Presentation on theme: "Paper in progress The role of management accounting in supporting business transformation Ian Herbert 12 September 2002."— Presentation transcript:
Paper in progress The role of management accounting in supporting business transformation Ian Herbert 12 September 2002
Ian Herbert - Loughborough University2 Outline u How the project started u Background to new work practices –Empowerment –Self-directed work teams –The learning organisation u Research method u Outline of the 2 case studies u Interim findings & conclusions (1998) u Second phase 2002 u Latest findings & conclusions u Reflection on role of management accounting
12 September 2002Ian Herbert - Loughborough University3 The original challenge! If we do our job properly there wont be any need for a separate management accounting department! Commercial Manager talking about his departments role in supporting empowerment
12 September 2002Ian Herbert - Loughborough University4 what is empowerment? u A form of employee involvement initiative that was widespread from the 1980s and focused on task based involvement and attitudinal change. u However…..
12 September 2002Ian Herbert - Loughborough University5 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 2002Ian Herbert - Loughborough University6 Typology of empowerment styles u Information sharing u Upward problem solving u Task autonomy u Attitudinal shaping u Self-management Wilkinson (1998)
12 September 2002Ian Herbert - Loughborough University7 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 2002Ian Herbert - Loughborough University8 u 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 2002Ian Herbert - Loughborough University9 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 2002Ian Herbert - Loughborough University10 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 2002Ian Herbert - Loughborough University11 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 2002Ian Herbert - Loughborough University12 Evolving themes for study u Empowerment u Self-directed work teams u Dissemination of financial information u Making financial sense of activities u Financial literacy u Role of the management accounting function - adding value
12 September 2002Ian Herbert - Loughborough University13 Research approach u Initially consisted of on site observation through attendance at management meetings, semi-structured interviews, review of management accounting information and systems. u Approach was to listen to MAs position and follow this through to budget holders opinions of the service they received. u More structured interviews and questionnaires developed from work of Wilkinson and Coyte. u Some sensitivities!
12 September 2002Ian Herbert - Loughborough University14 objectives of the field research u 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 2002Ian Herbert - Loughborough University15 Typical questions to budget holders u What financial information is supplied to you? u Do you understand it? u Does it help you to do your job? u Do you know how well your process/team is doing? u What effects does your process have on the financial performance of other processes? u What improvements could be made in way in which you do things? u How do you assess risk in decision making?
12 September 2002Ian Herbert - Loughborough University16 Typical questions to budget holders (cont) u Could the finance function help you more? –evaluating alternative solutions –controlling costs –making better decisions –improving efficiency u Do the finance staff understand your needs?
12 September 2002Ian Herbert - Loughborough University17 Two case studies u Utilityco. & Trainco. Similarities; u Ex- public sector, very bureaucratic cultures, u engineering based, u perishable product. u Technical processes & skills (to an accountant) u Dynamic market place driven by emerging competition and state regulation
12 September 2002Ian Herbert - Loughborough University18 Differences Utilityco Trainco u Public co. u V. large u Mature and deconsolidating market u Shedding staff u Few strategic variables u Many opportunities to add value u One primary customer, homogenous product u Specialist management accounting but with some fin acc responsibilities u Asset based u Severe cost pressure (impending) u Cash rich u Old economy u Efficiency u Private co. u SME 150 staff - £5m t/o u Expanding opportunities u Retention & recruitment issues u Many strategic variables u Limited opportunities internally u Many customers, variable product u Generalist finance function –FA –MA –Financial Management –Company secretarial u Skill based virtual co. u Less cost pressure (mainly volume) u Cash poor u New economy u Effectiveness
12 September 2002Ian Herbert - Loughborough University19 Utilityco. - Process of business transformation
12 September 2002Ian Herbert - Loughborough University20 Interim findings from Utilityco. u Significant variations in management culture and the level of financial empowerment between the sites. u Evidence of employees feeling empowered to a certain extent but comments such as; we can solve any problem ourselves, as long as it doesnt require spending any money! u Principal control mechanism still expenditure through the budget u Kingdom of Engineering the dominant culture.
12 September 2002Ian Herbert - Loughborough University21 Findings from Utilityco. (cont.) u Focus on stewardship and financial reporting u Traditional language of command & control u many arbitrary control mechanisms u Accounting focus is the past - not future u Little objectivity apparent in decision making - other than downside financial consequences u Lack of use of hard techniques…..
12 September 2002Ian Herbert - Loughborough University22 Examples of appropriate hard techniques u cost benefit analysis u labour analysis and use of overhead recovery rates u cash flow forecasts in revenue decision making u marginal costing u cost centre analysis and efficiency u job estimating, costing, and post-completion audit for larger projects u use of opportunity costing u what-if studies u Decision Support Systems u financial risk analysis with expected values for larger revenue decisions u financial simulation and modelling techniques u Economic stock-holding optimisation u extensive use non-financial performance measures u costing waste and downtime u Activity based costing
12 September 2002Ian Herbert - Loughborough University23 So what were MAs doing? - emphasis on.. u Development of financial accounting systems u Budgeting u Writing spreadsheet front ends to fin. acc. systems and between systems u Monthly reporting and variance analsysis u Development of KPIs u Much talk of using soft skills Benchmarking (ad hoc) our first concern is to protect the Site Manager from nasty budget surprises!
12 September 2002Ian Herbert - Loughborough University24 Perceptions of the users of accounting information u Budget holders felt confident about the financial decisions they were taking. u Everyone had received some financial training u <20% saw no need for further instruction. u However, much negative/defensive comment from more senior managers, e.g…….
12 September 2002Ian Herbert - Loughborough University25 Comments….. u we go through a long critical process to set the budget - nothing gets spent that isn't necessary - take my word! u who said that? Nobody at this site I hope! u its probably alright for other sites but we're different u we've come through a lot in the last few years u we will do it in the future u you can't rush people u our people are very experienced if somewhat traditional u our people are a bit too new for too much finance u no two decisions are the same u our people do it naturally (exercise financial awareness) u we trust our people u we're already beating 'World Class' standards u are you saying we're not efficient? u they can't overspend because we wouldn't sign the cheques!
12 September 2002Ian Herbert - Loughborough University26 Findings from Trainco – finding the balance u Dilemma between factory or empowered style u Reality tended to be nudging along the continuum. Factory styleEmpowered style - centralised- devolved - bureaucratic- participative - structured- fluid = Efficiency & control= Effectiveness & flexibility
12 September 2002Ian Herbert - Loughborough University27 Findings from Trainco – finding the balance u Dilemma between factory or empowered style u Reality tended to be nudging along the continuum. Factory styleEmpowered style - centralised- devolved - bureaucratic- participative - structured- fluid = Efficiency & control= Effectiveness & flexibility
12 September 2002Ian Herbert - Loughborough University28 Findings from Trainco u Finance function multi focused FR, MA, Finance u Key emphasis on financial analysis & aggregate control KPIs u Wrestling with reporting systems/software u Firefighting - e.g. cash management u Strategic involvement in a dynamic environment
12 September 2002Ian Herbert - Loughborough University29 Overall conclusions at interim stage: u primary orientation of management accounting seemed to be.. u Maintenance of financial reporting systems based around annual budgets, monthly accounts with a focus on controlling expenditure. u Little evidence of most of the hard methods and techniques of MA being used to support decision making.
12 September 2002Ian Herbert - Loughborough University30 Overall conclusions at interim stage- u Present role of the management accountant appeared to be that of passive score keeping. u 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. u Discrepancy between views of info. producers & users
12 September 2002Ian Herbert - Loughborough University31 Dimensions of Management Accounting Systems Job costing Job estimates
12 September 2002Ian Herbert - Loughborough University32 Previous focus of management accounting attention Job costing Job estimates
12 September 2002Ian Herbert - Loughborough University33 A further thought… The dilemma of empowerment for accounting u 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) u Management accounting techniques tend to be seen as external, top-down, checking mechanisms.
12 September 2002Ian Herbert - Loughborough University34 Suggestions u 1. developing a culture of involvement between producers and users of information; u 2. Supporting the concept of the learning organisation u 3. creating a new agenda for accountants within organisations, by working much more closely with decision making teams, at the point of resource consumption. u Proactively finding ways to add value to operations u extending financial awareness beyond the accounting department thereby embedding the role of financial decision making in empowerment initiatives.
12 September 2002Ian Herbert - Loughborough University35 Final thought for Management Accounting u seems to be a genuine gap between management accounting and developments in the new work processes within business transformation. u Accountants role as the prime shapers of organisational information systems might well become redundant.
12 September 2002Ian Herbert - Loughborough University36 The project revisited - June 2002 u Similar format to original research u People much more willing to talk and to be recorded but very difficult to get questionnaires returned!! u Much had happened at both companies and strong evidence of change in role of management accounting at Utilityco.
12 September 2002Ian Herbert - Loughborough University37 Just reflecting…in 1998 u Pre dot.com bubble u Windows 98 having teething problems u Little external (often little internal) u www = world wide wait with poor commercial content u PCs barely multi-media - Broadband? u Web authoring a specialist activity u Gas cheaper than coal u Cold winters, hot summers!!
12 September 2002Ian Herbert - Loughborough University38 Changes at Utilityco u Business environment had changed dramatically u Coal now cheaper than gas u 40% reduction in wholesale prices since 1998 (NETA) (- 27% in peak load £s since 2000) u Many more competitors, u IT and communications revolution (ICT)
12 September 2002Ian Herbert - Loughborough University39 £ Output prices Cost reduction Cost pressures at Utilityco. - staying ahead of the curve
12 September 2002Ian Herbert - Loughborough University40 Process of business transformation
12 September 2002Ian Herbert - Loughborough University41 Waves of change impacting upon Utilityco Market pressures Benchmarking against competitors Initiatives from HO
12 September 2002Ian Herbert - Loughborough University42 What had changed internally? u Genuine move towards an empowered culture evident u Greater involvement of MAs in operations u More use of hard techniques (eg life cycle costing v. fiscal planning u Greater respect for accounting function u More open and constructive interviews u New web-enabled real-time systems u Better communication between departments u Changed year-end! u but reasons for the changes not straightforward………
12 September 2002Ian Herbert - Loughborough University43 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 2002Ian Herbert - Loughborough University44 Report structured under four headings u 1. Technical/quantitative management accounting techniques. u 2. Development of IT based management accounting information systems u 3. Engagement with business management practices and the soft skill set required u 4. Aspects of management accountants' role within organizations which might evidence changes from the traditional role to an enlightened and progressive one.
12 September 2002Ian Herbert - Loughborough University45 1. Technical/quantitative management accounting techniques. u Emerging evidence of greater use of hard techniques to add value to operations u Talk of engaging with the detail rather than accumulation & aggregation. u New focus on optimising; –fuel type; –peak load operating v. base load – mothballing of over capacity
12 September 2002Ian Herbert - Loughborough University46 2. Development of IT based management accounting information systems u Issues of systems, inflexibility, incompatibility, lack of scope overcome through new systems (web-enabled front-ends) u Routine use of internet; – –Intranet –www –b2b commerce
12 September 2002Ian Herbert - Loughborough University47 3. Engagement with business management practices and the soft skill set required u MAs now seen as business partners - now on same side as management managing contracts and subcontractors. u Less time in front of computers, more time talking to engineers and understanding business issues. u Job adverts, selection processes & training now specify greater soft skill set.
12 September 2002Ian Herbert - Loughborough University48 4. Aspects of management accountants' role within organizations which might evidence changes from the traditional role to an enlightened and progressive one. dimensiontraditional enlightened time focus pastfuture outputs financial financial & non-financial outlook internalinternal & external style passivedynamic formalinformal control trust location in organisation part of technosystempart of support function independent involved isolatedparticipating rolecontrol and reportingadding value performance orientationlearning orientation Figure 1. Aspects of management accountants role within organisations see Mintzberg (1983) Coad (1999)
12 September 2002Ian Herbert - Loughborough University49 So what are they now doing? 1. Previous focus Analysis Planning (strategic) Decision making (tactical) Control
12 September 2002Ian Herbert - Loughborough University50 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 2002Ian Herbert - Loughborough University51 1. Emerging focus Analysis Planning Decision making Control routine expert
12 September 2002Ian Herbert - Loughborough University52 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 2002Ian Herbert - Loughborough University53 Now engaging with the detail
12 September 2002Ian Herbert - Loughborough University54 Using the detail to learn for the future f present
12 September 2002Ian Herbert - Loughborough University55 Summary - changes in role of MA u Now a business partner v. isolated specialist u Has devolved knowledge base (power) but kept status/influence through adding value and development of knowledge management culture u Reporting business performance not just financials u Moving towards an holistic data set u Using technology better u Task and project based as well as fiscal intervals u Accounting info. directed to middle and junior management where controllable costs lie u Expanded skill set – evidenced in job specs.
12 September 2002Ian Herbert - Loughborough University56 Situation at Trainco. u Significant increase in turnover and activity scope u Much less change in role of finance u Survived internal review of the function u Doing more with less (and more junior staff) u Many systems issues now resolved through new integrated software u Key involvement in development of learning culture and knowledge management u Radical progression not so discernable but changes in emphasis drawn from outside influences and embedded slowly.
12 September 2002Ian Herbert - Loughborough University57 Summary of the two cases - two very different scopes u Utilityco is about optimisation of on-going operations with significant costs and benefits - MA has a key role in supporting decision making u 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 2002Ian Herbert - Loughborough University58 Final conclusions u New role for MAs is possible and achievable through evolution not revolution u Opportunities for change mainly occur through adversity and benchmarking u 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 u Leverage of technology (ICT) a key skill u Accounting & finance is a broad church and one-size does not fit all.
12 September 2002Ian Herbert - Loughborough University59 End
12 September 2002Ian Herbert - Loughborough University60 End
12 September 2002Ian Herbert - Loughborough University61 benefits against cost of decision evaluation lowhigh Decision profile ad hocDecisions are intuitive/ Major capital or longer acts of faith role of MA term revenue decisions. is legitimising decisions (contracts). and organising financeForecasting Appraisal Modelling routineMany 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 2002Ian Herbert - Loughborough University62 Orientations of Management Accounting System based on cost v. benefit of decisions Ad hoc routine low high Potential benefits from evaluation decision profile Monthly Reporting Analysis for control
12 September 2002Ian Herbert - Loughborough University63 Orientations of Management Accounting System Ad hoc routine low high Potential benefits from evaluation decision profile Monthly Reporting Analysis for control utilityco trainco
12 September 2002Ian Herbert - Loughborough University64 objectives of the field research 1. 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.