paper in progress the role of management accounting in supporting business transformation ian...

Paper in progress

The role of management accounting in supporting business

transformation

Ian Herbert

12 September 2002

12 September 2002 Ian Herbert - Loughborough

University 2

Outline How the project started Background to new work practices

– Empowerment– Self-directed work teams– The learning organisation

Research method Outline of the 2 case studies Interim findings & conclusions (1998) Second phase 2002 Latest findings & conclusions Reflection on role of management accounting


University 3

The original challenge!

“If we do our job properly there won’t be any need for a separate management accounting department!”

Commercial Manager talking about his department’s role in supporting empowerment


University 4

what is empowerment?

“A form of employee involvement initiative that was widespread from the 1980s and focused on task based involvement and attitudinal change.”

However…..


University 5

“Most (initiatives) are purposefully designed not to give workers a very significant role in decision making

but rather to enhance employee contribution to the organisation.”

Wilkinson (1998)


University 6

Typology of empowerment styles

Information sharing Upward problem solving Task autonomy Attitudinal shaping Self-management

Wilkinson (1998)


University 7

For the purpose of this study ‘financial’ empowerment is…

The discretion of employees to commit external expenditure and direct the consumption of internal resources - involving budget holders

AND……• Is distinct from other schemes where workers might have

discretion over processes or customer interactions,

BUT……

• do not have the discretion to spend money!


University 8

About…

1. providing relevant financial information to managers and operatives in ways that they understand so that they can plan and monitor activities better.

two-way dialogue between producers & users of financial information;

– enabling empowerment of all employees through information systems

– understanding & engaging with the ‘sharp-end’

– devolving the power of knowledge

What does management accounting have to do with empowerment?


University 9

Supporting self-directed work teams (SWTDs)

Coyte 1995

management accountants can support SDWTs in two respects:

1. involvement and facilitation of team development and team processes

2. providing teams with resource consciousness.


University 10

supporting SWTDs: specifically…

1. focus on value generation and value analysis

2. focus on more timely measures:

– different communication media– interpersonal skills needed to better facilitate the

transfer and – understanding of key performance information by

operations personnel


University 11

3. establish methods of data collection, and forms of analysis and presentation.

4. design and develop key performance measures

5. facilitation of direct data input/collection by operations management and staff

How to support self-directed work teams:


University 12

Evolving themes for study

Empowerment Self-directed work teams Dissemination of financial information Making financial sense of activities Financial literacy Role of the management accounting

function - adding value


University 13

Research approach

Initially consisted of on site observation through attendance at management meetings, semi-structured interviews, review of management accounting information and systems.

Approach was to listen to MA’s position and follow this through to budget holder’s opinions of the ‘service’ they received.

More structured interviews and questionnaires developed from work of Wilkinson and Coyte.

Some sensitivities!


University 14

objectives of the field research

to assess the extent to which management accounting is able to support the process of business transformation.

– Is MA information useful, relevant, timely, appropriate?– What techniques are being used– Do MAs support users - communication & dialogue– Is this really a new enlightened role?


University 15

Typical questions to budget holders

What financial information is supplied to you? Do you understand it? Does it help you to do your job? Do you know how well your process/team is doing? What effects does your process have on the financial

performance of other processes? What improvements could be made in way in which

you do things? How do you assess risk in decision making?


University 16

Typical questions to budget holders (cont)

Could the finance function help you more?– evaluating alternative solutions– controlling costs– making better decisions– improving efficiency

Do the finance staff understand your needs?


University 17

Two case studies

Utilityco. & Trainco.

Similarities;

Ex- public sector, very bureaucratic cultures, engineering based, ‘perishable’ product. Technical processes & skills (to an accountant) Dynamic market place driven by emerging

competition and state regulation


University 18

DifferencesUtilityco Trainco

Public co. V. large Mature and deconsolidating market Shedding staff Few strategic variables Many opportunities to add value One primary customer, homogenous

product Specialist management accounting but

with some fin acc responsibilities

Asset based Severe cost pressure (impending) Cash rich Old economy Efficiency

Private co. SME 150 staff - £5m t/o Expanding opportunities Retention & recruitment issues Many strategic variables Limited opportunities internally Many customers,

variable product Generalist finance function

– FA– MA– Financial Management– Company secretarial

Skill based → virtual co. Less cost pressure (mainly volume) Cash poor New economy Effectiveness


University 19

30

X

XH

1990

2002

1998

future

H

HH

YY

core

Utilityco. - Process of business transformation


University 20

Interim findings from Utilityco.

Significant variations in management culture and the level of financial empowerment between the sites.

Evidence of employees feeling empowered to a certain extent but comments such as;

“we can solve any problem ourselves,

as long as it doesn’t require spending any money!”

Principal control mechanism still expenditure through the budget

‘Kingdom of Engineering’ the dominant culture.


University 21

Findings from Utilityco. (cont.)

Focus on stewardship and financial reporting Traditional language of command & control many arbitrary control mechanisms

Accounting focus is the past - not future Little objectivity apparent in decision making - other

than downside financial consequences Lack of use of ‘hard techniques…..


University 22

Examples of appropriate ‘hard’ techniques

cost benefit analysis labour analysis and use of overhead recovery rates cash flow forecasts in revenue decision making marginal costing cost centre analysis and efficiency job estimating, costing, and post-completion audit for larger projects use of opportunity costing what-if studies Decision Support Systems financial risk analysis with expected values for larger revenue decisions financial simulation and modelling techniques Economic stock-holding optimisation extensive use non-financial performance measures costing waste and downtime Activity based costing


University 23

So what were MAs doing? - emphasis on..

Development of financial accounting systems Budgeting Writing spreadsheet ‘front ends’ to fin. acc. systems and

between systems Monthly reporting and variance analsysis Development of KPIs Much talk of using soft skills Benchmarking (ad hoc)

“our first concern is to protect the Site Manager from nasty budget surprises!”


University 24

Perceptions of the users of accounting information

Budget holders felt confident about the financial decisions they were taking.

Everyone had received some financial training

<20% saw no need for further instruction. However, much negative/defensive comment

from more senior managers, e.g…….


University 25

Comments….. we go through a long critical process to set the budget - nothing gets spent

that isn't necessary - take my word! who said that? Nobody at this site I hope! its probably alright for other sites but we're different we've come through a lot in the last few years we will do it in the future you can't rush people our people are very experienced if somewhat traditional our people are a bit too new for too much finance no two decisions are the same our people do it naturally (exercise financial awareness) we trust our people we're already beating 'World Class' standards are you saying we're not efficient? they can't overspend because we wouldn't sign the cheques!


University 26

Findings from Trainco – finding the balance

Dilemma between factory or empowered style Reality tended to be ‘nudging’ along the continuum.

Factory style Empowered style

- centralised - devolved

- bureaucratic - participative

- structured - fluid

= Efficiency & control = Effectiveness & flexibility


University 27

Findings from Trainco – finding the balance

Dilemma between factory or empowered style Reality tended to be ‘nudging’ along the continuum.

Factory style Empowered style

- centralised - devolved

- bureaucratic - participative

- structured - fluid

= Efficiency & control = Effectiveness & flexibility


University 28

Findings from Trainco

Finance function multi focused FR, MA, Finance Key emphasis on financial analysis & aggregate

control KPIs Wrestling with reporting systems/software Firefighting - e.g. cash management Strategic involvement in a dynamic environment


University 29

Overall conclusions at interim stage:

primary orientation of management accounting seemed to be..

Maintenance of financial reporting systems based around annual budgets, monthly accounts with a focus on controlling expenditure.

Little evidence of most of the ‘hard’ methods and techniques of MA being used to support decision making.


University 30

Overall conclusions at interim stage-

Present role of the management accountant appeared to be that of passive score keeping.

Gradual move from top-down control towards bottom-up empowerment not matched by a similar change in the role or outlook of the management or information systems.

Discrepancy between views of info. producers & users


University 31

Dimensions of Management Accounting Systems

Management Accounting

System

Detail data/ Information for control

Future

Past

Summary/ strategic information

Job/activity estimatin

g

Data mining

Period accounts

Plans & budgets

Job costing

Job estimates


University 32

Previous focus of management accounting attention


System


Future

Past


Job/activity

estimating

Data mining

Period accounts

Plans & budgets

Job costing

Job estimates


University 33

A further thought…The dilemma of empowerment for

accounting

Empowered workers will make decisions and monitor team effectiveness in ways that are familiar and comfortable to them undermining the potential role of accountants (many ‘own’ systems evident)

Management accounting techniques tend to be seen as external, top-down, checking mechanisms.


University 34

Suggestions

1. developing a culture of involvement between producers and users of information;

2. Supporting the concept of the learning organisation

3. creating a new agenda for accountants within organisations, by working much more closely with decision making teams, at the point of resource consumption.

Proactively finding ways to add value to operations extending financial awareness beyond the

accounting department thereby embedding the role of financial decision making in empowerment initiatives.


University 35

Final thought for Management Accounting

seems to be a genuine gap between management accounting and developments in the new work processes within business transformation.

Accountant’s role as the prime shapers of organisational information systems might well become redundant.


University 36

The project revisited - June 2002

Similar format to original research People much more willing to talk and to be

recorded but very difficult to get questionnaires returned!!

Much had happened at both companies and strong evidence of change in role of management accounting at Utilityco.


University 37

Just reflecting…in 1998

Pre dot.com bubble Windows 98 having teething problems Little external email (often little internal) www = world wide wait with poor commercial content PC’s barely multi-media - Broadband? Web authoring a specialist activity Gas cheaper than coal Cold winters, hot summers!!


University 38

Changes at Utilityco

Business environment had changed dramatically

Coal now cheaper than gas 40% reduction in wholesale prices since

1998 (NETA) (-27% in peak load £s since 2000)

Many more competitors, IT and communications revolution (ICT)


University 39

£

1990 1998 2002

Output prices

Cost reduction

Cost pressures at Utilityco. - staying ahead of the curve


University 40

30

X

XH

1990

2002

1998

future

H

HH

YY

core

Process of business transformation


University 41

Waves of change impacting upon Utilityco

HO

Market pressures

Benchmarking against

competitors

Initiatives from HO


University 42

What had changed internally?

Genuine move towards an empowered culture evident Greater involvement of MAs in operations More use of hard techniques (eg life cycle costing v. fiscal planning Greater respect for accounting function More open and constructive interviews New web-enabled ‘real-time’ systems Better communication between departments Changed year-end!

but reasons for the changes not straightforward………


University 43

SDWTs

empowerment

IT & info systems

Organisational change & change

drivers

The learning organisation

Changing work

practices - virtual co.

Management Accounting role, skills & techniques

Expanding scope of the study


University 44

Report structured under four headings

1. Technical/quantitative management accounting techniques.

2. Development of IT based management accounting information systems

3. Engagement with business management practices and the ‘soft’ skill set required

4. Aspects of management accountants' role within organizations which might evidence changes from the traditional role to an enlightened and progressive one.


University 45

1. Technical/quantitative management accounting techniques.

Emerging evidence of greater use of ‘hard’ techniques to add value to operations

Talk of ‘engaging with the detail’ rather than accumulation & aggregation.

New focus on optimising;– fuel type;– peak load operating v. base load– mothballing of over capacity


University 46

2. Development of IT based management accounting information systems

Issues of systems, inflexibility, incompatibility, lack of scope overcome through new systems (web-enabled front-ends)

Routine use of internet;– Email– Intranet– www– b2b commerce


University 47

3. Engagement with business management practices and the ‘soft’ skill set required

MAs now seen as business partners - now on same side as management managing contracts and subcontractors.

Less time in front of computers, more time talking to engineers and understanding business issues.

Job adverts, selection processes & training now specify greater soft skill set.


University 48

4. Aspects of management accountants' role within organizations which might evidence changes from the traditional role to an enlightened and progressive one.

dimension traditional enlightened

time focus past future outputs financial financial & non-financialoutlook internal internal & externalstyle passive dynamic

formal informal control trustlocation in organisation ‡ part of technosystem part of support function independent involved isolated participatingrole control and reporting adding value ∞ performance orientation learning orientation

Figure 1. Aspects of management accountants’ role within organisations see ‡ Mintzberg (1983) ∞ Coad (1999)


University 49

So what are they now doing?1. Previous focus

Analysis

Planning(strategic)

Decision making(tactical)

Control


University 50

1. Previous focus

Analysis

Planning(strategic)

Decision making(tactical)

Control

Seeing how things are

Making things better

Making sure things stay good & are fair


University 51

1. Emerging focus

Analysis

Planning

Decision making

Control

routine routine

expert


University 52

1. Emerging focus

Analysis

Planning

Decision making

Control

Self/team monitoring

Transparency/

Distribution of info.

Micro-managing/

Planning to nth degree

Real-time information

Data integrity

Managed through….


University 53

Now ‘engaging with the detail’

Past

Plans & budgets


Future


Job/activity

estimating

Data mining

Period accounts


System


University 54

Past

Plans & budgets


Future


Job/activity

estimating

Data mining

Period accounts


System

Using the detail to learn for the future f present


University 55

Summary - changes in role of MA

Now a business partner v. isolated specialist Has devolved knowledge base (power) but kept status/influence

through adding value and development of knowledge management culture

Reporting business performance not just financials Moving towards an holistic data set Using technology better Task and project based as well as fiscal intervals Accounting info. directed to middle and junior management

where controllable costs lie Expanded skill set – evidenced in job specs.


University 56

Situation at Trainco.

Significant increase in turnover and activity scope Much less change in role of finance Survived internal review of the function Doing more with less (and more junior staff) Many systems issues now resolved through new

integrated software Key involvement in development of learning culture

and knowledge management Radical progression not so discernable but changes

in emphasis drawn from outside influences and embedded slowly.


University 57

Summary of the two cases - two very different scopes

Utilityco is about optimisation of on-going operations with significant costs and benefits - MA has a key role in supporting decision making

Trainco has myriad small operational decisions (little scope for detailed analysis). Also has significant strategic options but which are difficult to appraise financially.


University 58

Final conclusions New role for MAs is possible and achievable through

evolution not revolution Opportunities for change mainly occur through

adversity and benchmarking At present role/status looks encouraging but the key

factors seem to be; – expertise in making financial sense of activity– communication and teamworking– general information systems – wider training/experience & professional integrity

Leverage of technology (ICT) a key skill Accounting & finance is a broad church and one-size

does not fit all.


University 59

End

www.role-of-management-accounting.com


University 60

End

www.role-of-management-accounting.com

www.role-of-finance.com


University 61

benefits against cost of decision evaluation

low high

Decision profile ad hoc Decisions are intuitive/ Major capital or longer

acts of faith role of MA term revenue decisions.

is legitimising decisions (contracts).

and organising finance Forecasting

Appraisal

Modelling

routine Many small specialist led Learning organisation

decisions are Benchmarking

Role of MA is retrospective holistic data set

analysis for control based Involvement

scorekeeping based on financial

data plus non-financial KPIs


University 62

Orientations of Management Accounting System based on cost v. benefit of decisions

Ad hoc

routine

low highPotential benefits from

evaluation

decision profile

Monthly Reporting

Analysis for control


University 63

Orientations of Management Accounting System

Ad hoc

routine

low highPotential benefits from

evaluation

decision profile

Monthly Reporting

Analysis for control

utilitycotrainco


University 64

objectives of the field research1. To evaluate the perceived contribution of management accounting

information to the needs of managers and the extent to which accountants can support devolved decision making.

2. Evaluate the extent to which the traditional and more contemporary, techniques and practices of management accounting are relevant, and are actually used, in decision making at the point of resource consumption.

3. To suggest how management accountants might better support operational managers and, in doing so, how communication and understanding could be improved between the producers of information and its users.

4. Draw conclusions about how management accountants might succeed in developing a more proactive or enlightened role in supporting organisational activity.

paper in progress the role of management accounting in supporting business transformation ian...

Documents

u approach

u background

budget holders u

field research u

empowerment slide

budget holders cont

value slide

management accounting