The #3 Pencil Principle
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12 August 2013 - 23:13, by , in Performance Management, No comments

The story is told in industry circles about the 1950’s accountant who was bent on cutting overhead expenses. He issued a memo to all employees saying “Beginning today, everyone must use #3 pencils instead of #2’s.” He argued that the harder lead in #3 pencils would last almost three times as long.

What was the result? Instead of the #3 pencils lasting three times as long, they lasted twenty times as long. And pencil purchases dropped to almost zero! What happened? Sensible employees simply refused to use #3 pencils and instead bought their own soft and easily erasable #2’s.

What’s the point? If you make something hard enough for people, they will usually not do it. If you want employees to use your Activity Based Management (ABM) system for cost improvement, don’t say “We need everyone to reduce their cost by 10% this year. Please see Mel Smith to pick up your ABM reports.” That’s a pure #3 pencil statement. If I’m an employee that is willing to help, I have to (a) know Mel Smith and remember to ask him for my ABM reports; (b) know what the acronym ABM means; (c) worry about the consequences of cost improvement; e.g. “Will ABM eliminate my job?”; (d) figure out how to read and interpret my ABM reports; and, (e) know how to use my ABM reports for continuous improvement. Why make it so hard for me to come up with cost improvements? Don’t you want me to submit and implement improvement plans?

Here are some simple steps that your organization can take to make continuous improvement easier for your employees:

  • Senior Management must define targets, timeframes and consequences. Don’t assume that employees know what to do. Be specific. Tell the employees “We need a 5% cost improvement by June 30th.” Also define the positive and negative consequences of meeting or missing this goal.
  • Format activity accounting reports in a simple spreadsheet format. No matter what ABM software you use, create a spreadsheet-style report with activities as the columns and overhead costs as the rows. The spreadsheet format is the easiest for non-financial employees to understand and use.
  • Provide employees a copy of “Using ABM for Continuous Improvement”. This very popular book was specifically written for non-financial employees. The book is easy to read, contains step-by-step activity cost reduction instructions and is loaded with practical examples. Orderyour books today.
  • Get the ball rolling by organizing one or two continuous improvement workshops. Show groups of employees “how to” use their ABM reports to identify and measure cost improvement. ICMS can help. We offer an onsite continuous improvement workshop that uses your actual ABM data. And we guarantee results!
  • Name a Continuous Improvement Coordinator and make them highly visible. This person should be your on-staff internal ABM coach and consultant for employees.

Even though we are no longer in the ‘50’s, the #3 Pencil Principle still applies. To enjoy the bottom line benefits of ABM you have to make it easy for all employees to get involved in the continuous improvement process.

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Tom Pryor
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