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Transcript of 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
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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…..
12 September 2002 Ian Herbert - Loughborough
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)
12 September 2002 Ian Herbert - Loughborough
University 6
Typology of empowerment styles
Information sharing Upward problem solving Task autonomy Attitudinal shaping Self-management
Wilkinson (1998)
12 September 2002 Ian Herbert - Loughborough
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!
12 September 2002 Ian Herbert - Loughborough
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?
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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:
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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!
12 September 2002 Ian Herbert - Loughborough
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?
12 September 2002 Ian Herbert - Loughborough
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?
12 September 2002 Ian Herbert - Loughborough
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?
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
University 19
30
X
XH
1990
2002
1998
future
H
HH
YY
core
Utilityco. - Process of business transformation
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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…..
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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!”
12 September 2002 Ian Herbert - Loughborough
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…….
12 September 2002 Ian Herbert - Loughborough
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!
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
University 32
Previous focus of management accounting attention
Management Accounting
System
Detail data/ Information for control
Future
Past
Summary/ strategic information
Job/activity
estimating
Data mining
Period accounts
Plans & budgets
Job costing
Job estimates
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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!!
12 September 2002 Ian Herbert - Loughborough
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)
12 September 2002 Ian Herbert - Loughborough
University 39
£
1990 1998 2002
Output prices
Cost reduction
Cost pressures at Utilityco. - staying ahead of the curve
12 September 2002 Ian Herbert - Loughborough
University 40
30
X
XH
1990
2002
1998
future
H
HH
YY
core
Process of business transformation
12 September 2002 Ian Herbert - Loughborough
University 41
Waves of change impacting upon Utilityco
HO
Market pressures
Benchmarking against
competitors
Initiatives from HO
12 September 2002 Ian Herbert - Loughborough
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………
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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)
12 September 2002 Ian Herbert - Loughborough
University 49
So what are they now doing?1. Previous focus
Analysis
Planning(strategic)
Decision making(tactical)
Control
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
University 51
1. Emerging focus
Analysis
Planning
Decision making
Control
routine routine
expert
12 September 2002 Ian Herbert - Loughborough
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….
12 September 2002 Ian Herbert - Loughborough
University 53
Now ‘engaging with the detail’
Past
Plans & budgets
Detail data/ Information for control
Future
Summary/ strategic information
Job/activity
estimating
Data mining
Period accounts
Management Accounting
System
12 September 2002 Ian Herbert - Loughborough
University 54
Past
Plans & budgets
Detail data/ Information for control
Future
Summary/ strategic information
Job/activity
estimating
Data mining
Period accounts
Management Accounting
System
Using the detail to learn for the future f present
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
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.
12 September 2002 Ian Herbert - Loughborough
University 59
End
www.role-of-management-accounting.com
12 September 2002 Ian Herbert - Loughborough
University 60
End
www.role-of-management-accounting.com
www.role-of-finance.com
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
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
12 September 2002 Ian Herbert - Loughborough
University 63
Orientations of Management Accounting System
Ad hoc
routine
low highPotential benefits from
evaluation
decision profile
Monthly Reporting
Analysis for control
utilitycotrainco
12 September 2002 Ian Herbert - Loughborough
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.