Strategic Management Accounting & the Path Forward
Strategic management accounting (SMA), which has existed in academic circles and publications for several decades, has recently experienced an increase in both interest and debate due to factors within the profession as well as external ones. The purpose of this writing and analysis is to not simply conduct a review of existing literature in the marketplace, but to also project a path forward for accounting professionals. In the face of such a rapidly evolving and highly competitive business environment, it is important to remember and reiterate the importance of effective and forward-thinking leadership. Organizations, arguably now more than ever before, must be able to quantify and plan for future trends, risks, and opportunities. Leadership, however, is similar to virtually every other skill or competency in the fact that it must be continuously developed and refined. Engaging in debates, analyzing current trends within the marketplace, and thinking strategically to map out how larger trends are influencing business decision making, represent several key components of thought leadership that must become part of the managerial accounting mindset.
Drilling specifically into the specifics related to the implementation of such a headset, it is important to first acknowledge some of the obstacles and challenges that might impede a seamless transition to that of strategic partner and business decision maker.
First, internal silos and rivalries between varying functional groups might make coordinating the flow of information more difficult than it otherwise would be. This occurrence can stymie even the most logical and well-thought-out attempts to improve internal communications.
Second, legacy information systems, data compatibility issues between new technology and old technology, as well as between different iterations of new technology and systems, will delay such initiatives.
Additionally, and perhaps most importantly for this context, is the difficulty of quantifying information that is currently presented in a qualitative format.
Matters related and linked to governance, sustainability, risk management, and other stakeholder-oriented initiatives clearly have a quantitative effect on organizations. A major challenge, however, is determining logical and unbiased methods by which to quantify, rank, and report on such data.
Although this represents a challenge, it is simultaneously an opportunity for accounting professionals willing to embrace the situation with an open mind. Accounting professionals are, almost universally, viewed as reasonable, unbiased, and skilled advisors in matters of tax, audit, and other professional business services. As the profession transitions, it is essential that accounting professionals do not lose sight of, or fail to capitalize on, existing strengths. The previous point cannot be emphasized or repeated often enough—management accounting professionals already have the tools they require to elevate themselves within their organizations. Effectively bridging that gap, from conceptual idea to reality, however, requires that the professionals attempting to implement such an idea be prepared to articulate and advocate for their positions on a continuous basis.
One of the best methods by which accounting professionals can advocate for and support the concept of SMA is to rationally and objectively walk organizational leadership or their clientele through the various scenarios by which a more strategic accounting function can benefit the organization. Outlining the steps, addressing questions and concerns associated with the implementation of such a methodology, and openly advocating for the position will assist in defusing any initial objections to the idea. Additionally, and akin to the suggestions related to governance and sustainability reporting, the presentation and analysis of information in a familiar format will make implementation and buy-in much simpler to attain. At this point, however, it remains an obligation on the part of management professionals to maintain momentum and continuously reinforce the importance and value that are added to the business decision-making process by embedding management accounting professionals in the upper levels of organizational leadership.
Implementation
The path to implementation, and sustaining such an implementation once it has been established, of course, is not a seamless task, and must be properly planned out in order to succeed and be effective. In order to successfully advocate for, and implement, something akin to a strategic accounting function, the management accountants supporting the idea must be able to clearly articulate and explain the specific steps by which such a program can be implemented. The very nature of business that makes reporting, compliance, and data analysis so challenging, namely the increased requirements for information and the growing number of stakeholders demanding such information, also provides opportunities for management accountants to demonstrate value, and improve the standing of both themselves and the profession. What follows is a high-level overview of the methods by which management accountants can implement, in the real world, tactics and ideas to gain a seat at the proverbial table, and become true partners in the decision-making process.
In addition to the following topics, it is important for organizations and management teams to remember the guidelines introduced previously. These guidelines are broad enough to be applicable to a wide range of organizations, but action-oriented to spur business actions.
Link strategy, operations, and reports disseminated to end users by producing the breadth of information, and distributing it in the appropriate venue for each stakeholder group, that modern marketplace conditions dictate.
Connect information with the front and back end—organizations have vast quantities of data, but must be able to interpret and efficiently glean business insights from this information.
Understand what integrated reporting represents—if stakeholders request additional information and analytics on sustainability or governance, an integrated reporting (IR) initiative provides an opportunity to proactively develop such areas.
Focus on what the information illustrates—reporting, regardless of form, is a business necessity, but that does not mean it should be treated only as an expense item if management can leverage the information into insights and business actions.
Look forward—insights into risk management, supply chain operations, and the needs of stakeholders, including customers, provide a roadmap for decision making moving forward; management should use the map.
From Concept to Implementation
Possibly the first and most important step for management accounting professionals to implement a strategic management accountant model is to engage and partner with other functional areas within the organization. Information technology (IT), corporate finance (which may or may not include budgeting and financial planning and analysis), and corporate communications represent potential partners for accounting professionals to work with in order to successfully elevate the value of the profession. While these departments are, in essence, support departments for the core operations and business of the entity, it is important to not overlook the informational value that can be brought to bear through increased coordination and communication. The best story, product, or service idea will not succeed if it is not supported by a strong cast of financial, technological, and other types of support services. The true value generated by the professional services aspects of the organization lies within the information that is able to be communicated.
IT is playing an increasingly important role in how organizations both operate and communicate the results of operations to end users. Framed in this light, and buffeted by changes on virtually every front, it is logical to expect that IT and management accounting form a closer working partnership. Both functional areas find themselves under increased scrutiny and budgetary discipline in the face of increased competition, but are also burdened by increasing informational requirements for both financial and nonfinancial information. As with any internal relationship within an organization, in order to elevate the position of the management accounting function without generating animosity from other functional areas, it is imperative to approach the conversation from a win–win perspective. Developing better reports and templates for management to use for decision making elevates the value brought by both IT and accounting professionals.
Governance, compliance, and how organizations contend with and complete audits continue to evolve and be influenced by technology. The broader conversation regarding IT risk, strategy, and planning has been recently elevated to the board level and is forecast to continue to have a strong impact on how organizations operate and plan moving forward (Heroux and Fortin 2013). In particular with the risk of data security issues, including but not limited to hacks, leaks, and breaching of confidential client and operational information, it is clear that the conversation surrounding technology and long-term planning has evolved. Management accountants are well positioned to take advantage of this area of growing importance, framing these topics within the broader conversion on integrated and nontraditional reporting. Many accounting professionals are already tasked with assisting technology testing and implementation—this is simply an extension and development of an existing responsibility. With the importance of data and analytics only continuing to grow, the importance of establishing and maintaining a robust technology governance strategy cannot be overstated.
Focusing on the details of developing reporting tools and templates to improve the frequency of both traditional financial reporting as well as reporting linked to nontraditional and traditional qualitative information, there are some tactics and ideas that can be utilized to develop real-world reports. Working hand-in-hand with IT to identify and isolate the individual pieces of information necessary is a logical extension and development of the current roles for both individual departments. Information, particularly in the age of increasing digitization, is situated to play the role of key resource. Just as land represented the key resource of the agricultural age, and iron and steel represented the key resource of the industrial age, information and analytics will represent the key resource for organizations moving forward in the globalized age.
Understanding and articulating the business value of data and analytics to business decision makers are essential, as well as an important step for developing and sustaining adjustments made to the reporting and analytical framework used by the organization. After clearly and quantitatively explaining the importance of data and analytics to the future success of the organization, the next step is to prioritize efforts and resources. Obviously, every functional silo will want more resources and management expertise applied to their specific issues and problems—this is where the quantitative skills embedded within the accounting function can serve an additional role. Layered on top of analyzing and presenting the specific information requested by management and external users is the capability of management accountants to analytically present and stratify which information will generate the most proverbial bang for managerial buck. Data, identified previously as the key resource of the future, expanded upon in the following, exist in abundance. A differentiating factor between successful and unsuccessful organizations will be the success with which organizations can discern what information is realistically pertinent to managerial decision making.
It is subsequent to the internal decision-making process that inevitably follows such an assessment, and assuming at least a preliminary understanding of the information required by primary stakeholders, that a true SMA partnership can begin to show fruition. One of the more logical activities that reasonably should be undertaken by the management accounting function and IT is a comprehensive review of what information is, in fact, disseminated to both internal and external decision makers. Reviewing the information communicated to external decision makers, while relatively simply in principle, is a critical component in developing better templates and reporting frameworks. Drilling down specifically to the core issues at hand, there are several items that should be contained within the assessment as well as the findings resulting from the assessment.
Implement to Lead
First, what is the frequency with which information is communicated? Is the information communicated on a uniform basis to all external users, or do different users receive different information at different times? Assuming the latter, which makes sense from an operational point of view, the next line of questioning relates to the availability of the information that is distributed more often than traditional financial information, as well as identifying what specific personnel or departments are directly responsible for the preparation and maintenance of this information.
Second, following the identification of the information distributed to stakeholders, and the frequency with which the information is distributed, the next step is to design methods by which operational data can be integrated within the reporting framework. Every industry and organization is different, obviously, but there are several strategies that can be used to determine the ease with which information can be translated into financial data. Returning to the core mission and prerogative of the management accounting function, turning operational data into financial information, this step is particularly important for elevating the role of the function within the organization. Establishing these connections and linkages is imperative for a more strategically oriented accounting team to assume a more proactive leadership role. An essential step in the preparation of reports, linking back to the previous statement regarding Key Performance Questions (KPQs), can now be revisited and expanded upon.
Expanding, briefly, on the area of KPQs, it is virtually impossible to overstate how important it is asking accurate questions to both management practices at large, and the implementation of an SMA functional group. Understanding, and being able to explain, possible solutions to organizational problems and concerns are ways in which accounting professionals can clearly demonstrate the value of a more proactive accounting function to the organization and are an important step in developing a more strategic accounting function. Business organizations contend with a multitude of issues on a day-to-day basis, and in order for the organization to successfully navigate, information and analytics must be available in a format that is understandable. More important than having the information at hand, however, is the fact that the information presented must be explained and linked to the actual business issues at hand. The role of interpreter and translator, of the function that can link data to business questions, is an area where management accountants can take a leadership role.
Drilling down to the core needs of informational users is important for the following reason—even if users have been receiving certain types of information that does not mean that it is useful for them. Interacting and engaging with stakeholders is a critical process in a business environment that is increasingly stakeholder-oriented and driven. Establishing and maintaining good relations with stakeholders requires consistent and proactive engagement and interaction. Simply put, the accounting function must ask the correct questions to help ensure that the information produced and distributed is of use to the decision makers receiving the data. The accounting function creates value through information, and this information must be tested and verified as useful in order to maintain the value-added component of the accounting function. After surveying and documenting what information is of priority to the end users, as well as any suggestions or requests for additional information, the management accounting function can begin developing templates and reports to capture data. Information, whether it is operational, statistical, or financial in nature, exists in abundance in every organization. The challenge is harnessing what is required and consolidating it into the proper format.
Governance Leadership
With increasing frequency, there appear stories in media related to shareholder discontent, alleged breaches of fiduciary duties, and financial repercussions of mismanagement of organizational resources. Clearly, there are financial and bottom-line implications for organizations that do not accurately track, report on, and proactively manage the effects of governance (good and bad), on how the company operates. It is important to remember, even as metrics are designed and reports are constructed, that governance is an inherently qualitative feature of an organization. In essence, the role of the management accountant in this situation is to collect and analyze the appropriate qualitative information, and then convert that information into comparable metrics that can be compared against the appropriate peer group. This opportunity differs both from traditional financial reporting and even sustainability reporting in the following manner. In both these situations, the quantitative information and data exist, and the management accounting function is simply making better use of the data through analytics. In the case of governance, a critical part of the challenge is the development of appropriate metrics themselves.
Several key areas come to the forefront at the intersection of corporate governance and accounting.
First, and arguably most important, is the fiduciary responsibility that the corporation has to both financial and nonfinancial stakeholders. Balancing the demands and requirements of these oft-conflicting groups is a delicate balancing act that lies at the heart of many modern governance decisions.
Second is the presentation of financial information to the marketplace, that is, different end users and different groups of stakeholders require different information, presented different ways, and delivered at different times. The second point is not anything that should come as a shock to business decision makers, but it is important to articulate and recognize the fact as part of the operational reality.
Equally as important as having open lines of communication between management and external users of information, it is imperative that management have the necessary tools to facilitate this communication.
Using Data to Make Better Decisions
There is no shortage of information and coverage related to the importance of corporate governance as it links to business decision making, but drilling down to the specific issues at hand for reporting and analytics is important for practical implementation. While accounting professionals can cast a relatively broad net with regard to collecting information, to remain relevant, and maintain a seat at the decision-making table, it is imperative that only meaningful data be presented for further analysis. Linking back to the importance of communication and engagement with stakeholders, management accounting professionals must play a pivotal role in the development and testing of governance templates. The data included within presentations, metrics, and templates, however, must have meaning for the organization. Every organization and industry is different, so this step can represent a challenge for the professionals involved. All of that said, however, there are several key questions that should be asked both of the functional silos involved in governance and senior management.
First, what is the peer group of this organization disclosing and discussing for governance matters? Specifically, how often does the board turn over, what is the background of board members, and how active is the board in charting the strategy of the organization? In essence, what objective and quantitative data and information would the organization be able to provide to activist investors or other external parties interested in the organization? Addressing these concerns, which are clearly not only academic concerns, provides a clear opportunity for accountants to lead while leveraging existing quantitative competencies. Drilling specifically in how to measure the success and robustness of the board and associated actors, there are several measures that might be of use. First, the number of meetings with activists, as well as documenting the proceedings of those meetings with activist investors and other stakeholders, provide several benefits to other shareholders. Of particular importance in an operating environment that is increasingly contentious is the commitment by the management to proactively reaching out and engaging with shareholders to help defuse potentially acrimonious situations before they occur.
Second, what models and goals is the board setting for the organization, and what are the consequences for both management and the board itself, if the goals established as part of the budgeting process are not met. An oft-repeated complaint and criticism about boards is that boards simply rubber stamp management directives without holding the management team accountable for the results achieved, or not achieved, by the organization. In a multitude of studies and observations based on market performance, it is increasingly apparent that dynamic boards that are both partners of management, while also being able to honestly critique the C-suite, generate financial results superior to those generated by boards that are not as engaged. The third aspect that can be evaluated, and should be integrated within the evaluation of board performance, is how many initiatives, either proposed externally or organically developed, are implemented pertaining to sustainability and other stakeholder-oriented initiatives. In a business environment where information is a commodity available to all, it is imperative that the directors and other senior leaders of organizations act accordingly. It is important to remember that, despite how excellent the product or service is, no organization can survive in a vacuum, that is, stakeholder directives and requirements must be successfully elevated to the board level.
Increased Transparency
This idea of growing transparency links back to an overarching theme that should be driving the transition of the accounting function from that of historical record-keeper to one of strategic business partner and decision maker. Information, specifically disseminated via the Internet, social media, and other nontraditional media outlets, has radically transformed the way in which organizations interact with other, other internal functional departments, and external users of organizational data. In light of such increased transparency, it is imperative that organizations have the means by which to communicate with stakeholders, address their requirements, and answer their questions regarding the performance of the organization at large. In order to successfully navigate this new age of transparency, management decision makers must have access to information that is concise, consistent, and easily accessible for the users who require access.
Management accounting can deliver and bring tremendous value to the implementation and maintenance of transparent reporting and communication systems. Arguably more important than any specific report or template that is developed by the accounting function are the rigor and analysis that are brought to bear on organizational data as a result of the creation of various templates. Integrating the needs of the management with the realities of available resources within the organization requires a logical analysis, conducted within a strategic headset of how the firm is perceived both in industry as well as by end users, by their consumers, regulators, or other stakeholder groups. Additionally, the increasing volume of news coverage, as well as the continuous nature of media and investor scrutiny has created an environment in which organizations must be able to nimbly react to inquiries and requests for data.
Bridging the gap between the concept of information and data as the key resource of the digital and global economy, the realities of many organizations, and the requirements of end users of information, it is readily apparent that management accountants operating in a strategic role can add value to the organization. Integrating the concept of radical transparency does not mean, as some technology firms have done, disclosing the compensation of every employee, increasing the minimum pay for all employees, or handing out luxurious perks. Instead, and in a manner more conducive to long-term stewardship of organizational assets and value, transparency requires that information must be accessible and reliable for end users. Outlined and analyzed previously, there are clear and business-oriented ways in which management accounting professionals can work with other functional areas to assist organizations fulfill these requirements. In doing so, however, it is critical that the professionals involved continue to advocate, and demonstrate the fact that although they are involved in the creation of reports, accountants are much more than “bean counters.”
Social media, analytics, and the increasing integration of technology into virtually every aspect of business decision making and business operations have led to a restructuring of what expectations are among customers, organizations, and other organizations. Transparency, in the form of increased stakeholder reporting and demands and interactions from external users, necessitates that information be conveyed more effectively than according to previous policies and procedures. From an organizational perspective, the implications of increased transparency are clear. A failure to produce and communicate information consistently, and in a manner consistent with stakeholder demands, has the potential to have serious financial ramifications.
Bean Growing and the Strategic Headset
For most accounting professionals, the idea of business development and broader organizational leadership is a concept usually reserved for client relationship partners, senior executives, and leaders of the particular organization or industry in question. In addition to, and linking to this concept, is the idea that strategic thinking and planning only apply to senior leaders or members of the company that are in roles labeled strategic planning, senior vice president, and so on. This idea and concept could not be farther from the truth. Every accounting professional should embrace the opportunity and relish the challenge of transitioning from bean counting and financial reporting to that of strategic partner and bean grower. This concept, of course, is always easier to say than to effectively implement, but fortunately there are existing tools, frameworks, and entire professional associations dedicated to the development and evolution of the accounting profession and the individuals working within it. Put simply, the tools and market needs already exist, and it lies almost entirely with the practitioners to leverage these available resources in a timely, efficient, and effective manner. Getting to the most significant aspect, it is important for them to understand the specific organizations and tools at their professional disposal. While themes and ideas may be universal, the implementation will obviously differ from organization to organization.
The concept of “bean growing” is not an entirely new concept; the accounting literature abounds with examples of both academic and practitioner-based writings, focusing on how accounting professionals can become more integrated within the business decision-making process. A critical difference, as the economy transitions increasingly to a digitized framework and business model, is that the tools and techniques available to accounting professionals have caught up to the expectations of users and industry. Specifically, and returning to the core theme of SMA, these tools allow management accountants to explain and lead more effectively, integrating information from the organization, whether it is initially produced quantitatively or converted from initial qualitative data to quantitative metrics and key performance indicators (KPIs). Transitioning to a role as data expert, however, requires that accounting and other financial professionals are trained and remain aware of the wide variety of tools and dashboards available to make reporting and analysis more efficient and streamlined.
Drilling down, it is important to keep in mind that although the conversation may evolve and shift to analytics and new analytical tools, that does not require that all CPAs must become IT specialists. Automation has made many financial transactions easier, faster, and less costly. In addition, by automating and standardizing transactions such as currency swaps and other items related to debt and equity holders, there is greater consistency and comparability among financial statements. That said, such automation can lead to errors, oversights, and a complacency that can be exploited by accident as well as by individuals and organizations motivated to defraud. Focusing on both emerging trends in modern accounting and in the marketplace at large, it is clear that stronger and more comprehensive controls and systems over cash and currency flows are needed. As accountants are increasingly involved in IT initiatives focusing on these very issues, it is not a large stretch at all to strive for a more proactive approach. It is also important to remember that cash is an asset, resides on the balance sheet (as a current asset/cash equivalent), and falls directly within a core competency of the accounting profession.
Redefining the role of the accounting function means that the practitioners involved in the accounting field must be able to see the future of the profession and engage in activities that position practitioners most effectively to play a more strategic role in the business decision-making process moving forward. In essence, and in partial response to the various changes in the broader business environment, finance and accounting must evolve and transition to embrace a new role in the context of business management. Integrating the ideas and concepts of bean growing is a critical part of this process, but that in and of itself is merely one part of a broader transition, labeled for this purpose as Finance 2.0. As the business environment continues to change and evolve over time, accounting professionals must keep pace accordingly.