International Business & Economics Research Conference Las Vegas, Nevada 2002

The Relationship Between Cost

Management And Company Performance:
The Slovenian Case
Metka Tekavcic, (E-mail: metka.tekavcic@uni-lj.si), University of Ljubljana, Slovenia
Darja Sink, (E-mail: darja.sink@uni-lj.si), University of Ljubljana, Slovenia

Abstract

Contemporary decision-making system must be able to predict long-term consequences of

present company performance. Moreover, it must be able to support implementation of changes
as regards existing ways of doing business. Cost management is a set of techniques and methods
for planning, measuring, and reporting intended to improve a company’s products and processes.
Its ultimate purpose is to provide information which companies need to provide the value that
customers demand. The aim of the paper is to emphasize the relationship between cost
management and company performance theoretically and empirically. The paper sets out to
investigate first, how company performance is influenced by the use of particular cost
management techniques and methods, and second, whether better performing companies are
more inclined to implement a particular cost management technique or method, by providing
final results of empirical research conducted in Slovenian companies.

Introduction

Business of the late 1990s is characterized by a rapid rate of change, evolutionary business practices, and
intense competition. Present dynamic business environment demands a lot of flexibility and adaptability from
companies. In such an environment timely and quality decision-making is of great importance. It enables efficient
business performance and reaching predetermined objectives. Contemporary decision-making system must be able
to predict long-term consequences of present company performance. Moreover, it must be able to support
implementation of changes as regards existing ways of doing business. Companies wishing to compete in
demanding markets must accept the challenge of achieving business excellence. Business excellence refers to cost
efficient link-up of activities within all organizational units, continuous improvement of business processes as well
as products and services designed to fulfill customer needs. Business excellence requires extremely flexible
performance that enables companies to respond quickly to changes in the business environment and to adapt
correctly to new customers’ needs.

Global competitive pressures have made companies focus increasingly on the cost management that has
always been a basic component of any successful business strategy. Modern cost management still in its infancy, has
roots in cost accounting and managerial accounting. Cost management assumes knowledge of both, although the
purposes and methods of cost management differ in important ways from those of cost accounting and managerial
accounting. Modern cost management helps a company improve its product and processes by reducing waste and
other non-value-adding activities, because it assumes familiarity with all business processes. A great part of cost
management deals with streamlining internal processes, integrating more tightly with suppliers and distributors,
ensuring quality, etc. Cost management is a set of techniques and methods for planning, measuring, and reporting
intended to improve a company’s products and processes. Its ultimate purpose is to provide information that
companies need to provide the value that customer demand.

The purpose of the paper is to emphasize the relationship between cost management and company
performance, theoretically and empirically. The aim of the paper is to investigate first, how company performance is
influenced by the use of particular cost management techniques and methods, and second, whether better performing
companies are more inclined to implement a particular cost management technique and method, by providing final

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results of empirical research conducted in Slovenian companies. The results presented in the paper can be applied to
all companies trying to compete in the global environment.

Contemporary cost management concepts (CCMCs)

In today’s business environment companies focus increasingly on cost management. Modern cost
management assumes knowledge of cost accounting and managerial accounting, although the purposes and methods
of cost management differ in important ways from those of cost accounting and managerial accounting. The primary
purpose of cost accounting has always been to calculate inventory and cost of goods sold for financial statement
purposes. In other words, the focus of cost accounting is on external financial reporting. The primary concern of cost
management, by contrast, refers to internal decision-making (Handbook of Cost Management, 2001, page xiii).

Although managerial accounting has always been intended to provide support for decision-making used
internally by managers, its emphasis and methods have been attacked relentlessly since the mid-1980s. The
criticisms point out that traditional systems fail to provide relevant and timely information for managerial decision
making. Too often, traditional cost systems provide inaccurate and misleading product and customer cost
information. They focus too narrowly on historical information. They also emphasize the firm as the unit of analysis,
not considering the entire supply chain of which the firm is only a part. In short, they emphasize an outward-focused
historical cost lens, rather than a customer-focused prospective cost lens. Traditional cost systems also contribute to
dysfunctional behavior such as producing excess inventory to absorb overhead or buying substandard raw materials
to meet price targets. By contrast, cost management emphasizes better full-stream product and customer
information. Cost management helps a company improve its product and processes by reducing waste and other
non-value-adding activities. Although modern cost management requires knowledge of cost accounting and
managerial accounting, it also assumes intimate familiarity with all business processes, and with full stream supply
chains. Cost managers cannot measure and manage what they do not understand (Handbook of Cost Management,
2001, page xiii).

Cost management is a set of techniques and methods for planning, measuring, and reporting intended to
improve a company’s products and processes. Its ultimate purpose is to provide information that companies need to
provide the value that customers demand. Most people would argue about the basic tools, techniques, and methods
that, together, constitute cost management. These tools, techniques, and methods are directly or indirectly related to
cost management. In the paper they are referred to as ‘contemporary cost management concepts’ and abbreviated as
‘CCMCs’. CCMCs comprise the set of business practices and methods used to support outward looking and
strategically oriented companies. During recent years several CCMCs have been introduced in order to help
companies improve their decision-making and performance in highly competitive business environment. CCMCs
include several cost management tools, techniques, and methods, including activity-based costing (ABC), activity-
based budgeting (ABB), activity-based management (ABM), life-cycle costing (LCC), target costing, theory of
constraints (TOC), benchmarking, just-in time (JIT), total quality management (TQM), continuous improvement,
business process reengineering (BPR), and balanced scorecard (BSC). 1 In this paper, we do not intend to discuss
particular concepts in detail. Further reference to particular concepts can be found in Tekavcic, Sink (2002).

Cost management and company performance

Installing a cost management tool will not, by itself, increase company performance. Although executives
and managers usually talk about CCMCs as if they were an end in themselves, company should implement each of
these projects only to improve its performance. There are several facts showing that the implementation of CCMCs
is not always followed by improved company performance including (Van Der Linde, 2002):

 It is estimated that more than 75% of performance improvement projects do not produce targeted performance
improvements.
 Stories abound of costly organizational change efforts that either have fizzled, or worse, exacerbated the
situations they aimed at improving.
 The great majority of large-scale projects overrun both schedule and budget by very wide margins.
 The number of organizations with Balanced Scorecards—replete with metrics that no one understands how to
use to improve performance—is approaching epidemic proportions.

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The question is why so many well-intended performance-improvement efforts fail to succeed. Companies
should approach the question of how to start a project with a statement of their needs - such as: ‘We want to
implement Activity Based Costing across the organization. How do we start?’ Companies want to increase their
performance (customer satisfaction, mission effectiveness, response to new customer needs). Performance problems
are usually due to bad systems that give managers incorrect or inadequate information as managers make rational
decisions based on the information they have at hand. Therefore, fixing a system problem to get better or faster
information to managers will result in improved performance. Although this is easy to understand in theory, many
problems may occur in practice.

The first problem is associated with the statement that managers make rational decisions, given the data
available. There is an underlying assumption that all decision-makers in a company share the same understanding of
how the business works, and, if you provide them with better information, they will make better decisions. It is hard
to find a company where managers fully agree as to how the business really works, but they rather see it from their
own individual perspective. Given the same data, one will make a decision that may not be considered rational by
another. The second problem is associated with the statement that better information will lead to performance
improvement. Above we mentioned the familiar statistic that 75% of performance improvement projects fail to
produce the intended results. It is easy to put a great deal of good work into solving a problem that turns out to have
little effect. An ABC system giving more accurate product cost information won’t impact financial performance until
the decision rules in the company are changed. If salesforce continue to be compensated based on revenue, they will
continue to sell unprofitable but easy-to-sell products no matter what management knows about product profitability
(Van Der Linde, 2002).

An obvious caveat is always to keep the primary purpose of the project in mind. People tend to work to increase
the performance of the company. The most powerful discovery is to find the high leverage projects and most
effective project scope. Results flow from spending the effort at the start to get all members of the executive team to
share an understanding of how the business works – not just as seen from their unique perspectives. The heart of the
process is to clearly define the objective (performance improvement) and work back to find out how the
organization actually works to produce its output. In other words, you cannot fix the problem until you understand it.
Before improving the way your business works, you must first understand the way your business works.

Van Der Linde (2002) presents a good example of the company which decided to install an MRP system (a
software system integrating the information flow for production scheduling, purchasing, and inventory management
to solve the problem of late shipments to customers and declining profitability). A consultant insisted that computer
software could (and therefore, should) control the purchasing, receiving and issuing of every item right down to
nuts, bolts, screws, and washers. The purchasing manager and staff were inundated with paper when the system
came on line. However, they could not tell from the computer output which page contained critical information
which needed being dealt with, since all parts had the same priority. They worked back from the performance
improvement issue. They stated that the cause of late shipments was that often some parts were missing at the time
of scheduled start of production. They wanted all data on all parts in the computer system because the way to get
production started had always been to expedite those missing parts. Consultants suggested that they manage tightly
the parts that were difficult to manage and not have the others in the system at all, but manage them separately (as it
is not expensive to have abundant supplies of very low-cost items), because this clears the material manager’s view
of the parts that require close management.

It is important that a company starts with a clear statement of the problem – the problem nearest the customer.
From there, the operation of the system – the whole system that works together to produce the product or service
-must be understood. From a model of that system, the company should be able to find and explain the high leverage
changes. At this point it is vital to coach the decision-makers how to make decisions that work with the changed
system.

Choosing performance measures is a challenge, as performance measurement systems play a key role in
developing strategy, evaluating the achievement of organizational objectives and compensating managers. Ittner and
Larcker (2002) suggest that financial data have limitations as a measure of company performance. They note that
other measures, such as quality, may be better at forecasting, but can be difficult to implement.

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Performance measurement systems

Many managers feel traditional financially oriented systems no longer work adequately. A recent survey of
US financial services companies found most were not satisfied with their measurement systems (Ittner, Larcker,
2002). They believed there was too much emphasis on financial measures such as earnings and accounting returns
and little emphasis on drivers of value such as customer and employee satisfaction, innovation and quality. In
response, companies are implementing new performance measurement systems. A third of financial services
companies, for example, made a major change in their performance measurement system during the past two years
and 39% plan a major change within two years. Inadequacies in financial performance measures have led to
innovations ranging from nonfinancial indicators of intangible assets and intellectual capital to balanced scorecards
of integrated financial and nonfinancial measures. Nonfinancial performance measures have advantages and
disadvantages.

Advantages of nonfinancial performance measures

Nonfinancial measures offer four clear advantages over measurement systems based on financial data
(Ittner, Larcker, 2002). The first advantage refers to a closer link to long-term organizational strategies. Financial
evaluation systems generally focus on annual or short-term performance against accounting yardsticks. They do not
deal with progress relative to customer requirements or competitors nor other nonfinancial objectives that may be
important in achieving profitability, competitive strength and long-term strategic goals. For example, new product
development or expanding organizational capabilities may be important strategic goals, but may hinder short-term
accounting performance. By supplementing accounting measures with nonfinancial data about strategic performance
and implementation of strategic plans, companies can communicate objectives and provide incentives for managers
to address their long-term strategy.

Second, critics of traditional measures argue that success in many industries is enhanced by intangible
assets such as intellectual capital and customer loyalty, rather than the hard assets listed in official balance sheets.
Although it is difficult to quantify intangible assets in financial terms, nonfinancial data can provide indirect,
quantitative indicators of a firm's intangible assets. One study examined the ability of nonfinancial indicators of
intangible assets to explain differences in US companies' stock market values. It found that measures related to
innovation, management capability, employee relations, quality and brand value explained a significant proportion
of a company's value, even allowing for accounting assets and liabilities. By excluding these intangible assets,
financially oriented measurement can encourage managers to make poor, even harmful, decisions.

Third, nonfinancial measures can be better indicators of future financial performance. Even when the
ultimate goal is maximizing financial performance, current financial measures may not capture long-term benefits
from decisions made now. Consider, for example, investments in research and development or customer satisfaction
programs. Under accounting rules (e.g., in Slovenia, USA), research and development expenditures and marketing
costs must be charged for in the period they are incurred, thereby reducing profits. But successful research improves
future profits if it can be brought to market. Similarly, investments in customer satisfaction can improve subsequent
economic performance by increasing revenues and loyalty of existing customers, attracting new customers and
reducing transaction costs. Nonfinancial data can provide the missing link between these beneficial activities and
financial results by providing forward-looking information on accounting or stock performance. For example,
interim research results or customer indices may offer an indication of future cash flows that would not be covered
otherwise.

Finally, the choice of measures should be based on providing information about managerial actions and the
level of ‘noise’ in the measures. Noise refers to changes in the performance measure that are beyond the control of
the manager or organization, ranging from changes in the economy to luck (good or bad). Managers must be aware
of how much success is due to their actions or they will not have the signals they need to maximize their effect on
performance. As many nonfinancial measures are less susceptible to external noise than accounting measures, their
use may improve managers' performance by providing a more precise evaluation of their actions.

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Disadvantages of nonfinancial performance measures

Although there are many advantages of nonfinancial performance measures, they are not without
drawbacks. Research has identified five primary limitations (Ittner, Larcker, 2002). Time and cost has been a
problem for some companies. They have found out that the costs of a system tracking a large number of financial
and nonfinancial measures can be greater than the benefits. Development can require considerable time and expense,
not to mention selling the system to sceptical employees who have learned to operate under existing rules. A greater
number of diverse performance measures frequently requires significant investment in information systems to draw
information from multiple and often incompatible databases. Evaluating performance by using multiple measures
that can conflict in the short term may also be time-consuming. Bureaucracy may affect the measurement process
and transform it into mechanistic exercises that add little to reaching strategic goals.2

The second drawback is that, unlike accounting measures, nonfinancial data are measured in many ways,
there is no common denominator. Evaluating performance or making trade-offs between attributes is difficult when
some are denominated in time, some in quantities or percentages and some in arbitrary ways. Many companies
attempt to overcome this by rating each performance measure in terms of its strategic importance (e.g. from ‘not
important’ to ‘extremely important’) and then evaluating overall performance based on a weighted average of the
measures. Others assign arbitrary weightings to the various goals. However, like all subjective assessments, these
methods can lead to considerable error.

The third downside refers to the lack of causal links. Many companies adopt nonfinancial measures without
articulating the relations between the measures or verifying whether they have a bearing on accounting and stock
price performance. Unknown or unverified causal links create two problems in evaluating performance: incorrect
measures focus attention on the wrong objectives and improvements cannot be linked to later outcomes. Xerox, for
example, spent millions of dollars on customer surveys, under the assumption that improvements in satisfaction
translated into better financial performance. Later analysis found no such link. As a result, Xerox shifted to a
customer loyalty measure that was found to be a leading indicator of financial performance. The lack of an explicit
casual model of the relations between measures also contributes to difficulties in evaluating their relative
importance. Without knowing the size and timing of associations among measures, companies find it difficult to
make decisions or measure success based on them.

Fourth problem related to nonfinancial measures is the lack of statistical reliability - whether a measure
actually represents what it purports to represent, rather than random measurement error. Many nonfinancial data
such as satisfaction measures are based on surveys with a small number of respondents and questions. These
measures generally have poor statistical reliability and fail to discriminate superior performance or predict future
financial results.

Finally, although financial measures are unlikely to capture fully the many dimensions of organizational
performance, implementing an evaluation system with too many measures can lead to measurement disintegration.
This occurs when an overabundance of measures dilutes the effect of the measurement process. Managers may
follow a variety of measures simultaneously, but fail to monitor the main drivers of success.

Suggestions for implementation of appropriate measures

Once managers have determined that the expected benefits from nonfinancial data outweigh the costs,
three steps can be used to select and implement appropriate measures (Ittner, Larcker, 2002):

1) Understand Value Drivers

The starting point is understanding a company's value drivers, the factors that create stakeholder value.
Once known, these factors determine which measures contribute to long-term success and how to translate corporate
objectives into measures that guide managers' actions. While this seems intuitive, experience indicates that
companies do a poor job determining and articulating these drivers. Managers tend to use one of three methods to
identify value drivers, the most common being intuition. However, executives' rankings of value drivers may not
reflect their true importance. For example, many executives rate environmental performance and quality as
relatively unimportant drivers of long-term financial performance. In contrast, statistical analyses indicate these
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dimensions are strongly associated with a company's market value. A second method is to use standard
classifications including financial, internal business process, customer, learning and growth categories. Whereas
these may be appropriate, other nonfinancial dimensions may be more important, depending on the organization's
strategy, competitive environment and objectives. Moreover, these categories do little to help determine weightings
for each dimension. Perhaps the most sophisticated method of determining value drivers is statistical analysis of the
leading and lagging indicators of financial performance. The resulting causal business model can help determine
which measures predict future financial performance and can assist in assigning weightings to measures based on
the strength of the statistical relation. Unfortunately, relatively few companies develop such causal business models
when selecting their performance measures.

2) Review Consistencies

Most companies track hundreds, if not thousands, of nonfinancial measures in their day-to-day operations.
To avoid reinventing the wheel, an inventory of currently used measures should be made. Once measures have been
listed, their value for performance measurement can be assessed. The issue at this stage is the extent to which
current measures are aligned with the company's strategies and value drivers. A method for assessing this alignment
is gap analysis. It requires managers to rank performance measures on at least two dimensions: their impact on
strategic objectives and their currently perceived importance. The survey of 148 US financial services companies —
a joint research project sponsored by the Cap Gemini Ernst & Young Center for Business Innovation and the
Wharton Research Program on Value Creation in Organizations – found significant measurement gaps for many
nonfinancial measures. For example, 72% of companies said customer-related performance was an extremely
important driver of long-term success, against 31% who chose short-term financial performance. However, the
quality of short-term financial measurement is considerably better than measurement of customer satisfaction.
Similar disparities exist in nonfinancial measures related to employee performance, operational results, quality,
alliances, supplier relations, innovation, community and the environment. More importantly, stock market and long-
term accounting performance are both higher when these measurement gaps are smaller.

3) Integrate Measures

Finally, after measures are chosen, they must become an integral part of reporting and performance
evaluation if they are to affect employee behavior and organizational performance, which is not easy. Since the
choice of performance measures has a substantial impact on employees' careers and pay, controversy is bound to
emerge no matter how appropriate the measures. Many companies have failed to benefit from nonfinancial
performance measures through being reluctant to take this step.

One of the most successful efforts to integrate multiple perspectives in performance assessment has been
that of Kaplan and Norton (1992, 1993, 1996, 1999, 1999a). Their balanced scorecard approach incorporates four
perspectives on performance:

 The financial perspective (How do we look to shareholders?);

 The customer perspective (How do customers see us?);
 The internal business perspective (What must we excel at?);
 The innovation and learning perspective (Can we continue to improve and create value?).

These four perspectives provide a balance between external internal measures of performance for a
company and help translate a company’s strategic objectives into a coherent set of performance measures. Below are
the most common Key Performance Indicators used across most companies which have implemented a performance
measurement system http://www.bettermanagement.com/Library/Library.aspx?LibraryID=147&a=8). They are
divided into four major groups: financial indicators, process indicators, customer indicators and learning and growth
indicators. The most frequently used financial indicators are Total assets or Total assets per employee, Revenues per
employee, Revenues from new products / customers, Return-on-assets (Profits (Net Income) / Total assets), Return-
on-equity (Profits (Net Income) / Equity) Profits per employee, Profit margin, and Cash flow. Most frequently
mentioned customer indicators are Number of customers, Market share, Annual sales per customer, Average time
spent on customer relations, Sales closed vs. sales contracts, Customer loyalty index or Satisfied customer index.

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Learning and growth indicators are Leadership index, Employee turnover, Time in training, Average absenteeism,
Per capita annual cost of training, and Satisfied employee index.

Companies claim to have been using the scorecard for a variety of purposes, namely, to clarify and update
strategy, to communicate strategy throughout the company, to align unit and individual goals with the strategy, to
link strategic objectives to long-term targets and annual budgets, to identify and align strategic initiatives, and to
conduct periodic performance reviews to learn about and to improve strategy (Kaplan and Norton, 1996). However,
an important apparent measurement problem of the balanced scorecard is its incomparability across firms. Kaplan
and Norton (1993, page 135) noted: “The balanced scorecard is not a template that can be applied to businesses in
general or even industry-wide. Different market situations, product strategies, and competitive environments require
different scorecards. Business units devise customized scorecards to fit their mission, strategy, technology, and
culture.” This quote underscores the fundamental purpose of the balanced scorecard. The methodology is intended
to assist companies in improving their performance measurement and performance management processes. It may
not be very helpful as a tool for comparison across the board.

Theoretical implications suggest that companies using CCMCs should have better performance, especially
when faced with highly competitive and complex business environment. Performance can be measured by financial
and / or nonfinancial measures (performance indicators). Key performance indicators in a company provide a
mechanism to measure the critical success factors. They are mostly quantifiable measures that the organization uses
to evaluate and communicate performance against expected results. It is important that key performance indicators
are strategically linked and integrated throughout the company, controllable, measurable, simple, limited in number,
and credible. Further, they should present a balanced view of the organization. The concept of balance requires that
all key dimensions of performance, as defined by the critical success factors, are measured and reported in such a
manner that managers can understand the trade-offs and interrelationships among the different areas.

In the following chapter we are presenting the results based on an extensive research conducted in
Slovenian companies. Our basic objective is to investigate how company performance is influenced by the use of a
particular CCMC, and whether better performing companies are more inclined to implement a particular CCMC.

Empirical research: The Slovenian case

Business environment in Slovenia

Slovenia is a small transition economy with a population of about 2 million. It was founded in June 1991. It
is a small country with a land area of 20,296 square km, neighboring Italy in the West, Austria in the North, Hungary
in the East and Croatia in the South. It has been a constitutional part of former socialist republic Yugoslavia in the
period 1945-1991. The business environment in Slovenia has changed radically in the last decade. Slovenia has been
faced with the triple transition process: the transition to an independent state, the reorientation from former
Yugoslavian to the Western developed markets and the transition to the market economy.

When Slovenia became an independent state in 1991, it lost a rather large Yugoslav market. Companies’
markets began to change radically. Slovenian industry has succeeded in finding substitute markets. National
economy had some advantages due to the positive legacy of its Yugoslav past that gave Slovenian companies a
sizeable head start over the rest of the Central-Eastern European (CEE) region when it came into transition.
Slovenian companies had been exposed to the market economy for decades and had had traditional trade links with
Western European companies. Slovenia has remained one of the most successful economies in Central and East
Europe. This fact is proven by the high GDP per capita at around € 10,500 which exceeds 70 percent of the EU
average. In the beginning of transition period state-owned (i.e. socially-owned) companies encountered a radically
different business environment. Companies were facing privatization and changes in top management, companies’
strategic and tactical planning, operations, etc.

Slovenia is not the only CEE country facing transition period difficulties. Apart from Yugoslavia, some
other countries also split up (Czechoslovakia, the Soviet Union). Firms in these countries lost a significant part of
their domestic markets while their traditional export markets also disappeared. Companies in transitional economies
were entering an open competitive environment. They had to face the deregulated and liberalized business
environment. The problem was that many of CEE companies were neither flexible nor customer oriented. That is the
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reason why they had to rethink and / or change basic management tools they were using in order to survive in
turbulent business environment. Moreover, some companies began to use these tools for the first time. Due to its
successful transition process, Slovenia may be considered as a "benchmark" for the majority of transitional
economies in the region. It is currently in the process of integration into the European Union. Companies are
therefore faced with the intensive processes of deregulation and liberalization of the foreign trade regime. They are
being exposed to increasing foreign competition. The major changes in the business environment described above
strongly influenced the introduction of CCMCs in proactive and outward oriented companies. Practically all CEE
countries were in some sort of transition period during the last decade. Despite many remaining imperfections, these
countries now have functioning market economies. This is the reason why our research findings and main
conclusions regarding Slovenian companies can be applied to all countries facing transition period difficulties and
operating in turbulent environments.

Method

The aim of the research was to develop a better understanding of contemporary cost management concepts
(CCMCs) presence in Slovenian companies. In particular, we sought to explore whether the use of CCMCs affect
the performance of Slovenian companies. The purpose of our research was to find out the current situation as
regards the number, size, and performance of Slovenian companies familiar and unfamiliar with CCMCs, especially
those implementing or using these concepts. Reasons why particular types of companies use or fail to use CCMCs
will be defined in greater detail in our further research.

The main source of data is the survey ‘Cost management in Slovenian companies’ conducted during the
winter of 2000/2001. The empirical research is based on an extensive questionnaire. After a careful consideration, it
was decided to conduct personal interviews with top managers or middle managers (responsible for the cost
monitoring and analysing). A fully structured interview with pre-coded responses was prepared. We chose personal
interviews because we believe that they provide more complete and precise information than mail, telephone or e-
mail questionnaires, taking account of the length of questionnaires. Personal interviews provided the opportunity for
feedback in clarifying any questions a respondent has about the instructions or questions. Other advantages of
personal interviews are moderate to fast speed of data collection, excellent respondent cooperation, low number of
unanswered questions, and lowest possibility for respondent misunderstanding (Zikmund, 2000, page 212). We
conducted personal interviews with 100 specially trained interviewers. 3 Each interviewer questioned 2-3 companies.
Slovenia is a relatively small country (20,296 square km, 2 million inhabitants), so we could cover all geographical
areas at a relatively low cost, which is usually not the case when using personal interviews (Zikmund 2000, page
212).

This study is based on the research sample of 264 companies. When choosing companies to be included in
the sample we had no intent to exclude any company. That is why we believe our selection has many attributes of
random selection. Moreover, the sample is relatively big and offers a good representation of the whole population, as
regards the size of companies, their geographical position and industry (branch) they belong to. The sample consists
of 33% small, 23% middle, and 44% large companies. Companies are classified according to Slovenian legislation
as follows. ‘Small company’ fulfills two of the following criteria: average number of employees does not exceed 50,
annual revenues are less than SIT 280 million (around € 1.25 million), average assets at the beginning and at the end
of the financial year do not exceed SIT 140 million (around € 625,000). ‘Medium company’ is a company fulfilling
two of the following criteria: average number of employees does not exceed 250, annual revenues account for less
than SIT 1,100 million (around € 5 million), average assets at the beginning and at the end of business year do not
exceed SIT 550 million (around € 2.5 million). Other companies were classified as ‘large companies’.

Research results

During our research we investigated the relationship between cost management and company performance.
We attempted to answer the following question: Does the use of CCMCs affect the performance of Slovenian
companies? Theoretical implications suggest that companies using CCMCs should have better performance,
especially when faced with highly competitive and complex business environment. Performance can be measured by
financial and / or nonfinancial measures. For an easier comparison among different companies, we selected financial
measures. Some companies participating in our research do not use nonfinancial measures at all; the ones using
them don’t use the same nonfinancial measures of performance. For this reason, it would be impossible to compare
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all companies according to nonfinancial measures. We compared different companies (who know CCMCs) using the
following financial measures of performance: net income (loss), ROA, ROE, and profit margin.

Table 1 presents final results as to what kind of companies have the highest performance measures on
average. There was no company implementing or using TOC. That made TOC incomparable to other concepts and
was thus not included in the analysis. Companies are classified in two types: A - Companies implementing or using a
particular concept, and B - Companies thinking it is wise to implement a concept or are planning to implement it.
The findings can be classified as follows: (1) The best results as regards financial performance measures on average
are achieved by those companies which are implementing or using JIT, TQM, and continuous improvement. In the
case of these concepts companies fall predominantly into group A. (2) Companies thinking it is wise to implement a
particular concept or are planning to implement it are frequently having the best results according to financial
performance measures, especially as regards ROA and profit margin. This implies that successful companies are on
average more inclined to implement CCMCs. The implementation of CCMCs is connected with high initial
investments. On the other hand, positive financial results can be expected in a few years time. Thus, it would be
appropriate to repeat the survey among the same sample units (including only those implementing or using CCMCs)
in a sequence of at least 5 years to test the influence of CCMCs’ on the company performance.

Table 1: Types of company with highest average performance measures

Concept Net Income ROA ROE Profit Margin

ABC A B A B
ABB A B A B
ABM A B A B
Life-cycle costing A B A B
Target costing A B B A
Benchmarking A B B B
JIT A A A A
TQM A A B A
Continuous improvement A A B A
BPR A B A B
Balanced scorecard A B B A
A - Companies implementing or using the concept;
B - Companies thinking it is wise to implement the concept or are planning to implement it;

Source: Research ‘Cost management in Slovenian companies’, winter 2000/2001.

As we can see in Table 1, research results suggest that companies differ according to performance
measures. This finding was also tested with statistical methods. We used One-Way ANOVA procedure to test the
dependence of performance of companies on the use of a particular concept. The One-Way ANOVA procedure
produces a one-way analysis of variance for a quantitative dependent variable (in our case particular financial
performance measures) by a single factor (independent) variable. Factor variable values are integers from 1 to 4, as
the research was set up involving four types (groups) of companies: (1) Companies unfamiliar with the concept, (2)
Companies familiar with the concept, but do not use it or think that using it is not sensible, (3) Companies thinking it
is wise to implement the concept or are planning to implement it, and (4) Companies implementing or using the
concept. Analysis of variance is used to test the hypothesis that several means are equal. One of the assumptions
underlying the One-Way ANOVA procedure is that the groups should come from populations with equal variances.
To test this assumption, we used Levene’s homogeneity-of-variance test. According to this test, we found out that
the assumption regarding equality of variances is not valid for profit margin for all concepts. That is why in final
findings we do not refer to profit margin and other performance measures, for which the assumption regarding
equality of variances is invalid. The final results are presented in Table 2.

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Table 2: F-test values and significance levels for each concept

Concept Financial Measure F-test Significance

ABC Net income 11.601 0.000
ROA 5.840 0.001
ROE 5.703 0.001
ABB Net income 7.142 0.000
ROA 4.518 0.004
ROE 6.175 0,000
ABM Net income 2.104 0.101
ROA 3.085 0.028
ROE 5.178 0.002
LCC Net income 6.510 0.000
ROA 3.438 0.018
ROE 5.423 0.001
Target Costing Net income 4.680 0.003
ROA 4.207 0.006
ROE 4.354 0.005
Benchmarking Net income 6.336 0.000
ROA 3.067 0.029
ROE 4.155 0.007
JIT ROA 4.359 0.005
TQM Net income 10.116 0.000
ROA 1.472 0.223
Continuous Improvement Net income 6.140 0.001
ROE 4.937 0.003

Source: Research ‘Cost management in Slovenian companies’, winter 2000/2001.

First, we found out that on the average net income is dependent on the use of the following concepts: ABC,
ABB, life cycle costing, target costing, benchmarking, TQM, continuous improvement, BPR, and balanced
scorecard. Second, we found out that on the average ROA depends on the use of the following concepts: ABC, ABB,
ABM, life cycle costing, target costing, benchmarking, JIT, BPR, and balanced scorecard. Third, we found out that
on the average ROE is dependent on the use of the following concepts: ABC, ABB, ABM, life cycle costing, target
costing, benchmarking, BPR, and balanced scorecard.

As we have already explained, in today’s business environment key performance indicators should present
a balanced view of the company. One would therefore expect that companies using nonfinancial performance
measures perform better as they know more dimensions of their company than companies which are tracing
financial performance measures only. Research results (see Table 3) suggest that Slovenian companies differ
according to average performance measures.

Table 3: Average performance measures according to using vs. not using nonfinancial performance measures

Group Net Income ROA ROE Profit Margin

Group 1 - Using nonfinancial € 960,700 5.7% 15.6% 5%
performance measures
Group 2 – Not using nonfinancial € 471,600 3.8% 5.1% 4.5%
performance measures

Source: Research “Cost management in Slovenian companies”, Winter 2000/2001.

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This finding was also tested with statistical methods. We used Independent Samples T-test to test the
dependence of performance of companies on the use of nonfinancial performance measures. All companies in the
sample were split into two groups. Companies using nonfinancial performance measures were placed into group 1.
Companies not using nonfinancial performance measures were placed into group 2. We expected, that companies
from group 1 on average perform better than companies from group 2. Results are presented in Table 4. In order to
generalize the conclusion, the t-test for independent samples was used. We tested the following hypothesis (Curchill,
1995):
H0: 1 = 2
H1: 1  2

Table 4: Analysis of the relationship between the use of nonfinancial performance measures
and company performance
Net income ROE ROA Profit margin
t-test for comparison of two means -0.644 -4.354 -0.841 -0.237
Confidence level (2-tail) 0.520 0.001 0.401 0.813

Source: Research ‘Cost management in Slovenian companies’, winter 2000/2001.

The data allow us to reject null hypothesis (H0) and accept alternative hypothesis (H1) only for ROE. There
are statistically significant relationships between the use nonfinancial performance measures and ROE. On the basis
of these results we can not conclude on the whole that Slovenian companies using nonfinancial performance
measures are performing better than those companies which do not use nonfinancial performance measures in their
decision-making. Further research will be needed to investigate this research question further.

Although Slovenian companies are tracking nonfinancial measures, only 6.5% of Slovenian companies
actually implement or use formally modelled balanced scorecard. Nevertheless, a lot of companies (91.3%) track at
least several nonfinancial measures. What is more, they find nonfinancial measures very important and
indispensable when measuring and managing company’s performance. In general, companies track the following
nonfinancial measures:

 Satisfaction of customers (66.3%),

 Quality (56.8%),
 Market share (48.5%),
 Employees’ capabilities (34.5%),
 Flexibility (32.2%),
 The number of new products / services (24.2%),
 Activities’ running time (23.1%), and
 The number of innovations per employee (12.9%).

Although nonfinancial measures are increasingly important in decision-making and performance

evaluation, companies should not simply copy measures used by others. The choice of measures must be linked to
factors such as corporate strategy, value drivers, organizational objectives and the competitive environment. In
addition, companies should remember that choice of performance measurement is a dynamic process - measures
may be appropriate today, but the system needs to be continually reassessed as strategies and competitive
environments evolve (Ittner, Larcker, 2002).

Discussion

Our research findings show that until recently, a relatively small number of Slovenian companies have
undertaken implementation of CCMCs. TQM, continuous improvement, and JIT are best known among Slovenian
companies (Tekavcic, Sink, 2002), but it should be stressed that almost a quarter of Slovenian companies are still
unfamiliar with them, although since the early 1980s these concepts have been intensively used abroad. CCMCs are
implemented and used mostly by large companies (Tekavcic, Sink, 2002). This is quite understandable, given that
the implementation of these concepts is connected with relatively high requirements for knowledge, resources, and
time. However, there is a considerable pay-off, as we found out that on average companies using CCMCs perform
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better than those which fail to do so. Larger firms tend to know CCMCs better and use them more frequently than
smaller firms because larger companies possess more financial and managerial resources, have greater production
capacity, and attain higher levels of economies of scale. Similarly, Krumwiede (1999) argues that according to a
survey4 conducted by the Cost Management Group of the Institute of Management Accountants (IMA) ABC
adopters tend to be somewhat larger on average than nonadopters. Possible reasons for the size difference include
availability of resources (human and financial) and economies of scale in implementing ABC at multiple sites.

Research also indicated some reasons why Slovenian companies fail to implement CCMCs. First, the most
important reason is lack of top management buy-in. Despite top management’s awareness of the potential benefits of
the concepts, it is not willing to invest its own time or the funding needed to implement them. Top management buy-
in is very important because management stimulates creativity, empowers employees, provides leadership, and
establishes a framework for providing resources. Countless case studies have shown that top management’s
commitment is crucial (Maguire, Putterill, 2000, page 601). For example, previously mentioned IMA survey’s
results support the idea that ABC needs strong commitment from upper management. 58% of the usage-level
companies had a very high level of top management support (versus 40% for the nonusage companies) (Krumwiede,
1999, page F1-4). Top managers must not only be committed, they must be seen to be committed. An effective way
to do this is by being present at key gatherings, actively participating in them, and supporting the initiatives both in
word and action.

Second, there tends to be a lack of clear objectives in Slovenian companies. Third, there is a lack of
employee involvement. Employees are not involved in creating, implementing, and continuously improving
CCMCs. Fourth, there is lack of funding. Companies (top management) are not prepared to invest great amounts of
money into implementation of projects. As a counter argument we can say that according to a survey conducted by
the Cost Management Group of the Institute of Management Accountants (IMA) 89% of companies using ABC said
it was worth the implementation costs (Krumwiede, 1999, page F1-5).

Fifth, a lack of information technology support was also mentioned. It must be emphasized that a company
operates in a predetermined direction only by the use of advanced information system that represents basic support
to decision-making. Information has to be proper, accurate and timely, prepared in the most suitable way for those
who use it. Under such circumstances, information supports good decision-making. It is extremely important that
benefits derived from information exceed the costs incurred by collecting it. According to a survey conducted by the
Cost Management Group of the Institute of Management Accountants (IMA), it appears that improvements to the
information system often procede both ABC adoption and reaching the usage level. A high level of IT sophistication
appears to be an important factor in getting to the usage stage for the majority of companies. Of the usage-stage
companies, 61% received an above-average IT score, compared to only 46% of the nonusage stage firms. 5 In
general, companies will have an easier time implementing ABC if their IT system has the following characteristics:
good subsystem for example, sales system, manufacturing system, and so on) integration, user-friendly query
capability, available sales, cost, and performance data going back 12 months, and real-time updates of all these types
of data (Krumwiede, 1999, page F1-4). Sixth, there is a lack of knowledge and training in companies as neither the
implementation team nor the people using CCMCs' information are properly trained.

The aim of our research was to find out the current situation as regards the relationship between cost
management and performance of large Slovenian companies. Reasons why particular types of companies use or fail
to use CCMCs will be defined in greater detail in our further research focusing also on SMEs. It is noteworthy that
there is a considerable difference between large companies and SMEs. On average SMEs do not posses the
knowledge and resources of large companies, however, this is not an excuse to exclude concepts such as
benchmarking and TQM, the use of which shouldn’t be constrained by the size of the company. They should be
implemented in SMEs too, at least to some extend, especially in Slovenian and other CEE companies operating in
transitional turbulent business environment facing severe global competition. TQM should be an integral part of the
culture of every company committed to customer satisfaction through continuous improvement, which is facilitated
through organizational learning which is supported by benchmarking. This culture tends to vary in different
countries as well as in different industries. However, there are certain essential principles which can be implemented
to secure greater market share, increased profits and reduced costs.

Although customer satisfaction has become a top priority for a lot of Slovenian companies today, many
management control systems overemphasize throughput and short term cost control (e.g., reducing scrap and
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rework) within individual departments. These systems based on traditional accounting lead to goal-congruence and
displacement problems. That is, maximizing or minimizing some measure in individual responsibility centers does
not always lead to what is best for the company as a whole. Managers resort to managing the numbers instead of
focusing on activities that would lead to higher quality and lower costs. These conditions cause losses in
downstream processes and also losses to customer or society. This is obviously inconsistent with the goal of
customer satisfaction, and it is also a poor strategy in a globally competitive environment.

Slovenian companies should use a process management approach to improvement which requires defining
each activity as part of a business process that can be continuously improved. Activities defined in this way can be
based on various techniques to decrease time, improve quality, and reduce the cost of those activities. According to
Brimson and Antos (2000), process management is crucial to excellence because high levels of performance are
possible only when activities are carried out to the best possible standards, the unused capacity is minimal, the best
practices are continually made better, and the activities are executed perfectly. 6

Conclusion

Many companies are currently engaging in continuous improvement efforts that recognize the need to
eliminate non-value-added activities so as to reduce lead time, make products or perform services with zero defects,
reduce product costs on an on-going basis, and simplify products and processes. Present dynamic and uncertain
business environment climate makes it hard for companies to meet stakeholder expectations. The proper use of
CCMCs provide managers with the critical information they need to make proper business decisions related to costs
and profitability, so companies can remain strong and efficient when faced with global competition.

Under normal conditions in the past, managers could often afford to be reactive. They could take actions
that nested comfortably within their routine planning and control duties. But with a business moving into a turbulent
business environment, demands for information and analysis become imperative and more challenging. For this
reason it is important that companies learn about and start adopting CCMCs. The use of CCMCs in Slovenian
companies for ensuring their effective performance is required due to the increasing complexity of economic
processes and the system changes in Slovenian economy.

References

1. Brimson, J. A., Antos, J., (2000), ‘Activity-Based Budgeting’ in Barry J. Brinker (ed.), Guide to Cost
Management, (New York: John Wiley & Sons).
2. Churchill, G. A. Jr., (1999), Marketing Research: Methodological Foundations, (Fort Worth: The Dryden
Press).
3. Emerging Practices in Cost Management (1999), James B. Edwards (ed.), Boston: WG&L/RIA Group.
4. Emerging Practices in Cost Management: Strategic Cost Management (2000), James B. Edwards (ed.),
Boston: WG&L/RIA Group.
5. Guide to Cost Management (2000), Barry J. Brinker (ed.), New York: John Wiley & Sons.
6. Handbook of Cost Management 2002 edition (2001), John K. Shank (ed.), USA: WG&L/RIA Group.
7. Ittner Christopher and Larcker David: Non-financial Performance Measures: What Works and What
Doesn’t, http://www.bettermanagement.com/Library/Library.aspx?LibraryID=131&a=8, 22.8.2002.
8. http://www.bettermanagement.com/Library/Library.aspx?LibraryID=147&a=8 - The Most Commonly
Used Key Performance Indicators
9. Kaplan, R. S., Norton, D. P., (1992), ‘Balanced Scorecard – Measures That Drive Performance’, Harvard
Business Review, 70(1): 71-79.
10. Kaplan, R. S., Norton, D. P., (1993), ‘Putting the Balanced scorecard to work’, Harvard Business Review,
70(5): 134-147.
11. Kaplan, R. S., Norton, D. P., (1996), The Balanced Scorecard – Translating Strategy into Action, (Boston:
Harvard Business School Press).
12. Kaplan, R. S., Norton, D. P., (1999), ‘Why Does Business Need a Balanced Scorecard?’ in James B.
Edwards (ed.), Emerging Practices in Cost Management, (Boston: WG&L/RIA Group).
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B. Edwards (ed.), Emerging Practices in Cost Management, (Boston: WG&L/RIA Group).

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14. Krumwiede, K. R., (1999), ‘ABC: Why It's Tried and How It Succeeds’ in James B. Edwards (ed.),
Emerging Practices in Cost Management, (Boston: WG&L/RIA Group).
15. Maguire, W., Putterill, M., (2000), ‘Continuous Improvement in Turbulent Times’ in Barry J. Brinker (ed.),
Guide to Cost Management, (New York: John Wiley & Sons).
16. Oliver, L., (2000), The Cost Management Toolbox – A Manager’s Guide to Controlling Costs and Boosting
Profits, (New York: AMACOM).
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International Journal of Business and Economics, 2(1): 172-178.
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Slovenian Companies’ in S. Sharma and L. Galetic (eds.), An Enterprise Odyssey: Economics and Business
in the New Millenium 2002 (CD), (Zagreb: University of Zagreb, Graduate School of Economics and
Business).
19. Van Der Linde Bob: Performance Improvement: What Gets Results?,
http://www.bettermanagement.com/Library/Library.aspx?LibraryID=3850, 22.8.2002
20. Zikmund, W. G., (2000), Business Research Methods, (Fort Worth: The Dryden Press).

Endnotes
1
We selected those CCMCs, which are most frequently discussed in cost management literature, for example in
Handbook of Cost Management, Guide to Cost Management, Emerging Practices in Cost Management, and
Emerging Practices in Cost Management: Strategic Cost Management.
2
For example, shortly after becoming the first US company to win Japan's prestigious Deming Prize for quality
improvement, Florida Power and Light found that employees believed the company's quality improvement process
placed too much emphasis on reporting, presenting and discussing a myriad of quality indicators. They felt this
deprived them of time that could be better spent serving customers. The company responded by eliminating most
quality reviews, reducing the number of indicators tracked and minimizing reports and meetings (Ittner, Larcker,
2002).
3
Interviewers were properly trained because the research was part of their postgraduate course work.
4
The data cited in this paper come from two IMA surveys which were mailed in November 1995 and January 1996.
5
The ‘IT score’ was based on responses to questions relating to system characteristics such as subsystem integration,
query capability, available data, and frequency of updates.
6
More on process thinking and management, also in Slovenian companies, see in Rant, Sink, 2002.

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