Strategic Management Accounting: A Path Forward
Business, across industry and geographic boundaries, is undergoing a dramatic change linked directly to the multiplicity of interested parties and organizations focused on how specific organizations are performing. The very structure of corporations and organizations continues to change and evolve in response to the changing business environment. Accounting professionals and management professionals must evolve and reposition themselves in order to remain relevant within the marketplace. That said, it is important to keep in mind and factor into ongoing analyses and discussions that there are tools, concepts, and strategic accounting available to accountants to make this transition simple and productive. In essence, it is important for accountants to remember that the conversations around new paradigms, reporting requirements, and managerial headsets must be approached in an objective manner. It is imperative that accounting professionals seeking to implement a more strategic accounting function and embrace a more strategic role for accounting professionals must also coordinate and partner with other functional groups.
Returning to the core concept of what strategic management accounting represents, which is a more comprehensive and holistic method to evaluate firm performance, provides insights and pathways toward a less disruptive adoption and implementation phase for a more proactive, decisive, and engaged accounting function. Akin to the convergence and blurring of traditional industry lines, the lines and distinctions between varying functional groups and the information reported therein are blurring. Coordination and communication among information technology, accounting/finance, budgeting and forecasting, and operations allow internal managers access to higher quality information, external users of a broader array of data, and the accounting function to position itself in a more strategic and proactive manner. This, in essence, the delivery and communication of information and data from operations, through the accounting and finance process, to the various end users, forms the foundation of strategic management accounting and the opportunities for the profession.
Integrating the growing importance of analytics, stakeholder-oriented reporting, and the interconnectivities that already exist within the accounting profession is a relatively straightforward task. What remains is the motivation and mindset necessary to effectuate the necessary changes. In this sense, it is important to remember that, in order to best effectuate change within the profession and within various organizations, that accounting professionals engage in actions that have a bias toward change. The underlying trends within the marketplace and the profession are only an incomplete picture of what must be assessed to develop and sustain a more strategic and proactive accounting function. Fully adopting and integrating the strategic headset mentioned throughout encompasses this somewhat psychological approach to analyzing the changes and forces driving the changes within the accounting profession.
One of the most envied and oft-pursued managerial attributes is innovation. Innovative thinking and managerial creativity is what, in essence, drives and propels many organizations forward in the current marketplace. Organizations such as Apple, Tesla, and Disney have obtained leadership status both within their respective industries and the marketplace at large due, in large part, to the innovative thinking, creativity, and fresh ideas that are brought to bear within the marketplace. Drilling deeper, however, reveals some of the core pillars of innovation as it pertains to in business functions as well as what is truly meant when an individual or organization is innovative. Innovation, it appears, is not so much the creation of entirely new ideas from the bottom up. Rather, in the sense of business and generating value for the end users of the information, innovation and creativity appear to be more akin to combining existing data, information, and methodologies in new and creative ways.
Creativity and the Path Forward
Creativity and the accounting function do not traditionally have a positive relationship, that is, in most instances, the phase creative accounting is used to describe accounting techniques and ideas that resulted in fraudulent activity and the destruction of shareholder value. This is, clearly, not the approach to creative accounting and creativity within the accounting profession that this narrative proposes; this is a path toward value creation. What integrating financial reporting and strategic management accounting and the associated areas of focus that are associated with these trends propose is that accounting professionals think outside of the proverbial box. In essence, it is important for accounting professionals to recognize that there truly is no box, that is, the profession has an opportunity to innovate.
Merely stating that the accounting profession and the individuals therein have an opportunity to succeed and innovate, however, provides an insufficient perspective on how specifically the profession should enact these changes. Institutional inertia, competing interests within organizations, as well as a hesitancy within some professionals can result in a difficult environment in which to effectuate change. Moving against the traditional way of doing things and proposing new methodologies and ideas are always a risky endeavor, that is, some of the new initiatives and ideas simply will not succeed. That said, it is imperative to at least begin the process of engaging in change, that is, professionals must make decisions that have a bias toward action. A bias, at the most basic level, simply means that an inclination to behave in a certain away. Accounting professionals must undertake actions and initiatives that are arranged in such a manner that is conducive toward action and progressing forward.
Specifically, and has been mentioned throughout this narrative, there are specific steps and actions that can and should be taken by management accounting professionals to enact change and further develop the concept of a strategic management accounting function. Partnering with other functional groups, outlining different scenarios integrating a more proactive and strategic accounting function, and illustrating the potential value added that would result from such an accounting function represent decisions and actions that have a bias toward action. Stated another way, the decisions outlined previously and described as ways in which to further promote and facilitate the adoption and sustaining of a proactive and strategic accounting function mean that accounting professionals must take action and embrace the changes affecting the market and the profession.
It is not enough to simply undertake actions that have lead toward decision making or changes within the organization, and there must be a goal, or at the very least, a framework in place to indicate whether the actions undertaken are leading to the desired outcome. In other words, the accounting professionals and management decision makers who are undertaking various decisions to lead, grow, and develop the organization must be able to benchmark the actual results of their actions versus a mental model or depiction of what the expected outcomes should be. Constructing mental models, projections, or visualizing the end results of how a project or certain item should look is a powerful tool that simultaneously allows individuals to check progress while alerting them as to whether something is amiss.
Facilitate, Then Lead Change
Mental mapping, visualizing change, and embracing decisions that require actions to be taken are powerful ways to begin the adoption and development of a more proactive and strategic management accounting function, but there must be data to support the proposals. Coming full circle, it is imperative that accounting professionals remember that, while not everyone involved in the decision-making process is a quantitatively inclined individual, virtually every decision maker understands the importance of high-quality information delivered in a timely manner. Building on that, and incorporating that theme into the presentation of new ideas and concepts, a straightforward matter even when the information presented and opportunities are not precisely presented in a manner ideally suited for quantitative analysis is an initial action step.
Oftentimes decisions made in an organization are with imperfect information in an environment comprising trade-offs and, most importantly, other possible options. Every option delivered to the organization and senior management for consideration and implementation has a multiplicity of outcomes, and for every outcome, there is always a range of possible results. For example, a publicly traded real estate investment trust (REIT) is considering whether or not to install solar panels at the locations on the eastern seaboard of the United States. In order to effectively assess the effect of this initiative, there are a multitude of factors that must be taken into account. These data points include, but are certainly not limited to, the costs of the panels, installation costs, state and local tax credits, federal incentives and tax credits, possible incentives and other credits from utility organizations, current and projected power costs, and the expected savings that are to be accrued from the initiative. Clearly, any initiative undertaken by an organization must also be able to satisfy any internal requirements such as net present value analysis and the minimum internal rate of return necessary to approve and launch the initiative.
While the scale of projects inevitably vary, and shift over time, the underlying fundamentals of project evaluation and the criteria utilized can be applied generally. Interpreting the qualitative process of managerial evaluation and decision making that is already in existence to a quantitative framework can be performed as follows. In essence, when discussions and analyses are examined and presented to the management team, both the individuals presenting and being presented to are calculating the various probabilities of different outcomes. Returning to the example of solar panels at various facilities, every possibility that could be different under various scenarios, ranging from the granting of tax credits and governmental subsidies, to the actual savings that will be achieved by implementing the solar technologies, a probability is assigned to articulate what the management team feels the likelihood of these events occurring may be.
Explaining this process to the management team is often a timeconsuming and frustrating part of many presentations and assessments. Management wants to understand where the figures they are looking are coming from and what factors were incorporated into the calculation arriving at the conclusion. These are unreasonable demands, and management accountants should be able to articulate and explain what is occurring in a logical and commonsense manner. After all, it is readily apparent to both the management team and the accounting individuals tasked with preparing the analyses that the figures presented are forward-looking in nature, and by default, have a substantial amount of estimate underlying the final total. The skill and ability to present these facts, understand what they mean to the management, and incorporate them into the final decision-making process, is invaluable.
Models for Change
Engineering, analytics, and other quantitatively oriented fields are often perceived as beyond the reach of professionals who have not had extensive training or hands-on experience working in the field. While it is true that the aforementioned fields of study often involve specific metrics and calculations to assist in facilitating change, they boil down to systems and procedures that are put in place to help the users of information make better decisions. Layering information like stacks of paper is a welldocumented method for as sessing how individuals learn, that is, breaking down complicated decisions and fact patterns into more manageable segments and pieces of information. Engineering, analytics, and assembling information in support of a more strategic accounting function can be thought of in a similar way.
Similar to measuring and explaining the underlying methodology and rationale for selecting one project over another type of project, it is often illuminating to disassemble the decision at hand into more manageable pieces of data. Objectively outlining the costs, benefits, and opportunities embedded within the decision to pursue a more proactive accounting function versus maintaining the status quo can be of benefit when attempting to explain qualitative concepts such as why it is important to quantify and consistently rank factors such as human capital and corporate governance. Bringing these conversations and ideas to the forefront, in addition to generating productive conversation and debate over the specifics of the ideas themselves, develops another benefit for accounting professionals involved in the process.
The Strategic Headset
The concept of the strategic headset has been revisited and examined throughout this writing, and this is for a very simple, yet very powerful reason. A more proactive and strategically oriented accounting function, to put it simply, cannot exist within the boundaries and constraints of what is perceived to be a normal accounting and finance function. Rote preparation of reports and different types of analyses on a monthly, quarterly, or annual basis is insufficient in a business environment that demands increasingly diverse amounts and types of information from organizations. In order to effectively address the requirements of the marketplace, which now includes regulators, stakeholders, nongovernmental entities, and the traditional shareholder constituents, organizations must be simultaneously more flexible and more analytical in nature.
Recognizing this need, generated from the marketplace and external users, and internalizing the ramifications of these needs into the organizational decision-making process, is an essential step in developing and maintaining the strategic headset. Integrated financial reporting and a more strategic accounting function are not one-time events that occur and then can be set on cruise control. Rather, these are fundamental changes in how organizations report on and disseminate information to both internal and external decision makers. Accounting professionals must be able to embrace the leadership roles, challenges, and opportunities associated with making such changes permanent. In short, to implement and sustain a more strategic accounting function, accounting professionals must become more strategic in how they carry out activities and embrace these changes. Wearing the strategic headset and understanding what such an outlook means for the current and future of the profession are of paramount importance to professionals seeking a more decisive role.
The strategic headset changes not only how accounting professionals perceive different challenges and opportunities, but integrating this mindset into the decision-making process also changes how the professions and the individuals within the profession are perceived and evaluated by peers and supervisors within the organization. Merely by bringing the ideas mentioned in this narrative, as well as others, to the table for analysis and conversation, the accounting function is playing a more decisive and leadership role within the organization. Proactively approaching challenges and opportunities from different angles, asking questions about the underlying drivers of financial performance, and proposing the utilization of leading market thought and strategy to solve organizational problems are what strategic thinking and leadership build upon. Accounting professionals lay at the nexus of operations, management, and data distribution to both internal and external stakeholders. Against this backdrop, it is logical that the professionals involved think and act in a more strategic and comprehensive manner.
Concluding Thoughts
Integrated financial reporting is not, in and of itself, a cure for managerial oversights, subpar operations, or a company culture that stifles innovation and creativity. Integrated reporting is what the naming convention would suggest: a financial reporting framework distributed to external users. The framework itself, however, is less important than the information contained within the report, and the adjustments required on the part of the organization in order to make issuing such a reporting framework a worthwhile endeavor. It is also important to take into account the costs and complications of developing the systems and processes, in addition to training and developing individuals to take advantage of the opportunities arising from implementing such a system and structure.
Additionally, it is essential to keep in mind that adopting a more strategic accounting function need not be completed in one fell swoop. It is perfectly logical and reasonable to expect that adoption of innovative ideas and thinking will take a certain amount of time to complete, to achieve buy-in to implement, and even more time to test and ensure that it meshes effectively with existing protocols and processes. Accounting moves at a deliberate pace for a very good reason; the information produced, verified, and distributed to end users carries a substantial amount of weight and is treated as such. To not lose this veracity, maintaining industry standards and excellence, while also introducing new methodologies and ideas, is the fine line the professions must now walk.
The fact of the matter remains that the trends and concepts included within integrated reporting, and the very idea of a more decisive and proactive management accounting function, are not merely passing trends, but appear to represent concepts and ideas that are only increasing in importance. Stakeholders, including but certainly not limited to financial shareholders and creditors, are increasingly interested in how organizations are performing, but not only on a financial statement level for the current period. In the aftermath of the financial crisis of 2008–2009, and the subsequent increase in both regulation and global competition, the pressures and requirements placed on organizations have increased. In order to effectively address this varying array of informational requirements, organizations must be able to produce and verify information on a wide variety of metrics.
Multiple capitals, discussed in this text and the focus of ongoing and continuous refinement and analysis, represent a truly exciting area for accounting professionals. Many of the drivers and factors included within a multiple capital model include information that, while clearly important to managerial decision making, have not previously been quantified and reported upon in a consistent manner. Bringing standardization and consistency to these amorphous concepts, and demonstrating that linkage between these ideas, the implications for decision making and organizational performance are ways in which accounting quantifiably adds value and improves the decision-making process.
The path forward, although always full of uncertainty, is becoming clear. Stakeholder reporting, multiple capitals, increased utilization of analytics, and a more proactive accounting function are trends of growing importance. It is up to the profession to recognize these opportunities and seize them; the relevance and applicability to existing competencies is readily apparent. The most important takeaway?
Make decisions with a bias toward action, and take action to become a strategic accounting professional.