The Balanced Scorecard

Managing Change and challenges for the futureWeek 22

www.bradford.ac.uk/management1Learning OutcomesAppreciate management accounting change as cumulative, complex, and interconnected processes over timeBe familiar with the basics of an institutional theoretical perspective on management accounting changeIdentify characteristics of successful and unsuccessful changeAppreciate deep-set cultural and political aspects of changeDescribe key considerations when implementing and managing accounting changeGive an overview of some of the possible drivers and challenges of management accounting in the future

2IntroductionChange is all-pervading in and around organizations - management accounting is no exception: Considerable and ongoing change in the business environment context within which MA operates Changes in the role of management accountants Changes in both the technical nature and the use of MA techniques and systems

Design, implementation and ongoing management of change have become a crucial part of the roles of todays management accountants 3What is Change, and Why the Concern At All?We might consider change occurring at the following levels:

Environmental changee.g. new policies or rules at the economy/society level, new and emerging world orders, new technologies, or new social fadsOrganizational change e.g. mergers and acquisitions, alliances and networks amongst and between organizations, outsourcing Intra-organizational change e.g. the implementation of new accounting techniques, redefining departmental structures, staff re-skilling Group/individuals change e.g. the arrival and/or departure of staff, promotion, retirement 4A framework for Understanding MA ChangeAn institutional theory of MA change: Starts from a premise that MA constitutes a largely rules-based and routinized feature of day-to-day organizational lifeSuch rules and routines augment stability and continuity over time in organizational practice Rules and routines embodied in MA practices help bring order to organizations that otherwise could be far less organized given their mixed/complex make-up

So, how does such order come about? For most organizations, order is achieved through the inter-play of rules, routines and shared assumptions within an organization about the nature of its activities We call these shared assumptions institutions 5A framework for Understanding MA Change Rules and RoutinesRules are necessary to co-ordinate and give coherence to the actions of groups and/or individuals within an organization Rule-based behaviour can result from an explicit assessment of the available alternativesThere are different rules for what to do, when, and how Selected rules are then repeatedly followed so as to avoid undertaking such assessments on every occasion

By repeatedly following rules, organizational behaviour can become programmatic or automaticPremised in the tacit knowledge that people acquire through experience When people just know what to do, when and how

At this stage, such rule-based behaviour can be described as a routine

6A framework for Understanding MA Change Rules and Routines7

The interaction between budgeting rules and routines, and its influence on people's actionsA framework for Understanding MA Change - InstitutionsInstitutions - defined as an organizations shared and taken-for-granted assumptionsThey are simply the way things are around heree.g. Budgeting has become institutionalized in an organization when it is a generally accepted and unquestioned way of doing things Institutions form over time, with the ongoing re-enactment of rules and routines They are very often tacit assumptions which people just know as being how we do things without necessarily being observed in practice like rules or routines So, institutions can be observed through the things that people do within organizationsIt is rules and routines which shape the actions per se 8A framework for Understanding MA Change - Institutions9

The influence of institutions on actions through rules and routinesA framework for Understanding MA Change - InstitutionsAs MA rules and routines (e.g., budgeting) become more strongly institutionalized, they also become harder to change And they are rarely questioned, but assumed by all as the way things are doneThey become deep-set and ingrained aspects of an organization People seldom look outside the bubble or investigate alternative business ways

It is important to stress that an organizations rules, routines and institutions should be understood as far as possible before engaging in any change The process of managing (MA) change should give due attention to the existing rules, routines and institutions MA change will likely stand a better chance of success when its technical content and underlying philosophy complement (rather than conflict with) existing MA rules, routines and institutionalized ways Unsuccessful MA Change: Nasty Stuff LtdNasty Stuff Ltd is a small specialist-chemicals manufacturerAround 100 (mostly skilled) staff Since its establishment, production became locked-in to a small number of bespoke contracts with multinational customers

Captives business was so dominant - consistently earned ~ 80% of annual profits But carried substantial risk - specialist plant/labour, and uncertainty over renewal of contracts

Indeed, two major captive contracts were terminated without renewalLed to a severe cash flow crisisHard lessons learned

Directors agreed to redress the dominance of captives work New strategy targeted a 50/50 turnover split between captives and other products Other products to be developed for a broader customer-base, multi-client work 50/50 split to be achieved within five years - ambitious target

Importantly, it was R&D which had responsibility for developing the new multi-client products11Unsuccessful MA Change: Nasty Stuff LtdUnsuccessful MA Change: Nasty Stuff LtdIn Nasty Stuff Ltd there were common assumptions (i.e., institutions) about the nature of the business Particularly concerning the importance of efficiencies, yields, working at (or near to) full capacity

The Managing Director (MD) claimed that these assumptions underpinned a results-orientation Contribution-based information was used considerably in most management reports

Material costs were especially high in relation to other costsOver time, contribution information came to underpin much of the day-to-day language used by the various managers to assess and convey performance in their part of the organizationMarketing Manager, Operations Manager and the Chief Engineer all relied heavily on contributions-based spreadsheets for day-to-day management of their functionsShift leaders and many operators just knew the contribution-earnings of individual products 12Unsuccessful MA Change: Nasty Stuff LtdPost-cash flow crisis, it was clear to MD that the institutionalized business assumptions, encompassing a results-orientation, and grounded in the recurrence of contributions-based routines, had failed to penetrate R&D He believed that R&D was internally focused on playful chemistry, which R&Ds highly-qualified chemists generally characterized as being slow and painstaking

The MD concluded that R&D was detached from the rest of the business, and more concerned with chemistry for the sake of chemistry, than in making money.

MD feared that absence of results-orientation in R&D could hamper new multi-client products ambition

Unsuccessful MA Change: Nasty Stuff LtdMA change in R&D:With the Chief Chemist, MD examined 3 years time-sheets, showing: Unsatisfactory time-utilization in R&D - e.g., only 60% of highly-qualified staffs time was actually spent on research activityNo overtime had ever been worked in three years by R&D staffConfirmed to MD an absence of results-orientation in R&D

Those products which R&D had spent time on, and which had eventually reached the market(s), earned negligible contribution earnings

MD introduced a new/simple system of accountability within R&D new rules Formalization of weekly time-sheets for individual research projects Prioritization of new products which were to be brought to the market by agreed datesUnsuccessful MA Change: Nasty Stuff LtdMD and Chief Chemist also developed new contribution-based reports and new reporting procedures (more new rules) for R&DIntention to make R&D more results-orientedBring R&D more in line with the rest of the business

These new forms of accountability rather rapidly became routine practiceCollection of time sheet data, inputting data, producing reports, holding monthly meetings with MDBut only really applied to the Chief Chemist

MD played a key role in this MA change implementation process, he mobilised:Staff perceptions e.g., utilizing various management-level meetings to convince others that change should take place within R&DResources e.g., drawing on the authority derived from his position as MDDecision-making e.g., monthly performance meetings with C/Chemist

The apparent ease/speed with which the new accounting practices became routinized within R&D was also helped by the initial enthusiasm for change of C/Chemist. He accepted:The necessity of new formalized time-sheets Systems of accountability aligned with elsewhere in the organization 15Unsuccessful MA Change: Nasty Stuff LtdHowever:After two years, there had actually been little change in the general ways of working within R&D

Intended results-orientation had not become instilled into R&Ds day-to-day activitiesThere was no thinking in terms of making money (MD) C/Chemist had acted as a buffer between his staff (in R&D) and the MDs broader concernsNo delegation of the new accounting duties (rules, routines) within R&DNew forms of accountability were not passed down to other members of staff within the department C/Chemist undertook all the new rules and routines of accounting personallyR&D staff had no knowledge of why they were filling in time sheets

New accounting systems in R&D had not changed R&D chemists institutionalized ways of thinking concerning what they did within the organisationResults-orientation not instilled within this department Dominant routines and taken-for-granted assumptions in R&D still expressed in terms of slow and painstaking chemistryUnsuccessful MA Change: Nasty Stuff Ltd - SUMMARYDifficulties of implementing MA change in an organizational setting where new procedures (rules) challenge prevalent taken-for-granted assumptions (institutions) concerning business activity On the surface, the implemented changes appeared relatively simple - time-sheet analysis is not exactly sophisticated management accounting!

On deeper reflection, the small changes implemented in R&D had radical effects Because the new contribution-based rules and routines, and intended results-oriented ways of thinking were fundamentally different to chemistry-oriented rules, routines and taken-for-granted assumptions in that department

If a results-orientation was to develop out from, or alongside the new accounting rules, institutional change was also necessary in R&D The dominant focus on chemistry for chemistrys sake needed replacing by general assumptions of making money and a results-orientation Such institutional change failed to materialize, and the change programme eventually led to conflict, and ultimately failed Successful MA change: PolyfoamPolyfoam was one of the worlds largest producers of polymer foamCompany A (i.e., the case-study) is a wholly-owned subsidiary of Polyfoam

Co. As principal source of management information was the periodic Business Performance Report Provided an overall evaluation of each business area - including cumulative results, current month/period results, available resources, capital expenditure, and an operations review The operations review was probably the most important document, and was designed to provide in a simple two-page format the results and current state-of-play for the business Although annual budgets were prepared for each functional area, they were not considered a management commitment Regarded as an estimate of the likely profitsFailure to achieve the budget was not necessarily considered to be a reflection of poor performance

However, during the 1990s (world recession) profitability declined This incited reconsideration of management information systems, including MA systemsSuccessful MA change: PolyfoamSuccessful MA change: PolyfoamThe recession put severe pressure on all of Polyfoams operating units (including Co. A)Suffered a major decline in demand for its products and incurred substantial operating lossesResponded by combining certain production facilities and seeking various ways to cut costs

Co. As management perceived their problems as stemming from significant competitive pressures in both domestic and overseas markets, poor delivery times, and a lack of quality products and Inadequate MA, and poor management information systems in general

Senior management decided to purchase a fully integrated, computerised management information system called Triton Provided the database needed to track costs through to production, as well as to facilitate the introduction of new software to better control the production process Integrated the financial and the manufacturing dimensions of the businessTotal quality management (TQM), just-in-time (JIT), and statistical production control (SPC) also implemented19Successful MA change: PolyfoamHowever, despite these changes in the manufacturing systemsProfits failed to increaseStill not achieving international competitiveness

They had focused on the mechanics and technical aspects of their new tools and techniques, rather than their substance (or the skills required) to enable the company to become internationally competitiveAttention to the control of operating costs, without due consideration of what was required to be globally competitive, and without sensitivity towards customer needs Response too production-centred and insufficiently customer-focused

However, in time, it was acknowledged that change was needed in the company's overriding (i.e., institutionalized) assumptions: i.e. a shift from a production-orientation to a customer-orientationSuccessful MA change: PolyfoamImplementation of World Class Management

Recognition of a need to change taken-for-granted business ways emerged alongside, and in part was due to, a growing awareness of the WCM programme CEO of Company A had attended a WCM training course offered by a regional training agency He immediately encouraged senior managers to do the same they were impressed!These senior managers embarked on a widespread training programme for multiple staff

5-year plan, plus a 1-page strategy for each business area, were developed1-page strategy outlined each area managers vision for their business

Implementation of WCM met minimal resistanceHad a remarkable impact on business performance - increased profitsPerformance improved over a range of indicators

21Successful MA change: PolyfoamConscious effort made to secure employee involvement in the change programmeUtilise employees skills in meeting customers requirements, and ensure employees attitudes were customer-focused Incentives were changed from individual- to group-based, and a weekly Competitive Edge Report was produced to provide the non-financial and financial measures required to control production

Post-implementation, Co. As managers: Focused more on actual costs and actual trends rather than standard costsMade greater use of non-financial measuresBecame pseudo-accountants, doing their own local analyses

The information flow tended to run from production to accounting, rather than vice-versa So-called Competitive Edge Reports were used for controlling operations, although the Business Performance Reports continued to be used for reporting purposes and for management control by senior managers

Number of people in Accounting (function) declined considerablyFinancial Controller described his new role as consultant to production managersSuccessful MA change: Polyfoam23

Important steps taken by managers for successful change: Successful MA change: PolyfoamThe process of change in Polyfoam can regarded as evolutionary

As changes failed to improve profitability, the need for a more customer-centred production culture was recognizedExternal stimulus in the form of a government incentive programme

It builds on, and extends, existing and prevalent ways of thinking

This need to change the existing institutional base was recognised before new WCM systemsWhen the new rules and routines were introduced, the institutions were already changing in a manner that was compatible with the underlying assumptions of WCMThis 2nd stage of the change involved institutional change, which had begun before the new rules and routines were introduced New (WCM) rules and routines were perceived as being in support of the new (customer-centred production) institutionsImplementing Management Accounting ChangeWe can now summarize some of the key messages from both case studies Institutions matterBreaking the BubbleInstitutional change 25Implementing MA Change: Institutions MatterA clear message from both case studies is that institutions matter

The prospect of successful change implementation is likely to be enhanced if the new MA systems are compatible with existing taken-for-granted assumptions in an organization

Both case studies convey that MA change is complex and multi-dimensional, requires careful planning and thoughtful implementation, and extends significantly beyond the purely technical focusToo much focus on technical aspects of change can create mechanical routines, with little or no accompanying change in dominant taken-for-granted business assumptions Acceptance and ownership of new systems (rules) will likely not be achieved through an overly technical change programme 26Implementing MA Change: Breaking the BubbleImportant to question an organizations existing/settled assumptions before any significant changes to MA systems are made Sometimes, change demands breaking the bubble of taken-for-granted assumptions - not easy to do!

In respect of breaking the bubble, change leaders should: Identify as far as possible the existing institutions within an organizational settingAssess the extent to which new MA systems require institutional change Recognize institutional differences between organizations and different organizational unitsRecognize institutional differences between individual departments of the same organization

Might be sensible for the change leaders to employ an outsider to break the bubble27Implementing MA Change: Institutional ChangeOnce an organizations taken-for-granted assumptions have been identified, how do we go about managing institutional change? Good communication, education and training are paramount (e.g. Polyfoam) Communicate the nature and purpose of any MA change, to all relevant parts of an organizationWhere necessary, explain and openly discuss the importance of changing organizational norms and unquestioned waysTraining in new procedures (and assumptions) should be both extensive and intensive

Mechanical implementation of a new MA system is unlikely to change embedded ways of thinking (e.g. Nasty Stuff Ltd)MA change should be accompanied by clear explanations of why such change is taking place This should encompass everyone who is involved in, or either directly or indirectly affected by the process of change 28Things to Consider When Implementing MA Change29