Back to the Toyota illustration... now that Toyota has all these parts engineered to be assembled into any Toyota and have pre-fabricated them and have them in inventory before they get any orders... how does Toyota “cost-justify” those parts? They don’t have any orders so there is no revenue. They are not making any money... they are not saving any money in the current accounting period.
In fact, the parts can’t be “cost-justified.” “Cost-justification” is an expense-based concept. They have created an inventory of assets that can be used, re-used in many implementations in many future accounting periods.
What is the difference between expenses and assets?... how many times you use them. If you use them once, they are expenses. If you use them more than once, they are assets.
Why do you need assets? Assets enable you to do something you otherwise are unable to do. If you want to get into the hotel business... you need an asset, a hotel. If you want to produce custom automobiles on demand, you have to have parts already in inventory that have been engineered to be assembled into many automobiles.
The basic problem is, it is very difficult to put values on assets. The accountants have difficulty putting values on assets. How much is this building worth? Hmmmmm. Has anyone bought a building zoned for the same purpose with the same square footage in a 10 mile radius in the last 15 years? How much was the market willing to pay for it? Or, how many rooms can you rent? Can you rent them out for the same price per square foot as in any building in downtown wherever it is? Can you expect 60% occupancy? 62.1%? 51.5% Do you have to borrow the money? What is the interest rate? What is the prime rate? What is the inflation rate? What is your Internal Rate of Return? This is really complicated!
How much is your house worth? How much was it worth yesterday? How much did you pay for it? What will the market pay tomorrow?
I have a good friend who is a CPA and he told me that the accounting rules prevent the Accountants from valuing assets... probably because of these complications and arbitrary assumptions.
All of the illustrations I have used are for tangible assets... what about intangible assets... like intellectual property... or Enterprise Architecture?! (I will develop some more thoughts about the value Enterprise Architecture for you later).
I was in Tokyo for a week and during that time I visited with two CEO’s... one at a Telephone Company and one at a company called JMAC. Both were scheduled for 20 or 30 minutes... courtesy visits for the visitor from out of town. In both cases they turned into 2 or 3 hour visits because in both cases, I told the CEO’s that the problems they were trying to solve were not IT problems, they were THEIR problems.
At JMAC, the CEO was giving me and a friend who was with me a presentation. He was identifying his customers like Toyota, Honda, Mitsubishi, Kawasaki, General Motors, Ford, Chrysler, General Dynamics, Lockheed, Boeing, McDonnell Douglas, Volkswagen, Daimler Benz, you name it! Major Manufacturers around the world.... and he was associating the revenues that JMAC was deriving from them. I turned to my friend and said, “what is going on here?! This guy is giving us a presentation to try to develop some credibility for him in our eyes... WE ought to be giving a presentation to HIM to develop some credibility for US in HIS eyes”!
My friend underlined an acronym on the hard copy in front of us... MITI (I think I have the acronym spelled correctly) It was the Japanese consortium of Government, Banking and Manufacturing that decided they wanted to own Manufacturing 35 or 40 years ago! They have now changed their name... the Japanese Management something or other (JMAC). What might they want to own next? Hmmmmmm.
All of the presentations and conversations in Japan were being translated by interpreters, typically, young women. I don’t know how they do it! In answer to a question, I did about 20 minutes in my own inimitable style... the young lady wrote down three kanji characters. Then she did about 20 minutes on the interpretation!! Good night!! How did she do that?!
Anyway, when Mr. Yamamoto (forgive me for not remembering his actual name!) left the room, he mumbled something and the interpreter said, “Mr. Yamamoto said you made his head hurt.” Yes, I said that his IT team who was in the room could not solve his problem because it was not an IT problem, it was HIS problem.