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Peter Desloge, CEO of Watlow, which encourages everyone, including workers, to innovate. (kigerphoto.com/Watlow)
Peter Desloge, CEO of Watlow, which encourages everyone, including workers, to innovate. (kigerphoto.com/Watlow)

Strategy

When the meltdown hit, this company chose lean accounting over layoffs Add to ...

When the recession hit in 2008, Watlow Electric Manufacturing Co. faced heavy losses and a tough decision. The 2,000-employee electrical equipment manufacturer could follow the conventional path and resort to layoffs and cost-cutting to balance the books, or stay the course with its long-term continuous improvement strategy in hopes that could help it find a way out.

The company, based in St. Louis, chose the latter.

The gamble paid off, and Watlow emerged in one-twelfth the time it had taken to emerge from the 2001 recession. The success was a triumph for chief financial officer Steve Desloge, who had championed the initiative from the start.

“We tightened our belt, but didn’t slow down strategic initiatives,” he says. “We knew that this was creating a negative impact on short-term results, but we don’t manage by month or quarter. We’re in it for the long haul.”

Long-term strategy is often sacrificed in today’s investment climate. According to investment firm LPL Financial, the average stock hold has steadily declined from eight years in the 1960s, to merely five days today. Organizations are expected to show short-term results at all costs, says Francesco Bova, assistant professor at the Rotman School of Management in Toronto. Consequently, R&D funding cuts, layoffs, and discarded long-term projects are commonly used to mollify anxious shareholders.

Watlow began a comprehensive continuous improvement strategy known as “lean” in 2004, but like many companies, continued to use traditional accounting methods to manage the company. This changed in 2005 when Mr. Desloge brought his financial team to the inaugural Lean Accounting Summit in Detroit.

“It turned a bunch of us traditional tried and true finance folks, manufacturing accountants, cost accountants, literally in three days. It completely opened our eyes to the things we were doing which are actually anti-lean,” he says.

Lean accounting provides the metrics that allow financial managers to support lean and other long-term initiatives. An estimated 58 per cent of all companies, including the vast majority of manufacturers, employ continuous improvement methods such as lean and TQM (total quality management), but traditional accounting methods don’t recognize the gains achieved through these methods. Consequently, such programs are tough for traditional CFOs to justify, particularly during an economic downturn.

“One of the consequences of traditional accounting is it focuses on short-term results,” says lean accounting expert Brian Maskell, who is a chartered accountant, author and president of lean consulting firm BMA Inc., and organizes the annual summit.

Lean accounting is not unique in its long-term orientation – as sustainability gains prominence in the accounting profession, concepts such as integrated reporting and full cost accounting are shining light on a much bigger picture. As well, they are bringing accountants in closer touch with the processes that drive the business.

“Sustainability is about working on the business, not just in the business,” says Mitch Silverstein, a chartered accountant and partner at accounting firm and consultancy Richter, paraphrasing business consultant Michael Gerber.

The new paradigm has transformed the role of Mr. Desloge’s team. In keeping with the “bottom-up” structure of lean, it is no longer a given that innovation comes from management. Instead, managers at Watlow have learned to step aside and let workers, some of whom have 30 years of shop floor experience, find ways to improve quality, shorten lead times and reduce costs.

“It’s their improvement, not something someone told them to do,” says Mr. Desloge. “They’re driving it as part of their daily life.”

Watlow’s financial team now uses their expertise to support worker initiatives. Front-line workers, for example, receive weekly reports they can use to continually improve their work processes. These reports, which often fit on a single page, can be understood by financial lay people, and measure simple metrics, such as materials bought, and labour and utility spend.

The lean approach places high value on human capital and, consequently, losing a skilled employee shows as a significant loss. As well, laying off employees as a result of better efficiency from worker-generated improvements is considered a bad faith move that kills continuous improvement culture. “We’ve declared that there will never be a loss of jobs because of a lean transformation,” says Mr. Desloge.

Innovations are often sought out in product development. In an interview with Medical Design Technology, CEO of Watlow Peter Desloge notes that, “Due to the speed of the industry, it is important to be able to turn around product designs and prototypes in a timely manner. We spend a lot of resources on ‘leaning’ out our design and manufacturing processes.”

Watlow’s key performance metrics have also been replaced by five new ones – people, quality, delivery, cost, and growth – all of which have seen steady single- to double-digit growth since 2005, according to the company.

Worker buy-in, which Watlow measures with employee surveys, has been “very positive,” according to the company. Mr. Desloge says decades-long veterans have told him they never knew their job could be so satisfying. “We couldn’t give them a goal that could be high enough for them, because they would just break it,” he says.

 

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