The impact of information technology on the work of the management accountant has been an area of discussion since Burns and Scapens published their famous article ‘Accounting change project’ which describes the way the work of the management accountant has changed. This article looks at some important IT developments and discusses how they have impacted on management information and measuring performance.
‘Enterprise Resource Planning (ERP) Systems are groups of software applications integrated to form enterprise wide information systems.’ (1)
Before ERP systems, departments would develop their own separate applications. The warehouse might have a perpetual inventory recording system while the manufacturing planning department would have a planning system, and the finance department would have an accounting programme system. These systems were not linked, which meant that sharing of information between departments relied on traditional communication methods. A lot of information was entered into two or more systems manually and often it was necessary to spend time reconciling information from one system with another.
In multi-national companies, subsidiaries around the world may have had their own systems which were not linked into head office. Head office had to wait for the monthly management accounts to find out what was happening in the subsidiaries, and the consolidated position might then not be known for another month.
The 1990s was the advent of the ERP system. The aim was that one system would serve the whole organisation. Typically ERP systems have a modular structure, such as a general ledger module for accounting, an inventory control module, manufacturing resource planning (MRP), sales ledger, purchase ledger, payroll, customer relationship management and sales and marketing modules. The best known providers of ERP systems are SAP, Oracle, PeopleSoft and Baan.
There are several advantages of ERP systems. Firstly, senior managers now have access to all the data in one place, rather than information being spread among separate systems. This enables managers to have a clearer knowledge of what is happening. It also leads to less duplication of data, which means less time is wasted entering information into two or more systems and reconciling information from different systems. The departments are aware of what other departments are doing – so the MRP system will be linked into the purchase system and inventory control system, for example, to ensure that inventory levels are sufficient to support planned production.
Scapens and Jazayeri (2) studied the impact that a global implementation of SAP had on management accounting practices at a multinational building company. What they concluded was that the management accounting data itself did not change, but the role of the management accountant did. Much of the management accounting data could be produced automatically by the system (eg once the standard costs were entered into the system, variances were calculated automatically, based on actual costs). This removed many of the routine tasks traditionally performed by management accountants. Non-financial managers also increased their own accounting knowledge, and with the help of the SAP system, could often get their own accounting reports.
While many of the routine tasks of the management accountant were no longer required, the management accountant was needed to help to interpret operating performance and financial results. Thus the management accountant had become an ‘internal consultant’ rather than a scorekeeper.
Some of the early ERP systems did not share a common database, but were linked together by interfaces, so that data from one system would flow through to another. Information about purchases, for example, would flow from the inventory control system to the general ledger system so that the accounting records could reflect the correct inventory balances. The lack of a common database meant that each department’s data was still inaccessible by other departments.
Truly integrated ERP systems work on a unified corporate database. What this means is that all the data from the organisation can be stored in one place, and accessed by the different modules of the ERP system. This allows management to interrogate the data more effectively to make use of the information available to gain additional insights into the business.
Integrated ERP systems support businesses that wish to move away from a functional structure to a more process based structure. This involves breaking down the barriers between the different departments, and focussing on the processes rather than the roles of each department. Many organisations have performed some business process reengineering at the same time as implementing new ERP systems. In terms of performance management, this supports initiatives such as activity based management and business process reengineering.
A data warehouse is essentially a very large database that stores all the information from the different systems in one place. Assuming that the organisation does not have a unified corporate database, or that there is data stored in older systems that the company wishes to retain, data is fed from the various systems into one place. The data is often ‘cleaned’ before being put into the warehouse, to remove duplicate or corrupted data.
The data in the warehouse can then be used by management to provide useful information. Big Data analysis such as data mining can be used to identify interesting trends that could provide insights into the business. This might include relationships, such as relationships between sales and marketing segments, which might help businesses to focus their products better.
For many organisations, knowledge is one of the key resources that they have. In a company that makes high technology products, for example, the technical knowledge of its engineers, programmers and designers will have a significant impact on how good the organisation’s products are. Knowledge is difficult to manage, because it exists in the brains of staff.
Knowledge management systems (KMS) aim to manage the knowledge that the organisation has. The aim of the systems is to store the information and share it, so it is available to other members of staff when they need it.
KMS can be broadly categorised as codified based systems and personalisation based. Codified based systems tend to include formal technical knowledge, such as laws or tax rules. A tax practitioner may use such a system to look up tax regulations, for example. Personalisation based systems are where staff within the business are asked to share their knowledge. The system will let staff input any information they think is necessary for others to know about. This information can be input using various formats – social media type pages, where information is posted, blogs, forums and wikis. (A wiki is a website on which users collaborate to input and update information.) Popular packages include Zoho.
An important aspect of performance management is ensuring that staff have the knowledge they need. Designing an appropriate KMS is therefore a good way of ensuring that the organisations knowledge can be maintained and shared. Some organisations have set up KMS for new staff, and discovered that it can reduce the time taken to learn the job. Customer service centres also use KMS to help them answer customers’ questions, and often customers are given access to such systems to help them find solutions in order to avoid having to call the call centre.
Customer relationship management (CRM) is the process of managing the relationship with a customer from the point where they are a potential customer, throughout their life as a customer. It starts with customer acquisition, which involves campaigns to find new customers, and continues with retention of customers, since retaining customers is easier than finding new customers.
CRM IT systems have become popular since the start of the millennium. Some of these are included as modules within an ERP system such as SAP, while others are stand alone, such as Salesforce. The systems support CRM activity by providing and storing data about customers, for example, information about conversations or interactions with the customer, pipeline management, and managing e-mail communications with the customer.
Historically, the first computerised information systems were held on large mainframe computers. Users would access the system using terminals that look like PCs, but did not have their own CPU so could only operate when connected to the mainframe. Access to the system was the preserve of a few privileged individuals such as the accounting staff and IT staff, and access was strictly limited.
Mainframes gave way to PCs in the 1980s, where staff had PCs on their desk. This supported ‘distributed’ processing, where data would be processed separately on PCs, for example accountants preparing spreadsheets.
The growth of client server computing gained popularity, whereby the PCs (the clients) would be linked up to a bigger PC called a server, which would provide services such as printing, file storage, and access to the internet. Systems such as ERPS could also be loaded onto the servers which allowed centralised processing. Local area networks enabled information to be shared within one location, while wide area networks allowed local area networks to interconnect, often using a devoted telephone line.
With the advent of the internet in the 1990s, organisations can now interlink over the internet. Intranets can also be set up. An intranet is a private network which is based on the internet, but only allows access to members of the organisation. The internet and intranet have clearly revolutionised the way people within organisation can communicate with each other. They have also lead to an increase in teleworking, where staff often work at home, and connect to their workplace via the intranet. The internet has also opened up the opportunity for cloud computing.
Traditionally, setting up a computerised information system involved buying hardware, such as servers and PCs, buying software licenses for all the applications, and loading these onto the servers or PCs that needed them. An IT department managed the organisation’s hardware, software and data, and was responsible for security.
Cloud computing involves buying the right to use computer applications which are held in a remote location, and accessed via the internet. The most basic cloud services include storage spaces such as Dropbox or Google Drive. Software as a service (SaaS) is another trend, where the user buys the right to use an application held on the cloud provider’s hardware, for example, many accounting products such as Xero and Quickbooks are cloud based. It is even possible to have complete system infrastructure via the cloud – the cloud service provider sets up the hardware and software architecture, and users access it via the web.
The advantage of cloud computing is that it changes what is normally a fixed cost into a variable cost. Users are generally charged for the amount they use, rather than having to make large upfront investments. This makes systems very ‘scalable’ which means that organisations buy exactly the amount of IT they need, rather than having to invest in steps. It also saves time – large, dispersed organisations can get access to a global centrally managed system via the internet in a fraction of the time it would have taken to set up local, interconnected networks at each location.
Cloud computing allows organisations to standardise their information systems globally, very much reinforcing the approach of ERP systems. Senior management can access the global data remotely, and there is more ability to share information among all employees as they will all be able to access data from wherever they are located.
One possible disadvantage of cloud computing is security. Having your information system or data on somebody else’s hardware means that you lose control of it. However, the providers of cloud services generally have excellent security measures in place, so the data is probably safer than it would be if it were held in house.
There are many implications of the IT developments describe above, both for organisations and for performance management and measurement. The role of the management accountant has always been to provide information to organisations to help them plan and control their organisations, and make decisions. Traditionally much of this information was financial.
The first, and perhaps most obvious implication of the developments described above is that there is a huge amount of information that is now available to organisations, which is very easily accessed, and shared. This means that traditional financial information perhaps becomes less important.
A second implication is that managers and employees can now find much of the information that they need for themselves. Historically, the management accountant was the provider of information for performance management, but often finds that his role has been usurped by the systems above.
A third implication is better collaboration and sharing, which should lead to better team working within organisations. This supports the process view of the organisation, where staff recognise that they are working together to meet the needs of the customer, rather than doing a task that relates only to their internal department.
A possible weakness is that with so much information around, managers may not be able to see the big picture. This is where the management accountant can help. There is a greater role in terms of interpreting the information, and pointing senior management to the data that is really important. It also includes explaining how the financial and non-financial data interlink.
References
Written by a member of the APM examining team