Paper in progress
The role of management accounting
in supporting business
transformation
Ian Herbert
12 September 2002
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
2
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
3
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
4
“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
5
Typology of empowerment styles
 Information
sharing
 Upward problem solving
 Task autonomy
 Attitudinal shaping
 Self-management
Wilkinson (1998)
12 September 2002
Ian Herbert - Loughborough University
6
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
7
What does management accounting have to
do with empowerment?

1.
About…
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
12 September 2002
Ian Herbert - Loughborough University
8
Supporting self-directed work teams (SWTDs)
Coyte 1995
management accountants can support
SDWTs in two respects:
1.
2.
involvement and facilitation of team
development and team processes
providing teams with resource
consciousness.
12 September 2002
Ian Herbert - Loughborough University
9
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
10
How to support self-directed work teams:
3.
4.
5.
establish methods of data collection, and
forms of analysis and presentation.
design and develop key performance
measures
facilitation of direct data input/collection by
operations management and staff
12 September 2002
Ian Herbert - Loughborough University
11
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
12
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
13
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
14
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
15
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
16
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
17
Differences
Utilityco













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

12 September 2002







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
Ian Herbert - Loughborough University
18
Utilityco. - Process of business transformation
1990
1998
X
H
H
core
X
future
2002
H
H
Y
12 September 2002
Y
Ian Herbert - Loughborough University
30
19
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
20
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
21
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
22
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
23
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
24
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
25
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
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
 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
28
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
29
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 bottomup 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
30
Dimensions of Management Accounting Systems
Past
Data
Period
accounts
Job
costing
mining
Detail data/
Information
for control
Management
Accounting
System
Summary/
strategic
information
Plans &
budgets
Job
estimates
Job/activity
estimatin
g
Future
12 September 2002
Ian Herbert - Loughborough University
31
Previous focus of management accounting
attention
Past
Data
Period
accounts
Jobmining
costing
Detail data/
Information
for control
Management
Accounting
System
Job/activit
Summary/
strategic
information
Plans &
budgets
Job estimates
y
estimating
Future
12 September 2002
Ian Herbert - Loughborough University
32
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
33
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
34
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
35
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
36
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
37
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
38
£
Cost pressures at Utilityco. - staying ahead of the curve
Output
prices
Cost
reduction
1990
12 September 2002
1998
2002
Ian Herbert - Loughborough University
39
Process of business transformation
1990
1998
X
H
H
core
X
future
2002
H
H
Y
12 September 2002
Y
Ian Herbert - Loughborough University
30
40
Waves of change impacting upon Utilityco
HO
Benchmarking
against
competitors
12 September 2002
Initiatives from HO
Market
pressures
Ian Herbert - Loughborough University
41
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
42
Expanding scope of the study
IT & info
systems
The learning
organisation
empowerment
SDWTs
Management
Accounting
role, skills &
techniques
Changing
work
practices virtual co.
12 September 2002
Organisational
change & change
drivers
Ian Herbert - Loughborough University
43
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
44
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
45
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
46
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
47
4. Aspects of management accountants' role within
organizations which might evidence changes from the
traditional role to an enlightened and progressive one.
dimension
time focus
outputs
outlook
style
location in organisation ‡
role
∞
traditional
enlightened
past
financial
internal
passive
formal
control
part of technosystem
independent
isolated
control and reporting
performance orientation
future
financial & non-financial
internal & external
dynamic
informal
trust
part of support function
involved
participating
adding value
learning orientation
Figure 1. Aspects of management accountants’ role within organisations
see ‡ Mintzberg (1983)
12 September 2002
∞ Coad (1999)
Ian Herbert - Loughborough University
48
So what are they now doing?
1. Previous focus
12 September 2002
Ian Herbert - Loughborough University
49
1. Previous focus
Seeing how
things are
Making
sure things
stay good
& are fair
Making things
better
12 September 2002
Ian Herbert - Loughborough University
50
1. Emerging focus
routine
routine
expert
12 September 2002
Ian Herbert - Loughborough University
51
1. Emerging focus
Managed
through….
Self/team
monitoring
Transparency/
Distribution of
info.
Micromanaging/
Planning to nth
degree
Real-time
information
Data integrity
12 September 2002
Ian Herbert - Loughborough University
52
Now ‘engaging with the detail’
Data
mining
Detail
data/
Informat
ion for
control
Job/activ
ity
estimatin
g
12 September 2002
Past
Management
Accounting
System
Period
accounts
Summary/
strategic
information
Plans &
budgets
Future
Ian Herbert - Loughborough University
53
Using the detail to learn for the future f
present
Data
mining
Detail
data/
Informat
ion for
control
Job/activ
ity
estimatin
g
12 September 2002
Past
Management
Accounting
System
Period
accounts
Summary/
strategic
information
Plans &
budgets
Future
Ian Herbert - Loughborough University
54
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
55
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
56
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
57
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
58
End
www.role-of-management-accounting.com
12 September 2002
Ian Herbert - Loughborough University
59
End
www.role-of-management-accounting.com
www.role-of-finance.com
12 September 2002
Ian Herbert - Loughborough University
60
benefits against cost of decision evaluation
low
Decision profile
ad hoc
high
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
61
Orientations of Management Accounting System based on cost v.
benefit of decisions
Ad hoc
Monthly
Reporting
Analysis for
control
decision
profile
routine
low
Potential benefits from
high
evaluation
12 September 2002
Ian Herbert - Loughborough University
62
Orientations of Management Accounting System
Ad hoc
trainco
decision
profile
Monthly
Reporting
Analysis for
control
utilityco
routine
low
Potential benefits from
high
evaluation
12 September 2002
Ian Herbert - Loughborough University
63
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.
12 September 2002
Ian Herbert - Loughborough University
64