The Potential of Lean$Green Accounting
Two movements are coming together to close the gap on profitability and sustainability.
By Jean Cunningham, Founder and President, Jean Cunningham Consulting

The first Lean and Green Summit held in Boulder, Colo., in July 2008 united lean and green experts and executive practitioners. Both the lean and green fields still are rapidly evolving and not scientifically defined. But, in general terms, “lean” is the application of Toyota Production System (TPS) concepts to manufacturing and business processes and specifically includes the elimination of waste and non-value add activities. “Green” is the application of sustainable environmental and commercial practices to manufacturing and business processes. The summit objective was to “Explore how the proven business strategy of lean can naturally be applied to issues of sustainability.”  

Sustainability refers to the ability of human economic systems to last longer and have less impact on the world’s ecological systems. Applied broadly, sustainability may help slow increases in carbon emissions and the depletion of natural resources, and the problems caused therein. On a personal scale, the question to ask is, “What are the green activities by which some unit of economic production for an entity — a business firm, a family household, a farm — can be made more sustainable?”

The emphatic conclusion by summit attendees was that “lean and green” has tremendous potential to be mutually beneficial. For instance, one high-profile lean and green area in the near future will be the forced or pressured reduction in green house gas (GHG) emissions as more legislation is enacted. The language of business is starting to and ultimately always will include the measurement of a company’s carbon footprint and GHG emissions. When appropriately applied, both lean and green activities work to reduce excess production that in this case is the production of carbon emissions. Lean principles drive the practitioner to eliminate non-customer-driven activities, while sustainability efforts are focused on reducing GHG emissions through the reduction of energy usage and non-reusable materials. Companies that start understanding their carbon footprint and how to measure it now will have a distinct advantage going forward.

From the summit discussions, it was easy to see a symbiotic relationship between lean and green as well as — by extension — an expected financial gain from associated activities. But, how to truly measure the financial impact of lean and green initiatives was not obvious and of great concern since “money, money, money” is ultimately the language of business! Since the accounting function measures and reports all things financial, the discussion inevitably morphed into the first public discussion of “Lean$Green accounting.”

Lean$Green accounting is an integrated systems approach for streamlining the accounting, control, measurement, reporting, and management of the sustainability of an enterprise. In practical terms Lean$Green accounting means expanding the traditional reporting framework to take into consideration environmental and social performance in addition to the financial or economic performance.

As a technical practitioner in the lean community for 15 years, I often chafe at the need to financially justify what seems obviously to be the “right” business improvement approach. However, as a financial professional, I fully understand that capital markets demand more than just a “right” feeling and need the ability to see a clear financial gain or advantage for new endeavors. Short-term gains tend to generate the most excitement, and long-term gains tend to have the greatest impact.

Lean$Green Scorecard

Glenn Marshall is the Benchmark and Sustainability Champion with Northrop Grumman Shipbuilding, a national director for the Association of Manufacturing Excellence, and an early adopter for deploying lean accounting.  Glenn and the other lean leaders he works with see the potential for this new initiative and are encouraging experts in lean accounting to develop Lean$Green accounting practices and principles. This article (which will run in two parts in this issue and February) is a first step in that direction.

Glenn has developed a Lean$Green enterprise value stream scorecard to measure multiple levels within an organization. The scorecard is used for accounting, controlling, measuring, reporting, and managing sustainability at all levels of the enterprise. This scorecard focuses on key performance indicators (KPI) of the value streams to eliminate waste by minimizing the consumption of resources. These measurements are necessary to maximize the creation of value for customers, stakeholders, and communities.

The scorecard requires a mix of leading and lagging indicators to drive the deployment and achievement of strategic objectives. These sustainability indicators would be measured from a variety of perspectives — customer, financial, operational, people, and sustainability — and would provide the economic, social, and ecological performance of the enterprise.

Lean$Green accounting will contribute the financial perspective to Glenn’s scorecard. The initial challenge will be to expand on traditional measures to create a sustainability index or construct to enable companies to evaluate their financial performance.

Risks Need to be Overcome

The risks for the establishment and growth of Lean$Green accounting are the same risks that had to be overcome to establish lean financial management. The risk is embodied in an entrenched, traditional adherence to standard cost accounting. The traditional accounting systems fail as lean is implemented for four main reasons:

• Too internally focused – No efforts to include the customer, suppliers, the community, or external stakeholders.

• Completely focused on the value-add activities – No focus on non-value add waste.

• Too precise – Significant time wasted on levels of precision that add no value for the customer.

• Completely focused on manufacturing – No waste-reduction efforts on the enormous amount of time spent on non-manufacturing business processes.

For the expanding group of companies that have already adopted lean accounting, Lean$Green accounting will be much more easily approached, but for the majority the risks remain.

To avoid and/or overcome these risks, the Lean$Green accounting movement needs practical, usable, and “understandable by non-accountants” information to build knowledge and grow  experienced practitioners. As with lean accounting, growth and the understanding of the benefits of Lean$Green accounting will be spread by word-of-mouth and referrals, and not by grand corporate edicts or laws and policies.

Lean$Green accounting cannot wait for a standard set of guidelines such as the ones provided by FASB or GAAP. While these guidelines have proven to have great worth historically, they have been developed over a long period of time and are built on the shoulders of established practice that lean brings into question. A new set of established practices and knowledge needs to be created. But, industry cannot wait, and the “established practices” will come into being over time through alteration, educated guesses, and experimentation. By drawing from the contributions of the early thought leaders, testing hypothesis, and reworking current thinking over several iterations, all of us can help catalyze and bring momentum to establishing this new body of knowledge right now.

This is similar to what occurred with the birth and growth of the lean accounting movement. First, lean manufacturing concepts became much more popular in the 1990s. Then, in 2003 two breakthrough books, Real Numbers and Practical Lean Accounting, were published on accounting in the lean organization. Finally, in 2005 the first annual Lean Accounting Summit was held, to bring together the lean accounting thought leaders to intermingle as well as share their experiences with others ready to learn and contribute. So in about five years, critical mass has certainly been passed, and lean accounting has become an acceptable alternative in lean organizations throughout the world. More time will take it from the acceptable stage to the necessary stage.

Likewise will the development of Lean$Green accounting begin.

Part 2 of Cunningham’s assessment of Lean$Green Accounting will appear in the February edition of Lean and Green News. In it, she will discuss specific ideas for a sustainability index and other measurements that could be used for Lean$Green accounting.