Lean and Six Sigma projects routinely succeed on the shop floor and fail in the accounts. The analysis is usually correct, the process genuinely improves, and yet the promised savings never appear in the profit and loss statement. This happens for three structural reasons: savings stay “soft” and cost-avoided, freed capacity is neither removed nor redeployed, and projects are selected by intuition rather than profit impact. Time-Driven Activity-Based Costing (TDABC) addresses all three.
The pattern every improvement leader recognises
Walk into almost any mature continuous-improvement programme and you will find a wall of completed A3s, control charts trending the right way, and a tracker claiming impressive cumulative savings. Then sit with the CFO and ask where those savings landed in the financials. The room goes quiet. The operational story is real and the financial story is missing, and the two have somehow never been reconciled.
This is not a failure of effort or of method. Lean and Six Sigma do what they are designed to do. The failure is at the seam between operations and finance, and it has three recognisable causes.
Cause one: the savings stay soft
Most improvement savings are booked as “cost avoidance” or “soft” savings. We avoided hiring a person we would have needed. We prevented overtime we might have paid. We reduced scrap that would have cost us money. Each of these may be genuinely true, and none of them necessarily changes a single line of the actual financial statements.
The general finding across cost management is blunt: cost-avoidance savings do not hit the financial statements. They are counterfactual. They describe a worse world that did not happen, not a better number than last year. A CFO comparing this year’s accounts to last year’s sees spending that did not fall, and is right to be skeptical of a savings tracker that claims it did. When the improvement team and the finance team are measuring different universes, trust erodes, and the next improvement budget gets harder to defend.
Cause two: freed capacity goes nowhere
This is the deepest cause, and the one TDABC was built to expose. An improvement frees capacity: hours of a person, a machine, a line, a desk. Kaplan and Anderson stated the principle plainly when they designed TDABC. Freed capacity does not become a saving until management either removes the cost of that capacity or redeploys it to productive use.
In practice, neither happens by default. The freed hours quietly refill with other work, or slack, or longer breaks. The headcount stays. The lease renews. The line keeps its full crew. The “saving” exists only as a slide, because the money that funded the capacity is still going out the door every month. An improvement that frees 15% of a team’s time and changes nothing else has, financially, freed nothing. It has merely made the team less busy, which is invisible on the P&L.
Cause three: projects chosen by gut, not profit
The third cause sits at the front of the funnel. How does an organisation decide which improvement to run next? Too often by intuition, by the loudest stakeholder, by the area where a champion happens to sit, or by where the visible pain is. Rarely by a hard estimate of financial impact, because the data to make that estimate does not exist.
So teams pour months of skilled effort into improving processes that were never the profit problem. They optimise an activity that consumes little cost, or speed up a product line that was already profitable, while the genuinely loss-making customer or the cost-heavy channel sits untouched because nobody could see it. Without a cost model that reveals where profit is actually being made and lost, project selection is a guess wearing the costume of rigour.
How TDABC fixes each gap
TDABC does not replace Lean or Six Sigma. It closes the financial seam they cannot close on their own, and it does so at each of the three failure points.
- It turns soft savings into a quantified business case. Because TDABC prices every activity at a capacity cost rate and traces it to products and orders, an improvement’s effect is expressed in the same euros the CFO uses. The saving stops being counterfactual and becomes a specific, traceable change in unit cost that finance can verify.
- It forces the capacity decision into the open. TDABC reports unused capacity as an explicit, costed line. When an improvement frees hours, the model shows exactly how many and what they cost, so management cannot quietly let them refill. The choice to remove or redeploy becomes a visible decision with a number attached, which is the only way freed capacity ever becomes real money.
- It ranks projects by profit impact. A TDABC model shows which products, customers and channels are profitable and which are not, and where cost actually concentrates. Improvement projects can then be selected for where they will move the financial needle, not where the noise is loudest. The improvement pipeline becomes a profit pipeline.
The slightly contrarian conclusion
The uncomfortable implication is that a Lean or Six Sigma programme without a cost model is, financially, flying blind no matter how disciplined its tools. The 2014 comparison in the International Journal of Productivity and Quality Management (Inderscience) reached a related verdict when it weighed TDABC against the value-stream costing of Lean accounting: for connecting operational improvement to financial reality at the level of products and orders, TDABC is the stronger instrument. The improvement methods find and fix the process. TDABC is what lets you prove the fix paid.
This is the argument we develop in our Lean Six Sigma and TDABC pillar, and it pairs naturally with the question of whether your saved minutes became profit and what happens to one improvement as it cascades up the profitability levels.
If your improvement programme looks healthy on the floor but you cannot point to it in the accounts, that gap is measurable. Start with a free Profit Check, see how we work and what a ProfitAudit 360 covers, or book a scoping call to connect your next project to the P&L before it starts.