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  What is Cogent?

George Hosking writes:

Cogent is a process which expresses a business as a complex algebraic formula. The algebra rigorously captures the causal relationships between the causes of cost in a business, and the end result – the company’s cost and profit structure. Understanding this algebraic formula gives a CEO great power over his business and its performance.

If someone had told me when I was a line manager in the chemicals industry, that it could be valuable to express my business as an algebraic formula, I confess I would have dismissed it as theoretical business school piffle – quite unlikely to apply in the real world. Fortunately no one did tell me that. Instead, a brilliant Dutch line manager with a superb track record of turning around underperforming businesses, Wim Jansen Verplanke, taught me how to turn around businesses. As he did so he did violence to much of what I had been taught as an accountant – e.g. one of Wim’s favourite phrases was “there is no such thing as fixed cost”. Working with Wim I discovered how true this is, when the need to change is sufficiently great.

It was only after learning how to turn around businesses that I had the thought “there must be a theory behind what I am doing in practice”. That thought led to the development of Cogent, and the algebraic formula. In Cogent, the theory followed the successful practice. And it really works.

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A word of warning:

Cogent works so powerfully and consistently because of the rigorous attention we give to identifying causal relationships. Associations are not good enough. Many approaches similar to Cogent fail because they are not conducted with rigour concerning the causal element.

Where Cogent works best

Cogent’s most appropriate application is to businesses whose activities are repetitive and which contain high levels of complexity – e.g. banking, insurance, consumer goods, packaging, plastics, wholesaling, retailing and speciality chemicals.

How Cogent works

Cogent works by reversing the usual way accountants view costs. Conventional accounting captures costs at the point where they occur. By this time, costs are symptoms of previous management decisions and actions. In Cogent, by analysing what causes cost to occur, management can operate on those causes and so impact, or reshape, the cost and revenue profile of a business. These causes of cost are termed “cost generators”.

IPP (Indirect Product Profitability) effects

Following the calculation of Direct Product Profitability a crucial step in Cogent is to identify, for each unprofitable activity, whether its existence might create a hidden benefit whose value offsets its direct unprofitability. A typical example would be a loss-leader product in a supermarket which, although unprofitable in itself, draws additional customers into the store and so adds to profit overall. Manufacturing companies often identify some unprofitable products in their range which help to capture business with key customers, and thereby justify their existence. We never ignore this dimension.

A case study demonstrates how the process works. See also Client Feedback.

Cogent and Activity Based Costing (ABC)

From time to time we are asked if Cogent and Activity Based Costing (ABC) are the same thing. They are not, although there are similarities.

Cogent originated about 1977, in the field of corporate turnaround, and so pre-dates ABC by some years. While both have their roots in the thinking of Peter Drucker, the focus of the two systems is different: ABC is designed primarily as a cost-allocation system, for product costing, and as such is an improvement on traditional cost accounting approaches. Cogent is designed as a strategic decision-making tool, to be used in the practical process of making businesses more profitable. Cogent produces new perspectives on product profitability, and also on store, customer, order, site, process, delivery and many other forms of profitability.

A principal difference lies in the methodology. ABC typically identifies the main driver of a given cost heading, then allocates all cost under that heading pro rata to the main driver. Cogent identifies several drivers for a single cost heading and expresses them as an algebraic formula reflecting a causal relationship. It is this characteristic, applied in tandem with knowledge of how to remove cost from businesses, which gives Cogent its practical value.

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