only do so much before they are pushed to their limit. If an employee gets “burned out” from their workload, it might actually cause productivity to decrease. Part of this decline is from “setup” costs that include restarting, coordination, tracking down information, remembering, and fixing errors caused by lapses in memory (p. 43).

All of these examples involve the tradeoff between investing for the future while losing profits in the short-run. Accounting and budgeting systems today place too much emphasis on the short-run, and do not consider the benefits a project might have in the long run. The authors provide some possible solutions to these problems.

Rafii and Carr recommend that the cost of prevention efforts should be capitalized and amortized when it comes to total quality management (p. 43). BlueCross of Massachusetts is currently following this approach. However, BlueCross does have control limits in place to prevent managers from abusing this practice.

Employees who make themselves redundant through process reengineering efforts should be rewarded rather than punished (p. 44). One must remember that it is not the employee who has actually become unnecessary, but the job skills needed for the redundant processes. Paul Revere Insurance Company gives job guarantees to any employee who helped reengineer their department out of existence (p. 44). Companies might also consider encouraging employees to find new ways to utilize the resources that have been provided from the reengineered process. Employees will no longer be so resistant to change when they know that their careers are no longer on the line.

The authors feel that project managers should divide their staffing budget to account for investments in process improvements and skill enhancements (p. 44). These costs need to be separate from the operating budget so that the short-term benefits are not distorted. The problems caused by assigning multiple projects to key individuals could be avoided by implementing budgeting rules that promote full-time dedicated staff (p. 44). Even if staff members (e.g., R&D engineers) are not being fully utilized, managers need to realize that it will be more beneficial to the company in the long run, especially when it comes to productivity.

Two problems exist when companies decide not to invest in improvement programs feeling that the costs outweigh the benefits. First, since these programs are not integrated into the existing environment, the information and reporting systems do not support these types of efforts (p. 44). Next, short-term performance pressures and short-term management thinking hinders or prevents change efforts (p. 44). Since it takes years for any new program to be fully implemented, managers do not consider them in order to preserve their short-term profits. Again, long-run benefits are lost to obtain short-run gains.

In order for these programs to be fully successful, adequate performance measurements are needed to show how much improvement is being made. If the accounting systems do not change with the programs, they will not properly reflect the timing of incurred costs (p. 44). The authors feel that the balanced scorecard system is a move in the right direction to accomplish this objective.

In conclusion, it cannot be stated enough that managers and their accounting systems need to stop relying so much on short-run benefits. It is this focus that is hindering improvement processes from being successful. Managers need to change their attitudes, and they need to make sure that their accounting systems reflect these changes as well.


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