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The changing role of management accounting

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1st Jul 2009
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Business models are changing in a way that will fundamentally alter the role of management accountants in future, according to Professors Alnoor Bhimani and Michael Bromwich.

There are key challenges facing businesses in the 21st century and management accountants will have to adapt to the changing commercial landscape. The future of business can be summed up in two words - fluid and flexible.

Innovation in the form of advanced operational systems and flexible organisational technologies has created a whole new form of business enterprise. As a result, these developments have given companies the nimbleness to meet the pressures of the modern business world from global integration to worldwide competition and complex supply chains.

All the signs indicate that companies are seeing the value of developing greater versatility in the future. By their definition, fluid organisations can assume different forms. They can be informal grouping of firms or parts of firms seeking to achieve specific shared objectives. Such groups emerge when the legal, managerial and governance structures of the parent firms are altered to allow more immediate entrepreneurial or innovative activity.

Creating new relationships and openness
These groups may come together to allow access to skills not possessed by some of the parent firms. The result is the creation a portfolio of skills which enables the group to move into novel areas of activities, risk bearing, financing and the development of large projects or new products that would otherwise be unviable.
Unlike traditional corporate structures, fluid entities are bound together by shared endeavours and continuously orchestrated interfacing. The emergence of such organisations has been facilitated by major changes in relationships with suppliers.

The necessity for trust and the role of the customer
The traditional approach of seeking suppliers by formal legal and fully specified tenders has been substituted by more subtle partnerships. The emphasis is now on substantial information exchanges between parties including full knowledge of the cost structures and production activities of all parties.

Today, suppliers may participate in the purchasing organisation’s planning and may even contribute to designing the production technology and the product itself. Trust is therefore a key component.

The customer relationship is also being transformed by these changes. Fluid and flexible firms founded on a strong digital platform now give customers direct access to collaboration infrastructures.

Businesses may co-create their products with the customer or they may go further and allow total product creation. Although enterprises may not pre-design the consumer experience with the product, they still invent the broad product concept and orchestrate the achievement of the product’s potential via the consumer.

The rise of the prosumer
Increasingly, a variety of industrial, service based and digital products are now created directly via customer input and design.

At the forefront of this revolution, consumers have turned into ‘prosumers’ who co-innovate products, services and, most essentially, experiences, with producers. Experience is increasingly becoming part of the consumer package. Apple invented the iPod but users create their own experiences with the product by loading it with independently created podcasts, shows, music and the like. Similarly, Facebook has developed a platform for users to stage their own unique experiences.

In other sectors, similar engagement is now commonplace. Toy firm LEGO takes part in ‘distributed co-creation’ where customers are invited to suggest new products while car manufacturer Peugeot recently asked for public input for a new vehicle.

IBM has adopted the open operating system Linux for some of its computer products and systems and this platform is continuously improved by a wide-ranging community of systems software developers. Different companies may try a variety of approaches but ultimately what facilitates this new attitude to innovation is the rise of the web as a participatory platform.

The new costs of doing business
This puts a new dynamic on the concept of costing. In the context of the electronic platform, the content of the website is generated by the consumer but it is the advertisements on the interactive platforms between users that form the revenue source.

In this situation, pricing and costing issues do not follow a traditional model which may be cost-plus based or market based. Rather, the pricing has to link directly into the strategy of the firm and its revenue-generating model where the product that is costed does not directly align with where sales are generated.

Co-creation of products is not a choice but a necessity for many business models. This is because product choices are infinite and cannot be conceptualised or delivered by one ‘producer’.

The new mindset
This is coupled with the fact that the product created by the consumer is often not in fact the product that is ultimately generating the firm’s revenues. Management accountants have a new role here in determining the costs and profitability of satisfying the specific consumer preferences.

They will need to cost the product attributes developed with, or by, consumers as well as analyse plausible revenue propositions that may be dissociated from the consumer created products.

In order to contribute to this new business process generally, management accountants will want to become part of management and operational teams and need to become business partners. To do this, they will need to understand the technology underlying the organisation and learn to cope without at least some of the conventional formal management control structures or systems.

In supply partnerships, management accountants will focus on designing information systems that allow more ready exchanges of information between parties. They will also need to become comfortable with operating in regimes which may have more informal management and governance structures and which rely more extensively on trust between partners. This has to be done whilst still providing appropriate performance reports.

The evolution of change
In the mid 1990s, fluid organisations appeared on the horizon. Today, we are seeing a rapidly evolution in their development. The challenge for management accountants is to seek solid grounding in knowledge about the technology available to, and deployed by, businesses.

Management accountants, it is anticipated, will aim to become skilled in appraising the benefits, costs and contextual issues of different customer supply networks and supply chains and report appropriately.
This is a formidable challenge but it is a fascinating time to be in business as we see technologies that were originally viewed simply as leisure-time activities now becoming essential components of the business process.

Professor Alnoor Bhimani is Professor of Management Accounting at the London School of Economics.

Professor Michael Bromwich was the Chartered Institute of Management Accountants’ Professor of Accounting and Financial Management at the London School of Economics and Political Science from October 1985 - 2006, now emeritus.

Professor Bhimani and Professor Bromwich will host a discussion entitled 'Management Accounting: Retrospect and Prospect', at the CIMA World Conference 2009 which will be held in Kuala Lumpur, Malaysia, on the 13 and 14 July.

Their book, also titled 'Management Accounting: Retrospect and Prospect', will be available at the end of July at www.cimapublishing.com.

This article was originally published on our sister site, Finance Week. 

 

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