A Field Study on the Acceptance and Use of a New Accounting System

Jamshed J. Mistry Suffolk University

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems

V.G. Narayanan Harvard Business School

A Field Study on the Acceptance and Use of a New Accounting System

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We thank our research partners for their participation. We appreciate the comments of

workshop participants at Michigan State University.

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Abstract

This study examines the attitudes, use, and acceptance of a new accounting system in a

pharmaceutical corporation that switched from an Activity Based Costing System to the

Theory of Constraints System (TOC). Using structuration theory as a framework, we posit

that user responses and attitudes towards TOC are influenced not only by the technical

features of the system and the potential economic benefits, but also by the fit between TOC

and the existing structures of the users environment. When users interact with TOC on an ongoing basis they form interpretations of the new system and based on such

interpretations, they exhibit actions with respect to the use of TOC ranging from

championship to rejection of the system. We explore cross sectional variations in the use of

the system and link such variations to the practical features of the new system as well as

the social structures of the users environments.

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A Field Study on the Acceptance and Use of a New Accounting System

1. Introduction

This study examines the adaptation, acceptance, and use of a new accounting

system in a firm. It uses structuration theory and a practice lens to posit that organizational

users responses, attitudes, and use of a new accounting system are driven by the fit

between the system and the existing structure and agency of the users environment, as

well as the interactions between the users and the system on an ongoing basis. Such

interactions in turn are influenced by the users existing knowledge set, prior training,

professional norms, expectations, and beliefs related to the new system. Based on such

interactions, users form interpretations of the new system and exhibit a set of actions with

respect to the system. These actions range from championship of the new system to active

rejection of the system.

The practice perspective on structuration examines how people interact with a

system (such as a new technology or a new accounting system), and in the process of such

interactions, construct structures that shape their use of the system (Orlikowski 2000). This

perspective recognizes that it is not just the mere presence of the system (the material),

or the use of the system by humans (the social) that drives the outcomes from the

system. Rather it uses the notion of constitutive entanglement, i.e., the social and

material are inextricably linked. Through repeated interactions, people shape the rules and

resources, and are in turn shaped by them, which drives the outcomes.

Our analysis is based on a field study of a leading pharmaceutical company

headquartered in Asia. This company instituted a TOC system based on the principles of

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Goldratt. The TOC system supplanted a standard costing and ABC accounting system and

was met with mixed response from the managers. The new system changed the focus of

the organization from cost minimization to a focus on maximizing throughput and

inventory turns. In addition, at the recommendation of the consultants who marketed the

new system, the firm also changed its performance measurement and incentive

compensation system for sales personnel from individual, ABC-based targets to divisional,

TOC based targets.

We conducted a series of field visits and interviews with key personnel and elicited

their views of the new system. There was variation in the responses of managers to the new

system as well as their use of the system. While some managers enthusiastically embraced

the new system, others were passive or resistant. We demonstrate that the acceptance and

use of each manager is based not only on the economic benefits of the new system but also

on their professional norms, interpretive schemes, and performance measurement systems.

Over a period of time as people engage in interactions with the TOC system, and as the

TOC system interacts with the existing accounting and control systems, as well as the

social norms of the user groups, cross sectional variations occur in the use of the TOC

system as well as attitudes towards the system.

We begin by documenting four types of responses to the TOC, i.e., active

resistance, resistance, acceptance, and championship, as well as identifying the drivers of

each type of response, and their implications for the acceptance of the TOC system.

Evidence from structured field interviews suggests that the primary drivers of a positive or

negative response to the system are changes to the performance measurement and incentive

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system, power structure, and the match of the new system to the structure and professional

norms of each department.

Finally, we use field evidence to systematically document via empirical

illustrations that the same system is enacted in different ways in different departments and

that such differences arise as a result of the interaction between the TOC system with the

structure and agency of each department, notably, the structural properties of the social

systems, the facilities, the professional norms, interaction patterns, and codes of conduct,

and interpretive schemes of managers in the department. For example, the most active

resistance to the TOC system was exhibited by the HR and sales departments. The roots of

the resistance were however, different in each department. The resistance of HR arose

from skepticism about the data and technology driven nature of the TOC. Traditionally,

the HR department had a people orientation and a qualitative approach to problem solving,

and this structure emanated from as well as was reinforced by the professional norms of

the department which included a people based problem resolution, consultative processes,

and a non-blame culture. In addition, the performance measurement system in the firm

evaluated HR based on its ability to meet recruitment and retention goals, and the VP of

HR was concerned that the new culture would alienate people and lead to higher turnover.

The resistance to TOC in the sales department emerged from a different source, i.e.,

a change in the performance measurement system from individual bonuses to divisional

bonuses. This created a dissonance in the department, which had hitherto focused on

individual goals and targets, and placed pressures on their professional environment which

had traditionally emphasized goal orientation, individuality, and personal ambition.

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In contrast to sales and HR, the TOC system was enthusiastically championed by

the Supply Chain and IT departments. The TOC system was a perfect fit with the

information intensive environment and the analysis orientation of the supply chain

department. In addition, the TOC system brought the performance measures that the

supply chain department had traditionally focused on, i.e., inventory turnover and

shortages, to the forefront of the firm. For the IT department, which had a preference for

objectivity, logic, and speed of information dissemination, the TOC system brought

perceived clarity in decision making, and emphasized decision making based on objective

data. Thus, consistent with structuration and practice theory, the acceptance and use of the

TOC system in each department was a function of three conditions, i.e., conventional

understandings and shared meanings (interpretive conditions), practical features of the

system (technological conditions), and social structures and norms (institutional

conditions).

This study contributes to the accounting literature by providing a nuanced

characterization of the factors that drive the acceptance, adoption, and attitudes to a new

accounting system. It provides field testing of a theory that has been underutilized by

accounting literature, i.e., structuration and practice theory. Structuration has been used by

extant research to study technology adoption in firms; its use in the context of an

accounting system enhances understanding of the agency as well as social factors driving

accounting system adoption and use.

The reminder of the paper is organized as follows. Section 2 discusses the theory

and research questions, and Section 3 describes our research setting and process of study.

Section 4 provides the insights from our field interviews. Section 5 concludes.

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2. Theory and Hypotheses

Although managerial researchers agree that accounting and control systems have

technical, economic, behavioral, as well as social implications, there is limited research in

the extant analytical, archival, and experimental accounting literature of the study of social

implications. Accounting and control systems such as budgeting, cost allocation,

performance measurement, and incentive compensation systems have largely been studied

from a deterministic perspective, whereby it is posited that the economic or technical

characteristics of accounting systems interact with behavioral factors to cause outcomes. A

large body of research in this area has explored how accounting and control systems

should be designed, and how they influence the firm and the people who use them. The

economic based view considers the design of accounting and control systems so as to

motivate managers and minimize agency losses from hidden action or hidden information

(see see Lambert [2001] for a review), whereas the behavioral view focuses on departures

from the economic optimal arising from judgmental and cognitive limitations of decision

makers (see Luft and Shields [2003] for a review).

Recently, the information systems literature has used a structuration perspective

which examines the interaction between people, structures, and technologies, and

recommends using a recursive, practice oriented lens (Orlikowski 2000). Initially

conceptualized by Giddens (1979), structuation is defined as the process by which social

structures (whatever their source) are produced and reproduced in social life (DeSanctis

and Poole 1994: 128). Structuration considers human action as an essential element, and

focus is placed on human actions that embed structures (rules and resources) within a

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system (such as a new technology) during the development phase, as well as the actions

involved in appropriating the structures at the time of the use of the system (Orlikowski

1992, 2000). The focus of structuration is on gaining a better understanding of the socio-

political process by which structures are embedded within a system (Giddens (1979, 1984).

Adaptive Structuration Theory (AST) focuses on the variations that occur when

advanced systems are used (DeSanctis and Poole 1994). AST examines organizational

impacts of new systems arising from two sources. The first is the structural potential,

which in turn has two components, i.e.., structural features and spirit. Structural features

refer of the type of structures that are provided by the new system such as the specific

rules, resources, and capabilities. Spirit refers to the users interpretations about the values

and goals of the new system. The second factor driving variations in outcomes is

structures that emerge in the course of human interactions with the system. In the process

of interacting with the system, the users make judgments and decisions regarding the

extent of use of a system, its interaction with the other systems in place, and the extent to

which the system is consistently used over time. Desanctis and Poole (1994) refer to the

process by which a rule or a resource within a system is brought into action as

appropriation of the structure. These appropriations are not mechanistically chosen, but

rather selected by users and likely to have cross sectional and temporal variations within

and across user groups. The factors that influence a user groups appropriation of structures

include interaction patterns in user groups including leadership styles, the group members

knowledge and experience with the structure, members beliefs about the knowledge set of

other users, and the extent of intra-group agreement on how the structures should be

appropriated. For example, a user group could observe a similarity between a structure of a

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new system and other structures of the same system or other pre-existing systems, which

can evoke positive or negative reactions.

A modified approach to structuration has been recommended in recent literature

which considers human actors involvement with a structure not as appropriation but rather

as enactment. This view, which is termed as the practice lens on structuration considers the

structures of a system not as embodied within the system but rather as emerging when

individuals interact with the technology and through such interactions shape and modify

the technology (Orlokowski 2000, 2002). Thus technology or accounting structures are not

independent, external, and waiting to be appropriated, but rather are constituted and re-

constituted via human engagement with the system.

The practice perspective suggests that when people use a system, the interaction

between the structure and human agency drive the acceptance and use of the system. The

structural component of a system includes the properties of the system as developed by the

designers, and other structures that are enacted in the course of the use of the system via

interactions. Agency includes users interactions with the material aspects of the new

system as well as the influence of other existing systems, social norms and codes of

conduct, and users assumptions and knowledge about the system.

Structuration theory and accounting

Structuration theory has been used to examine the context of management

accounting within the social structures of an organization. Macintosh (1994) argues that

because the structuration framework relies on social theories that describe, explain, and

analyze the social world and practices involved in complex management accounting and

control systems, it enables a better understanding of the social context of management

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accounting. A comprehensive understanding of managerial accounting and control systems

requires us to create a more detailed analysis of such social practices. Structuration

facilitates such analyses via its incorporation of the social theories of signification and

communication, domination and power, and legitimacy and morality (Macintosh, 1994).

In contrast with other social theories, structuration includes both structures and

agency. Macintosh (1994) posits that by including these two concepts, structuration

combines the structuralist position (the abstract codes that guide our behavior) and the

existentialist humanist position (the actions of individuals as they interact with each other

in organizational settings). The result of this combination is a process where social systems

sometimes function to almost automatically reproduce the status quo, while at other times

they undergo radical change. This focus gives credence to the dynamics of history and

change, and the ability of both to influence social interaction in organizations. Thus, the

framework provides a more comprehensive analysis of management accounting and

control systems, and helps explain intricacies that are beyond the scope of most other

frameworks. The value of structuration goes beyond the financials of a company as it

enables organizations to not only communicate financial numbers, but also reveals the

social codes related to power and morality (Macintosh and Scapens (1990).

In his review of structuration theory and its implications for management

accounting research, Busco (2009) suggests that the theory conceptualizes a way of

making sense of social life in an organization. He argues that structuration is useful in

exploring how management accounting systems can be implicated in processes of learning

and culture change in an organization. Busco (2009) combines struturation theory with

Giddens (1991) more recent thoughts on modernity to identify how management

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accounting systems can be utilized as socially constructed objects of trust for the

processes of change. Although such a trust will not guarantee that change will occur or

occur in some desired direction, it might increase the possibility of replacing trust in the

predictability of routines with trust in the change process.

Structuration provides a useful theoretical lens to study the adaptation and use of a

new accounting system such as TOC. Figure 1 provides a theoretical framework for

understanding cross sectional variations in the extent of use and the patterns of use of a

new accounting system such as TOC using a structuration perspective. The structure of

TOC in practice refers to the enactment of the TOC system to daily managerial activities.

Structure includes rules, regulations, frequency of use, and patterns of TOC use (or non-

use) in accomplishing work activities. The overall structure of TOC use is influenced by

other structural sub-components such as culture, goals, and hierarchies. In enacting TOC

structures, individuals draw on existing measurement and control system, professional

norms, routines, and habits in their group or department, and their assumptions and

knowledge of past actions. We test the framework in figure 1 using field data. The next

section describes our field research setting.

3. Research Setting

The setting for our study is a publicly traded pharmaceutical company (BPharm)

located in Asia.1 BPharm produces and distributes pharmaceutical and proprietary drugs,

with 80% of sales generating from outside its home country. It employs over 10,000 staff,

of which about 20% are scientific staff and hold advanced degrees. In 2007, after a number

1 The name of the company has been disguised to preserve anonymity.

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of years of anemic growth in margins, BPharm employed a consulting group (CG) to assist

in improving performance.

After preliminary meetings with the top management, CG recommended two new

initiatives, one for Operations and the other for Product Development. Both initiatives

were based on the philosophy of the Theory of Constraints (TOC). The next sub-section

describes the basic principles of TOC, followed by the process of implementing TOC at

BPharm.

3.1 Theory of Constraints

The Theory of Constraints (TOC) is based on the principle that the strength of any

chain, process, or system is dependent upon its weakest link Goldratt (1989). TOC

focuses on three key performance measures: throughput, inventory, and operating expense.

Unlike traditional accounting systems which focus on production and therefore consider

inventory to be an asset until sold, TOC emphasizes on the rate at which the firm generates

income through sales, rather than through production. TOC is a significant departure from

absorption costing and defines inventory as the money invested in goods that the firm

intends to sell or material that the firm intends to convert into salable products. TOC does

not recognize the concept of value-added and overhead. TOC defines operating expense as

all funds that the firm expends on converting inventory into throughput. It argues that to

optimize, a company needs to decrease inventory or operating expenses and increase

throughput. Anything that may hinder a company from accomplishing this goal should be

considered a constraint.

A constraint may be external or internal. An internal constraint exists when the

market is demanding more from the system than it can provide. An external constraint is

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evident when the systems supply is more that the market can accommodate. TOC

recommends that the firm identify the root causes of the constraints and investigate ways

to remove the constraint.

3.2 Theory of Constraints at BPharm

In the spring of 2008, BPharm started implementing the TOC based on Consulting

Groups recommendations. The first program, i.e., Project Management focused on the

process of developing a drug and bringing it to market (R&D and New Product

Development). Senior management divided this process into three stages, i.e., development

stage, integration stage, and filing stage. The development phase included the development

of the drug in the lab, the bench scale, and the pilot test of the product. The integration

phase involved executing the exhibit batches in the manufacturing facility for conducting

bio-studies. In this stage, the drug was tested further on humans before it could be sent to

the Food and Drug Administration in the U.S. (for example) for approval. The filing stage

comprised of three parts: pivotal studies (bio studies on humans), stability studies (in lab)

and the preparation of the registration documents. The filing phase included the

preparation of the registration document and ended with the filing of the product with the

Food and Drug Administration in the U. S. or the European regulatory authorities. Finally,

in the last stage the drug was sent to the approving authority for approval.

Initially, the management team determined that the weakest link in the chain (i.e.,

the constraint) was integration as they had several projects in queue for integration. They

determined that their capacity was four projects per month or forty eight each year, as this

was the maximum that the manufacturing team could handle in the integration phase. As

one product moved out of this phase (leaves integration) another one could be put into the

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system (termed as the virtual drum). However, they subsequently found that the primary

uncertainty was in the development stage as it involved developing the drug prototype and

it was difficult to predict accurately the amount of time (cycle time) needed to develop a

new product. The development phase involved multiple loops of the bench scale, lab scale,

and a pilot bio-study. Each loop was termed an iteration and management determined

that each process took, on average two and a half iterations or seven and a half months (as

each iteration took an average of 3 months). Thus, management determined that the release

of projects should be controlled based on work in process in the development phase as this

was the weakest link in the chain. Finally, it was also determined that the number of

iterations that could be completed would determine the number of projects that could be

worked on in a given year.

In the area of new product development, CG placed higher emphasis on execution

as opposed to planning. CG advised BPharm that an emphasis on execution would enable

the company to finish the project on time, assure a smooth flow projects, reduce

multitasking, and enable early identification of problems so as to be able to take the

necessary corrective actions. Multitasking was especially problematic at BPharm; too

many projects were being executed simultaneously, which placed pressure on people and

resources. CG also recommended BPharm reduce the number of projects to lead to better

flow and throughput.

To manage the project portfolio, three metrics were tracked, Due Date Performance

(i.e., the project was finished on pre-determined due date), cycle time of projects from start

to finish, and throughput (i.e., number of projects completed per unit of time). A new

system was introduced to manage the product development process. This system (The

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Critical Chain Project Management or CCPM), managed the distribution of workload and

set priorities for tasks. No other changes were made to the strategy or the structure of the

organization.

Another focus of the TOC was inventory management. Based on CGs

recommendations the following actions were implemented. First, inventory turns was

identified as the critical metric to be tracked on a daily basis. Second, the company moved

from a system of forecast based planning to consumption based planning. Thus, inventory

was not stocked based on forecasting, but rather based on replenishment, with buffers built

at various stages of the supply chain. The inventory levels in the buffers were tracked by

colors to facilitate replenishment. Black indicated zero inventory, red indicated that

replenishment was immediately required, yellow indicated that replacement would be

required soon, and green indicated that inventory was at a comfortable level. The inventory

status was required to be updated on a daily basis. The metrics tracked included Stock-out

%, Quality of Data Upload, Primary Sales, Secondary Sales, Inventory Turns, and Manual

Orders. In order to implement this initially, a number of distributors in the domestic

country were asked to computerize the inventory replenishment cycle by joining the

companys MYSAP system.

3.3 Field Data Collection

The author team conducted a series of structured in-depth interviews with BPharm

managers during the summer and fall of 2009. An additional set of interviews were

conducted in the summer of 2010, primary for clarification and collecting additional data

regarding the TOC program. The interviewees included: the Senior Vice President of

Human Resources (VP-HR), the Vice President of Information Technology (VP-IT), the

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Executive Vice President of R&D and Product Development (VPR&D), the Vice

President of Supply Chain Management (VP-Supply Chain), the Senior Director of Sales

(SD Sales), the Managing Director and Chief Operating Officer (MD- COO), and the

CFO. The objective of the interviews was to obtain information about the dynamics of the

TOC implementation in each department. We sought to obtain managers involvement in

the TOC process and their perceptions regarding the implications of the system for the firm

as well as their individual departments. The interviews, which lasted between 45 minutes

and two hours per interviewee, were recorded and transcribed by a professional

transcribing firm.

4. Evidence and Analyses

4.1 TOC in BPharm

Senior management of BPharm had exploratory meetings with Consulting Group in

early 2008. CG conducted a 10-day workshop the next month in with the senior

management group. Consistent with the tenets of TOC, Operations and Product

Development were identified as the critical areas of focus. During the workshops, BPharm

managers were appraised that TOC represents a significant departure from the existing

standard costing and conventional overhead allocation system in the firm because it does

not recognize the concept of overhead. Furthermore, unlike Activity Based Costing, TOC

does not recognize the importance of classifying costs into value added and non value

added. For optimal performance, TOC argues that it is critical to decrease inventory or

operating expenses and increase throughput. Any activity that hinders a company from

accomplishing this goal is labeled a constraint and the goal is to reduce these constraints.

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After an analysis of the existing processes via preliminary group interviews with

managers, Consulting Group identified inventory turns as the critical performance metric

to be tracked. Implementation began in early summer 2008, and in addition to inventory

turns the following performance measures were tracked on a daily basis: Stock-out percent,

Primary Sales (i.e. sales to stockists or distributors), Secondary Sales (sales by stockists to

the final customer which may be a hospital or a patient), and manual orders (orders not

generated by the on-line system designed by Consulting Group). The TOC implementation

was piloted in one state with 19 distributors (BPharm had a total of over 8,000

distributors). Over the next few months, the TOC was implemented for 1,100 distributors.

At the time of the interviews, TOC had been in place for over one year.

Examination of pre- and post-TOC operational and financial data provided the following

insights: (1) Number of projects completed increased significantly, (2) Number of days

sales outstanding decreased from about 200 to about 21, (3) Market share and revenues

remained relatively constant at about 2.5%, and (4) Profit before extraordinary items

remained relatively constant at about 20%. Interestingly however, managers had widely

varying views about the extent to which TOC was being used, the success of the TOC, and

the future of TOC. Some managers indicated that the TOC had been a success and brought

a huge improvement to important operational metrics, while other managers had opposite

views. The following sections analyze the cross sectional variations in how different

departments in BPharm enacted TOC. We link the differences in TOC practice to the

differences amongst departments in their structure with respect to rules, authority, and

orientation, and differences in agency such as performance measurement systems,

institutional factors such as professional norms, and interpretive schemes such as

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assumptions or knowledge that users draw upon when enacting the structures and systems

in practice.

4.2 Variations in Enactment of TOC

Our field interviews indicated mixed reactions to the TOC, with some departments

unequivocally supporting the system, others actively resisting the system, and some

departments passively accepting or opposing the system. Through our field interviews, we

were able to glean information about the drivers of the users attitudes towards the system

and observe the enacted TOC in practice.

4.2.1 CEO reactions: TOC as a means for aggressive growth

Interviews with the CEO demonstrated that he viewed TOC as a vehicle for

achieving a high level of growth for the firm. The CEO, who had been appointed in 2001,

was dynamic and goal oriented and his personality matched the lead consultant at CG. The

CEO was impressed by CGs claim that TOC was the only means of achieving the firms

growth targets. The strong technical orientation of TOC appealed CEO who had an

engineering degree and an MBA from premier institutions at the US. Under the CEOs

leadership BPharm witnessed remarkable growth via mergers, acquisitions, and joint

ventures, which transformed the company from a mid-sized pharmaceutical to a global

giant by 2009.

The CEO actively supported the TOC and agreed with its philosophy:

The focus is on improving the system as a whole. If you increase throughput

without increasing your operating expenditures, that will lead to better

results. TOC recommends that first, you must focus on what is constraining

the flow. Second, you choke the release of projects, otherwise that will clog

the system. Third, reduce multi-tasking because efficiency dramatically

slows down when people multitask.

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The CEO viewed the TOC as not only a means of achieving growth, but indeed of being

the only mechanism that would enable the company to grow. This is evidenced by his

response to the interviewers question regarding TOC vis a vis ABC:

I think that it [ABC] will lead to local optimization. If you see the entire

system as a whole, only then it will work. If you see each activity, cut it,

chop it, and see it in isolation, you will be misleading. You will be doing

improvement, no doubt, but you will improve something that will not impact

your bottom line.

The CEO viewed road-blocks to growth as constraints. He was of the opinion that any type

of restriction to growth was to be tackled immediately and aggressively, and as a result the

TOC system of color coding the inventory levels, and immediate attention to metrics was

consistent with his vision regarding the means for achieving growth. His focus was on the

efficiency of the system as a whole. He viewed the TOC as aligned with the organizing

structure of a growth oriented organization, and as supporting his role as providing the

essential leadership to enable the growth. He viewed the role of the performance

measurement and control system as providing an understanding and encouraging employee

effort towards system efficiency and system growth, rather than efficiency and growth of

individual areas. Because of his leadership orientation, he had a tournament model of

competition, where the primary goal was to get ahead.

In course of his interactions with the TOC several benefits of TOC became

immediately salient to the CEO. These included, a decrease in stockouts, a reduction in

project cycle time, and increase in the rate of project completion. As a result, the CEOs

belief in TOC was strengthened. TOCs highlighting of bottlenecks and focus on

eliminating constrains appealed to his professional norms and shaped his interpretation of

the system and his championship of the system (Figure 2).

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4.2.2 HR reactions: TOC hampering qualitative and people orientation

The human resources (HR) department was critical of TOC. Not only did they view

it as less than useful to their structures and practices in place, but they also regarded it as

contrary to HRs people orientation. The VP of HR was articulate in his criticism of TOC,

commenting: I would not have driven the change this way. He viewed the TOC as driven

by very very hard core logic based approach without an understanding of the qualitative

factors and the views of the people who use the system and are measured by it. He was

unimpressed by the lead consultant at CG, who he described as: a bull in a china shop

personality. His belief in the qualitative orientation of HR was reflected a number of

instances in his conversation:

A lot of issues that I seem to be picking up are more from a qualitative

sense as people talk to me.

In addition his people orientation was also apparent:

People are not speaking up when they need to speak up. We are pretending to be the emperors new clothes. If [CEO and COO] are not able to see the body language of people I think we should not call ourselves

a very perspective organization.

[During the meetings with the CG, our people were] totally switched off.

Not a word was said. I see it happening every time and question myself,

what does this silence mean?

We are talking about human beings, we are talking about emotions, we are

talking about vulnerability, sensitivities, and in my view, change is more

like an emotional process and less like a logical process, at least change of

the people kind.

The VP HR believed that CG had bullied the top management to buy into their

system, without an adequate understanding of its suitability. He sensed a rebellion in the

ranks however he felt that people would not speak up arising from respect for the CEO

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and other top managers. One primary concern he had with the TOC was its focus on hard

metrics designed by the consultants, instead of more holistic and people-oriented goals

such as recruitment and retention. The metrics put in place by TOC were completely

different from his goals as well as his operating style and as a result he was open in his

rejection of the metrics as: sheer nonsense and absolute drudgery.

In the course of the implementation of the TOC, the VP HR perceived that TOC

was hindering his retention goals.

In doing this we have gone to other extremes almost like a mercenary. For

example, I have started losing people in my research organization. One

very senior person who left recently was telling me, and again he was very

guarded, that my worry is that in this company I think people have enjoyed freedom of speech, I suddenly feel people are not speaking up, which is a

far more disastrous consequence even beyond just TOC. People are just not wanting to speak up.

Silence could be acquiescence, silence could be indifference and my worry

is if this goes on it will be like this guy who left said [omitted name] my fear is you will still lose some more scientists.

HRs rejection of TOC was not only driven by their disagreement with the goals

and metrics that were the focus of the system, but also because the process of TOC

implementation was not based on participation and consultation. Not only was HR not

involved at any stage in the TOC implementation process, but in the opinion of the VP HR,

others in the organization were also not involved. Anyone who expressed skepticism was

not given a careful assessment and instead a few people pushed the system through. The

VP commented, I dont think you know you can build and institutionalize a change

process by fatwa.

In summary, in their practice of TOC, HR people based their non-use on the fact

that the TOC was ill suited with their qualitative orientation and people orientation, which

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were the structures in place in HR. In addition, the metrics proposed by TOC were

misaligned with HRs metrics of recruitment and retention. As a result, the TOC-based

metrics were not tracked by HR. Institutionally, TOC was not a fit for the consultative

norms and practices in place in other HR systems. This lead to the interpretation that TOC

could change things for the worse and lead to poor buy in of the system (Figure 3).

4.2.3 Sales Reactions: TOC as shifting the planning and control system

We interviewed the Vice President in charge of Branded Formulations, the Senior

Director of Marketing, as well as sales managers from the sales department. Our interviews

with the Senior Director of Marketing at BPharm revealed that the pharmaceutical industry

market in Asia where BPharm operated has some unique features. First, the market was

very fragmented. For example, there was only about a 4% difference in market share of the

company with the largest market share and the company which was the 15th

in terms of

market share. Second, prices were regulated by the government, and as a result the

pharmaceutical firms competed on discounts provided to stockists. The stockists usually

waited until the end of the accounting period to place orders because they could negotiate

large discounts. Finally, a large part of the business was based on the personal relationship

between the sales representative and the stockist.

BPharm had a sales force of 2,500, including managers and sales representatives.

Before the TOC was introduced, the primary roles of the sales department were to generate

new customer relationships, to generate prescription demand, and stock replenishment. The

stock replenishment function was based on ex ante planning and forecasting, in which the

entire sales force participated. Sales representatives had targets for the territories that they

operated in, and were compensated based on sales relative to individual targets. About

24

20% of their total compensation was based on individual commissions based on meeting

territory targets.

The TOC introduced three significant changes to the sales function. First, the

incentive structure for the sales representatives was changed from individual incentives to

divisional incentives. Second, the basis of incentives was changed from primary sales

(sales to stockists) to secondary sales (sales by stockists). Finally, sales representatives

were no longer responsible for the stock replenishment function, but only responsible for

generating sales demand. These changes caused the sales force to react negatively to the

TOC as discussed below.

After the TOC, all the sales representatives in a particular division were paid the

same percentage incentive based on whether the divisional targets were met. Therefore, a

sales representative could be doing an excellent job managing customer relationships and

meeting targets, however, the division may be trailing behind and as a result the sales

representative would not obtain any incentives. The VP HR argued that change in

incentive system from individual incentives to group incentives was causing a higher

turnover amongst the sales representatives than earlier.

The other change to the incentive system i.e., the commission based on secondary

sales, as opposed to primary sales also caused considerable confusion and a lack of buy-in.

The Senior Director of Sales remarked on the reactions of the sales representatives:

So I have my own anxiety whether my prescription is getting sold or not,

and because of this fellows [stockists] mistake of not providing the material in time and in right quantity, I should not be held responsible for

falling short of my secondary sales quota.

25

Our interviews revealed that the sales division was even more skeptical about the

other change introduced by the TOC whereby the sales representatives were no longer

responsible for stock procurement but only for prescription generation. Stock procurement

was fully automated and based on the level of consumption and position of buffer stocks.

The sales representatives viewed this change as a loss of control over an important aspect

of their work. This was evidenced several times in the course of our study:

11 months back a rep was generating prescriptions with his right hand and

with his left hand he was procuring the stocks for that, so he had control on

both. Now today youve told him, that you not only have your right hand to generate prescriptions, you now also have your left hand to generate

prescriptions so please put more effort there and trust somebody else to get

that. Now it is the trust which is difficult for people to immediately come

to You have lost control, so youre anxious So currently we are trying to bring down the anxiety level and trying to bring in much more trust

between the prescription side and the demand fulfillment side. (Senior

Manager, Global Analytics Team).

So now were saying that trust somebody else to do that job as well or better than what you used to do, so you put more time and devote more

attention on prescription generation. That is something youre changing - a habit. Youre changing a habit of focusing only on one side of the job, which is your core job. And youre changing another habit which is trusting somebody else to do a very good job. And unfortunately if you look at the

history of last 2 3 years, there have been some cases in which supplies have been really messed up. Only a few cases, but unfortunately people tend

to only remember exceptions (Senior Director, Sales).

An additional issue that arose after the TOC was implemented was that as a result

of separating the procurement and the prescription generation function, and tying

replenishment to consumption, sales representatives were no longer forecasting.

Previously, forecasting was a means of communication of information from the field up to

the organizational chain. In addition, a problem was that not all customers could come on

board with TOC because of lack of IT infrastructure. The Senior Director of Marketing

26

was of the opinion that the TOC was implemented in a hurry and as a result, a full-

fledged pilot was not conducted. Such a pilot would have revealed problems in the field

such as the customers lack of IT infrastructure. Therefore the sales representatives were

facing a challenge as commented by the Senior Director of Marketing:

If there are a large number of customers who are not on TOC and if theyre into a forecasting habit, their habits are not changed, theyll continue to place orders at the end of the month.

Finally, sales representatives were concerned that the TOC was not resulting in an

increase in sales revenue or margins. The Manager of the Corporate Analytical team

commented:

During the initial stages of our project, we had a different expectation. We

thought that the result would be immediately striking our eyes. Now we

have such mixed results, like in some pockets we can see very good results,

and improvements and in some pockets you see downward trend.

Because we know the outcome is not there, so were trying to redefine what the problem is. Where are we going wrong? CG is trying to tell us where we

went wrong but sometimes they come up with requirements which I find a

bit impractical. For example expecting 100% discipline from all

distributors who are in TOC is very very impractical.

In summary, the sales department viewed the TOC as introducing a major change

in the performance measurement and incentive system, as well as reducing the

controllability of a key aspect of their task. Over time, the TOC did not manifest in an

improvement to their departments performance because of implementation difficulties. As

they interacted with the TOC, they perceived problems with it, especially with regard to

the expectations imposed by TOC over the behavior of their distributors and customers.

This lead to a resistance of the system, which increased over time as problems emerged in

the field during implementation (Figure 4).

27

4.2.4 R&D Reactions: TOC as reducing multitasking and improving completion rates

The R&D department at BPharm handled the development of new products and

formulations. There were 4 R&D heads, including one each for North America, Europe,

the rest of the world, and one for formulation development. Each head managed from 25 to

40 projects at any point in time. Each project manager was allocated a certain number of

projects to manage and coordinate with other functional departments. The focus of the

performance measurement system was on fulfilling process control protocols and

completing projects. The R&D employees were not compensated based on their individual

performance, but rather paid a bonus based on the overall performance of the organization.

The R&D department had a team orientation and a culture of managing issues by debate

and discussion.

The R&D department was one of the focus points for the TOC. Because timeliness

could have a huge impact on the market share of the project, the CCPM that was

introduced as a part of the TOC was helpful in keeping the momentum of projects moving

forward. CCPM played three key roles in improving the efficiency of the R&D

department controlling the release of projects, managing priorities, and timely support

for issue resolution. The Executive VP of R&D (EVP-R&D) viewed CCPM as very useful

in improving the completion rates for projects and increasing efficiency of processes by

reducing multitasking. There was a significant improvement in the rate of project

completion, measured by the department as due date completion. This was an important

metric and tracked weekly as well as followed closely by all the employees in the

department. The EVP-R&D commented that as TOC was implemented, the due date

completion metric showed steady improvement: a 25% improvement was observed

28

immediately on implementation, and by the end of the year the improvement in this metric

was about 55%. He also observed an overall increase in productivity due to reduction of

multitasking, and as a result of the combination of the two factors, the EVP-R&D

perceived an increase in employee satisfaction:

Now that we are controlling the release of the projects, whatever project we

start, goes through the completion phase much faster. So we are able to see

the completion of the project much faster in this environment compared to

the past and that creates better satisfaction.

At the same time however, the EVP-R&D was cautious about the success of TOC

and felt that not all the employees had changed their thinking as a result of the TOC:

There is still lot of work that needs to be done in the implementation. What

we have implemented is essentially the procedures, but in terms of the

peoples mindset, a lot of work needs to be done. Habits have to be changed. All of us have the habit that the more things we do, we see

ourselves as a much better individual than doing one thing at a time. I dont know whether its a habit or a culture all around, we see people preferring to do many things at the same time, rather than trying to focus on one thing

at a time. So we need to build a culture of avoiding multitasking, working

really only with the priorities, and in supporting or resolving the issues and

finding the right solutions to issues that block the flow of the projects. So a

lot of work needs to be done in terms of people management processes.

However, the EVP-R&D was clear that the TOC was beneficial for his department

and confident that the change in mindset would occur and that he would facilitate the

process.

In summary, TOC was successfully implemented and enjoyed a high buy-in in the

R&D department. TOC was a good fit with the quantitative, individualistic, and task

orientation of the R&D department. Important R&D metrics like due-date completion and

number of projects completed became salient. In addition, as TOC was implemented and

users interacted with it, the R&D department was able to observe immediate improvements

29

to efficiency. Not only were these efficiencies highly visible (such as due date

performance) but over time as people interacted with the TOC, these efficiencies further

increased. While on the one hand the TOC improved efficiencies in an important metric,

on the other hand it did not cause any disruptions to the performance measurement system

or to the power structure within the department. Because R&D was one of the focus points

of the TOC, it bought higher visibility to the R&D department from the organization as a

whole. As a result, R&D was supportive of TOC and was interested in facilitating its

success (Figure 5).

4.2.5 Supply Chain Reactions: TOC as reducing improving efficiency and transparency

Supply chain at BPharm was responsible for planning, sourcing, and logistics.

Before the TOC was implemented, supply chain used a monthly planning cycle, which

resulted in a forecast. Stocks were replenished based on the forecasted demand versus

current stocks. Inventory management had been a huge task for supply chain because some

areas had inventory shortages (which resulted in lost sales) while other areas had excess

inventory (and associated carrying costs). Moreover, the production departments also used

their own forecasting and as a result priorities across departments differed. The supply

chain department entire focus was on management of inventory and speed of inventory

turns was an important performance metric. Inaccuracies in demand forecasting were

manifested in the form of excess inventory or inventory shortages. In addition, supply

chain had an information intensive orientation and speed of information dissemination was

of the essence.

The TOC changed the planning process from production based on forecasted

demand to production based on consumption. Forecasting was no longer critical; rather

30

speed of replenishment was of the essence. This removed an important element of

uncertainty and errors for the supply chain department. In addition, other departments now

had to align with the supply chain department, which contributed to an increase in the

power of the supply chain department. The VP of Supply Chain (VP-SC) remarked:

We used to have our own priorities, every function and department used to

have their own priorities of production or procurement kind of things.

Today everything is governed by the consumption so everybody sees the

same priority.

The TOC system brought a high level of visibility to the supply chain department. The

metrics that were routinely tracked by supply chain, i.e., stock movement, sales movement

etc., were now in the forefront of measurement of performance of the entire firm. VP-SC

remarked:

Today you have total visibility end to end of the system if you open the

system, anybody who is authorized can see the system end-to-end.

Further, he remarked that inventory performance was now considered a joint

responsibility, and supply chain was no longer help completely accountable for shortages.

Production departments now had to look at consumption and plan accordingly:

When there are issues and when there are shortages there is a law there is a

faster response, a collective response, where everybody knows that, you

know, the moment the stock becomes zero it becomes black. So one of the

objectives what we take is, how to eliminate those blacks from the system.

So everybody looks at blacks, you know in the chain. Everybody tries to see

what part, what help he can do. Since it is visible and then it is faster,

otherwise if it is not visible than people have to push. Somebody some

planning guy and some supply chain guy has to push somebody to get it

done. So that became much easier.

When questioned about the lack of tangible financial results from the TOC system,

the VP-SC was convinced that the benefits from TOC will eventually accrue for BPharm

because the focus was now on the important metric, i.e., inventory:

31

The revenue increase will be so substantial that whatever benefits we used

to get with activity based costing will be very minimal compared to that.

You cannot focus on all of the things.

In summary, TOC increased the visibility of the supply chain department and

brought the departmental metrics to the forefront of the organization. At the same time it

diffused the responsibilities of stock outs and excess stocks from the supply chain

department to the organization as a whole. Finally, TOC system was information intensive

and as users interacted with it, it increased the speed of information dissemination, which

was consistent with the culture of the supply chain department. As a result, supply chain

was highly supportive of the system and championed it in the rest of the organization

(Figure 6).

4.2.6 IT: TOC as reducing improving speed and transfer of data

Obtaining and disseminating demand and supply information from the distributors

in a timely and efficient manger was one of the primary goals of the IT department at

BPharm. The IT department had an objective and data-intensive focus, and speed and

relevance of data transfer was of the essence. The TOC system had two benefits for IT.

First, it increased the speed of transfer of data, which greatly reduced information

dissemination lead times. The Executive VP of IT (EVP-IT) remarked:

The manufacturing constitutes a significant lead time of the total supply

chain lead time till we sell it to the customers. With [TOC] we know there

can be tremendous gain in actually shrinking lead times and I am trying to

put a lot of stress on reducing lead times to some ridiculously low level so

that its difficult for others to really match the service. Our inventory is in our SAP. So when our [Location Omitted] warehouse sells to the customer,

it allows for automatic buffer management system. So that integrates with

SAP. If the buffer is changed, it flows into SAP and generates process

orders. So the whole drudgery of data processing is out so people have to

only obey what is coming there. Purchase people have to only open the

32

computer and see in morning, what orders to place. There is no forecast, no

hassle. Get the order and get them in the lead time which is promised.

The second benefit of TOC for the IT department was that it increased the visibility

of IT performance. As a result, there was clarity and objectivity in decision making, which

was consistent with the objective mind-set of the IT department. The Vice President of

Formulations and TechOps remarked:

You can see the result at the end, you know stock outs have come down,

visibility has improved. Of course that exposes a lot of things which we

were not knowing before and it has brought a lot of clarity in decision

making even on the shop floor as well as even the management of

operations. Earlier you know many decisions were absolutely subjective,

you know there is some launch and somebody will say why dont you invest this. There is no commitment from anywhere. With strategist artistry and

the strong logic build behind is allows us you know in a very transparent

fashion, take decisions.

Finally, IT was convinced that the success of the TOC was dependent on the

expertise of IT. The IT department spent effort on integrating TOC with other systems in

the organization. As a result, from being a service function, IT became a function which

was at the forefront of the organization, and the contribution of IT to the success of the

system became very salient. The Vice President of Formulations and TechOps remarked:

The IT infrastructure is very critical. [SVP-IT] made that comment right at

the beginning: no IT without IT. Without IT I dont think we would have been able to implement with the speed with which we did.

Therefore, the TOC system was highly championed by the IT department because it

was a good fit to the information intensive and objective orientation of the department, it

increased the salience of the IT function to the rest of the organization, and it increased the

speed of response to issues that arose in the field during implementation (Figure 7).

5.0 Conclusions

33

A new managerial accounting system that emphasizes a different set of measures

from the status quo system is a major change for any organization. The managerial

accounting system can change the way performance is measured and rewarded, it can

change the manner in which decisions are made, and it can shift the focus of the

organization to a new direction. As a result of a new managerial accounting system, power

structures can be altered in the firm, and work processes may change towards greater or

lower efficiency. In this field study of an Asian pharmaceutical firm, we examine the

introduction, use and acceptance, of a TOC-based accounting system that replaced an

Activity Based Costing and Standard Costing system. We use structuration theory to

demonstrate that employees responses, attitudes, and use of a new accounting system are

influenced by how the system fits into the users knowledge sets, training, professional

norms, expectations, and beliefs related to the new system. In addition, as users interact

with the system they either form new interpretations of the new system or confirm their

existing beliefs about the system. As a result, users make conclusions regarding their

acceptance of the system, which can include a high buy-in and championship of the new

system on the one end, to active rejection of the system on the other end.

The structuration framework, although relatively underused in accounting, enables

us to obtain a deeper understanding of management accounting practices (Baxter and Chua

2003, Coad and Herbert 2009). Structuration recognizes that organizational systems

(including accounting and control systems) do not just include the material aspects, but

also include social aspects. Such social systems in turn both enable and constrain human

agency (Coad and Herbert 2010). The systems that emerge as a result of the interactions

34

between the social and material aspects can be different from the original and can drive

users reactions to the system.

Our field interviews suggest that consistent with the practice perspective on

structuration, when users interact with an accounting system they construct structures that

shape their use of the system, which drives the outcomes from the system including usage

and acceptance of the system. We document variation in users responses to the new

system as well as their use of the system based not only on the economic benefits of the

new system but also on users professional norms, interpretive schemes, and existing

performance measurement systems.

Like any field study, our study is also subject to problems such as researcher bias

and generalizability. Regarding researcher bias, it is possible that our interpretation of the

results was limited, and that we ignored other factors, although this risk is present in all

types of methods. Although the field environment provides an opportunity to explore

qualitative and behavioral issues in great depth than other methods, we do not presume that

our results generalize to other settings. However, by using a field study, we are able to

provide a richer characterization of the factors that drive the acceptance, adoption, and

attitudes to a new accounting system. Furthermore, the application of structuration theory

can generalize to other settings where new accounting system is introduced.

35

References

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whither. Accounting Organization, and Society 28: 97126.

Busco, C. 2009. Giddens structuration theory and its implications for management

accounting research. Journal of Management and Governance 13: 249-260.

DeSanctis, G., and M. S. Poole. 1994. Capturing the complexity in advanced technology

use: Adaptive structuration theory. Organization Science 5(2): 121-147.

Giddens, A. 1979. Central Problems in Social Theory: Action, Structure and Contradiction

in Social Analysis. Macmillan, London.

Giddens, A. 1984. The Constitution of Society. Cambridge, Policy Press, London.

Giddens, A. 1991. Modernity and self identity: Self and society in the late modern age.

Cambridge: Policy Press, London.

Goldratt, E. 1989. The Goal: a process of ongoing improvement. 2nd

Edition: MA: North

River Press.

Lambert, R. 2001. Contracting theory and accounting. Journal of Accounting and

Economics 32: 3-87.

Luft, J., and M. Shields. 2003. Mapping management accounting: graphics and guidelines

for theory-consistent empirical research. Accounting, Organizations and Society

28: 169-249.

Macintosh, N.B. 1994. Management Accounting and Control Systems An organizational

and Behavioral approach. New York: John Wiley and Sons.

Macintosh, N.B. and R. W. Scapens. 1990. Structuration Theory in Management

Accounting. Accounting, Organizations and Society, 15(5): 455-477.

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Orlikowski, W. J. 1992. The duality of technology: Rethinking the concept of technology

in organizations. Organization Science 3(3): 398-427.

Orlikowski, W.J. 2000. Using technology and constituting structures: A practice lens for

studying technology in organizations. Organization Science 11(4): 404-428.

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distributed organizing. Organization Science 13(3): 249-274.

37

Table 1

Types of Responses, Drivers, and Implications

Type of

Response

Interest in

Success of

the System

Performance

Measurement

and Incentives

Power

Structure

Process

Consequences

Structural

Consequences

Active

Resistance

(HR, Sales)

None Substantial

Change

Substantial

alteration

Change in

emphasis of

existing

processes

Resist change

Resistance

(CFO)

Low Substantial

change

Some

alteration

Change in

emphasis of

existing

processes

Do not support

change

Acceptance

(R&D)

High No Change Some

alteration

Increased

process

efficiency

Support

change

Champions

(IT, supply

chain)

Very high Some change Substantial

alteration

Increased

process

efficiency

Highly support

change

CEO Very High Potential for

change

Change

based on

potential

outcomes

None Highly support

change

38

Figure 1

Enactment of TOC in Practice

TOC in Practice

S

t

r

u

c

t

u

r

e

A

g

e

n

c

y

Focus of PM and

Control System

Professional Norms

Interpretive Schemes

Poor buy-in and attempt at understanding system

TOC in Practice

S

t

r

u

c

t

u

r

e

Buy-in and understanding of system

Other structures

Interacting with

TOC

39

Figure 2

Enactment of TOC in Practice - CEO

TOC in Practice

S

t

r

u

c

t

u

r

e

A

g

e

n

c

y

Focus of PM and

Control System

- System Efficiency

- System Growth

Professional Norms

- Tournament model

- Getting ahead

Interpretive Schemes

- TOC helps zoom in on bottleneck

- TOC eliminates

constraints

Leadership

Growth atmosphere

Poor buy-in and attempt at understanding system

TOC in Practice

S

t

r

u

c

t

u

r

e

High championship of system

Other structures

Interacting with

TOC

40

Figure 3

Enactment of TOC in Practice HR

TOC in Practice

S

t

r

u

c

t

u

r

e

A

g

e

n

c

y

Focus of PM and

Control System

- Recruitment goals

- Retention goals

Professional Norms

- People based problem resolution

- Consultative processes

- Non-blame culture

Interpretive Schemes

- Skepticism toward a single measure

- System can change things for the

worse

People Orientation

Qualitative Orientation

Poor buy-in and attempt at understanding system

TOC in Practice

S

t

r

u

c

t

u

r

e

People Orientation

Qualitative Orientation

Poor buy-in and attempt at understanding system

41

Figure 4

Enactment of TOC in Practice Sales

TOC in Practice

S

t

r

u

c

t

u

r

e

A

g

e

n

c

y

Individual Orientation

Target Orientation

Poor buy-in and attempt at understanding system

Focus of PM and

Control System

- Individual targets - Extensive ex-ante

planning

- Control over procurement and

sales

Professional Norms

- Goal orientation - Emphasis on

Individuality

- Ambitious culture

Interpretive Schemes

- Skepticism toward a group measure

- Skepticism toward a capped bonus

- Loss of control on

key aspect of task

42

Figure 5

Enactment of TOC in Practice R&D

TOC in Practice

S

t

r

u

c

t

u

r

e

A

g

e

n

c

y

Deadline Orientation

Task Orientation

High buy-in and aim to understanding system

Focus of PM and

Control System

- Work-flow controls - Clearly defined

individual priorities

Professional Norms

- Issue based support resolution

- Single task focus (not

multi-task)

Interpretive Schemes

- TOC viewed as a tool for reducing

multitasking and

improving

completion rates

43

Figure 6

Enactment of TOC in Practice Supply Chain

TOC in Practice

S

t

r

u

c

t

u

r

e

A

g

e

n

c

y

Planning Orientation

Information Orientation

High buy-in and aim to understanding system

Focus of PM and

Control System

- Inventory shortages - Inventory turns

- Speed

Professional Norms

- Information intensive environment

- Analysis orientation

Interpretive Schemes

- TOC viewed as a tool for improving

efficiency and

transparency

44

Figure 7

Enactment of TOC in Practice IT

TOC in Practice

S

t

r

u

c

t

u

r

e

A

g

e

n

c

y

Objective Orientation

Logic Orientation

High buy-in and aim to understanding system

Focus of PM and

Control System

- Speed of information

dissemination

- Buffer management

Professional Norms

- Clarity in decision making

- Decision making based on objective

data

Interpretive Schemes

- TOC viewed as a tool for improving

speed and transfer

of data

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