The Art of War, Chapter 2: Waging War

“Sun Tzu said: In general, the strategy for employing the military is this”:

If there are 1,000 4-Horse Attack Chariots, 1,000 Leather-armoured Support Chariots,
100,000 Mailed Troops, and Provisions are transported 1,000 li, then the domestic and external campaign expenses, the expenditures for advisors and guests, materials such as glue and lacquer, and providing chariots and armour will be 1,000 pieces of gold per day.

Only then can an army of 100,000 be mobilized.” *

* Sawyer’s translation

As an accountant who has worked in a bunch of technology start-ups; when I read this, the first thing I do is try to extrapolate Sun Tzu’s Quarterly Burn Rate.  It’s a bit tougher to try and calculate Cash Zero date seeing as, if the campaign is successful, you will have gained “the masses of All Under Heaven” – AKA “priceless”.

After spending a fair bit of time getting to know Indicee lately, the next thing that naturally came to mind was whether Sun Tzu’s Accounting system ties to his ERP system.  If he has Pieces of Gold in one system and Numbers of Men in another, he could be spending a ton of time cutting and pasting reports in Excel to get his Departmental Salary Breakdown by Headcount!

As a lark, I hacked together some Data to represent Pieces of Gold on one report and Numbers of Men on another report based on Sun Tzu’s numbers.  Pretending these were generated from different systems, I uploaded them to Indicee to see if I could combine the 2 reports into a single report.

Dating back to roughly 500BC, The Art of War is widely acknowledged as the greatest book of strategy ever written.  It pre-dates paper – the original would have been painted onto slats of bamboo.  It is also widely acknowledged that concepts from the book have applications far beyond the realm of warfare.  Personally, I think The Art of War is more useful than a library full of Psychology textbooks for understanding human behaviour.  Not in the Gordon Gekko kind of way.  Who can forget Michael Douglas in Wall Street?  Or for the real cinemaphile, Vin Diesel and Giovanni Ribisi parroting Wall Street in a sleeper flick called Boiler Room?

That said, the pop culture stuff really doesn’t do it justice.

I like the little snippet above.  Not only is it a slice of life from the Spring and Autumn Period of Chinese history – a period of time between roughly 722BC and 481BC.  It exemplifies that real expenditures are required to create gains.  1,000 pieces of gold a day.

Sun Tzu’s budget didn’t exactly break out all the costs for me in detail though.  In order to actually look at this in Indicee, I needed to figure out the cost on a line item basis.  I had to get creative.

So, I went to the most warlike company around, KKR (Kohlberg, Kravis, and Roberts). Sure, some of you may argue that Goldman Sachs is the more warlike.  But to me, KKR cemented their status back in 1988 with the LBO (Leveraged Buyout) of RJR Nabisco.  A transaction that was later immortalized in the film, Barbarians at the Gate, with James Garner and a cast of other hooligans that you are sure to recognize.  Back when $20 billion meant something!

I looked for a Profit & Loss (P&L) statement and anything I could find about employment by department for KKR.  I wanted to find comparables.  I couldn’t find much.  KKR was a private company up until a couple years ago. They went public just before the “unpleasantness” so I went looking for their public reports.  I found precious little detail there either.  Another similarity perhaps?

I had little to go on.  So, I used KKR’s relative split between Investment Expenses and Administrative & General Expenses to get the ball rolling.  I categorized all of Sun Tzu’s expenses as one or the other.  Then, I started taking guesses as to how the Expense statement might hash out.

With the 100,000 men, I created some departments and allocated guys keeping in mind KKR had 2 founders employed and 12 general partners (I believe) back in 1988. I employed copious amounts of artistic license in coming up with the following breakdown.

This is still Sun Tzu’s time though.  It’s 500BC.  Not surprisingly, the system didn’t recognize this date.  So instead I used a rough guess of the traditional Chinese calendar year, being approximately 2196.

Here’s a flyer: 2196 will be a leap year!

What was the end result?
After uploading all this stuff, I found the Quarterly Cash Burn for Sun Tzu’s operation was:

If I had to compile this information on a quarterly basis for a real business, I would just create this report once and then upload new data to Indicee as required.

The point of it all

Going back to my original thoughts, what if Sun Tzu’s Accounting System and ERP System didn’t talk to each other?  In this case, I would use Indicee to combine the data from the 2 reports to come up with something like this:

Now that I’ve set up this as a question, I will be able to add new data as it becomes available and Indicee will add-on to the existing stuff.

Sun Tzu never had it so good.

– Remember, next Tuesday we will be posting Part 2 of Interdepartmental Language Barriers Post—

Have a great weekend!

Related posts:

1. The Meaningful Scorecard
2. Quarter End Reporting – A Time for Reflection
3. Strategic CFO: Get in the Game

“Hard work is a prison sentence only if it does not have meaning”
- Malcolm Gladwell, author of Outliers

“Finding the one or two key numbers that drives success in your business, and bringing them to everyone is very powerful in a business”
– Joe Knight, co-author of Financial Intelligence

The inspiration for this post was a management improvement video (13 minutes) posted on You Tube by http://www.harvardbusiness.org of an interview with Joe Knight, co-author of the book series “Financial Intelligence”, Business Owner, and Harvard Business.org blogger.  The central message of the interview was that everyone in an organization benefits from understanding the numbers by which success is measured within a business.  The trick is finding the right numbers.  Particularly in today’s climate hearing about transparency is nothing new, but what doesn’t get as much play is this idea of narrowing the focus on measures of performance.

With respect to the numbers: Thanks to technology, we now have ALL the numbers available ALL the time. Reports have become super-robust because they can.  Although there’s an argument for providing surplus information and letting the end user choose which parts to digest, there is also a great danger.  Knight argues that providing less information to end users can actually produce better business intelligence.  The process of asking the questions and finding the underlying systems within an operating group can enable a more focused, effective approach to providing reports. First, understand the work flow and underlying system of work for operations groups; then, develop measures around them.  It’s easy to say, but when was the last time these conversations have taken place in your business?

“Business is like a game, and if you don’t understand the finances, you’re basically playing a game where you don’t know score”
- Joe Knight

According to Knight the emphasis should be, and this is where the interview really resonates with me, on providing a small number of operational metrics in a simple way and providing them to everyone.  He rightly points out that the people receiving this information probably don’t want to be accountants, and have little or no interest in double-entry accounting “no matter how exciting it may appear to be”.  For Accounting and Finance guys like us, it then becomes an exercise of translating Business Intelligence into Practical Intelligence in the reports we create to achieve an optimal value.  It would be like one of us attending an advanced physics lesson.  We would get way more out of it if someone simply dropped an apple on our heads.  Sometimes less is more.

The implied point here is that results are distributed throughout the business, not just to top managers.  Doing so, creates what Knight dubs “psychic ownership” so that even though employees may not BE owners of the business they start to ACT like owners.  This occurs when an employee can make the connection between his/her own actions and the financial result.  That is why the choice of what gets communicated is so crucial.  Finding one or two key drivers to the business that correlate with the financial results will accomplish this task.  Malcolm Gladwell, (author, and columnist for The New Yorker), makes a similar point, in his best selling book Outliers, about the importance of being able to see the link between effort and reward.  Gladwell contends there are 3 important qualities that define “meaningful work”, 1) autonomy, 2) complexity, and 3) a connection between effort and reward.  FYI, Outliers provides some interesting views through a number of entertaining anecdotes ranging from Bill Gates’ early days to The Beatles.

The book is about elements that contribute to the conditions for success.  The effort-reward piece is illustrated using The Garment Industry of 1890s NYC.  This turns out to be the roots of several top litigation firms in New York.  The moral of the story is that being able to see the connection between effort and reward creates a positive feedback loop.  Hard work becomes meaningful work.  I highly recommend it.

Ultimately, the “score” of the business is represented by the Financial Reports, right?  As accounting professionals, we know the complex process whereby these reports are created. As well, there are the intricacies and nuances associated with the interpretation of these reports.  We have the proper training to derive meaning from them.

Based on my experience, most of us are keen to share any and all of this information (confidentiality permitting) with colleagues.  In the video, Knight argues that we may be guilty of over-sharing; providing far too many KPIs.  If “KPI” is being used to describe every line item in the P&L, you’ve got a problem. The Law of Unintended Consequences kicks in, inadvertently confusing people.

There have been several studies recently on the behaviour of shoppers that would appear to bolster this line of thinking.  Shoppers who are given an abundant choice of product buy less than those given just one or two choices.  If we view the recipients of our internal management reports as “shoppers” and the reports we create as our “product” in conjunction with this behavioural insight that Knight suggests, we can create more effective reports.  At which point, as Gladwell illustrates, we will be able to show the link between effort and reward.

The result is the Meaningful Scorecard; communicating the numbers to people in “a way that gets at what’s important” and “how it affects them”.

So, the question is, what actions and activities correlate with success in your business?

Related posts:

1. RELEVANCE
2. Running the gauntlet of Year End Business Reporting
3. Improving Your Month-end Throughput

The guide targets two types of users coming to Indicee

The Business Analyst: someone that wants to load data themselves

The Business Manager: someone who wants to use data previously loaded

Let us know how we can improve the getting started area of the site. Keep your eye out for a number of how-to videos that we will be launching soon.

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