Horizontal accounting within organizations Robert Chenhall Monash University

Horizontal accounting within organizations Robert Chenhall Monash University 5 th Conference on New Directions in Management Accounting: Innovations in Practice & Research

Approach • Meaning of horizontal accounting (HA): – What does HA look like: practices – How does HA work: processes • Theoretical perspectives that provide research opportunities: – – – A value chain perspective (ABC) A strategic perspective (SCM) An organizational structural perspective An operations management perspective A human resource management perspective (Not consider relevant areas related to economics, marketing, IT, psychology and sociology) • Conclusions

What is horizontal accounting within organizations? • Accounting that assists in managing the efficiency and effectiveness of the value chain that exists within the organization. Management Accounting (horizontal & vertical) Horizontal accounting (entire value chain) Horizontal accounting within the organization Top management Suppliers Productive processes Customers

• What does horizontal accounting look like? – Practices: any management accounting practice that assists in managing the lateral dimension of the value chain • Strategic control: business modelling that shows how facets of the value chain interconnect to provide opportunities for strategic advantage. – integrated MCS: e. g. balanced scorecards, target costing, financial planning, ABCM. • Operational control: practices that direct operations and provide timely feedback for immediate correction and information for improvements. – – horizontal budgeting lean accounting integrated cost management non-financial measures (e. g. quality, reliability, throughput time, manufacturing measures, productivity measures (input/output) – summary costs – factory displays & charts

• Personnel control: practices to evaluate the performance of individuals at levels of divisions, teams, individual employees and which may form part of reward & compensation – Divisions: » financials and balanced scorecard type systems – Teams: » team maturity indexes, organizational climate surveys, team output measures – Shop floor individuals » non-financials » qualitative & subjective measures » 360 degree evaluations

– Processes (use): the way in which practices are used to assist in managing the lateral dimension of the value chain • Diagnostic use: used mainly for operational control – Operational controls (action plans nested within strategy) – Signalling and communicating strategy down to the value chain – Providing boundary spanning information & help develop networks across the value chain – Provide rhetoric and language for value chain management • Interactive use: used mainly for operational improvements & strategic control – Identify problems & opportunities within the value chain – Identify emerging issues that can address uncertainties and generate innovation related to the value chain – Acquire information for personnel control • Use management accounting practices in conjunction with other controls (combinations or packages of controls) – Combine formal practices with informal control, personal, clan, self control, professional control » diagnostic and interactive » formal controls and organic processes » coercive and enabling

Theoretical perspectives that provide research opportunities • A value chain perspective – The internal value chain has long been recognized as: • processes that involve the means to convert inputs into outputs – virtual organizations may manage the process without physical involvement in the transformation processes. • provides the basis to develop competitive advantage – Activity-based costing was a response to managing the ‘value chain’

• ABC, ABCM research opportunities – Surveys keep track of adoption and use • limited (& declining) interest in ABCM in the academic literature (both practice studies and theory-based research) • need an interesting angle if studying ABCM – use as an example of: » how MCS are diffused » how do MCS assist/hinder change » how MCS influence managers’ judgement » how MCS relate to broader management initiatives related to strategy, work place improvements, innovation

– The ABC implementation literature • Large number of studies that have looked at technical and organizational/behavioral factors that influence effective implementation. – Interesting broad findings – Need for more insightful studies of processes and how they work through time. – Useful research findings to transfer to studying implementation of other MCS » e. g. performance measurement, budgetary systems – Need to study effects of ABC together with other changes taking place within the organization » how to disentangle effects of ABC from other change initiatives?

• A Strategy Perspective – Strategic Cost Management (SCM) developed to move management accounting to a strategic approach • Consider the whole business strategically & how internal processes relate to strategy – ABCM or SCM? • ABCM is part of SCM – Other parts: e. g. value chain analysis, competitor costing, target costing, total cost of ownership, cost of quality, life cycle costing – Research orientation used to study SCM • Many practice-based studies and prescriptions • Few theory-based empirical studies to identify what SCM is and how it works – Mainly consider parts of SCM (e. g. ABCM, competitor costing, life cycles)

• Is SCM still an interesting area? – NO: see John Shank’s chapter in Bhimani (2006). • Why has SCM lost its impact? Did it ever have an impact? – Early enthusiasm in the 1980 -1990 s • Simmonds (1981): early links to strategy which was emerging as a way to link management disciplines • Kaplan & Johnson (1987) & Johnson (1992): showed the difficulties of MA & the need for a business related approach • Shank (1989): saw SCM as the way of the future • Cooper & Kaplan (1988); Shank & Govindarjan (1993) popularized ABCM as part of SCM • Bromwich and Bhimani (1994): was management accounting really irrelevant? – Authors sympathetic to SCM, SCM did not take off like ABC.

• Clarifying ideas in the mid-1990 – Did the construct & theorizing of SCM ever get developed ? • Atttempts to consolidate and define SCM – Considerable variation on its meaning, benefits and outcomes (Lord, 1996; Tomkins & Carr, 1996; Roslender & Hart, 2001, Anderson, 2006) – Little carefully constructed research to refine construct of SCM and examine why it might have worked, and if not, why not? • SCM is a practice-defined construct – The SCM construct is elusive and has evolved through time » It is a generic approach with a marketing, strategy focus » SCM can be applied to managing various functions (e. g. suppliers, customers, cost management, risk management) (see Anderson, 2006)

– Is SCM still relevant? Research opportunities • The essence of SCM is done by others – Other disciplines are defining themselves ‘strategically’ » operations management, IT, HRM, strategists. we need to understand these approaches • A strategic approach is more sophisticated than that used in most SCM research – Does the rational approach to strategy as considered under SCM lack relevance? » strategic problems cannot be objectively defined, they are open to interpretation from many different angles » strategic problems are wicked problems (interconnected, complicated, uncertain, ambiguous, conflicting) – Strategy involves intended rationality but may involve high levels of subjectivity and complex behavioural responses » take an approach that examine both the content of rational approaches and processes of behavioural responses

– Strategy as process as well as the prescriptive content (see Chenhall’s chapter in Chapman [2005]). • A process view starts to look at the dynamics of how SCM works (rational & behavioral) & implications for the value chain – link MCS to the dynamics of these processes » what are the dynamic relationships between strategic position, resources, value chain and outcomes? » how is, and how should, strategy be formulated & implemented? » who is involved in the strategy process and how do individual differences have effects?

• Some ways of studying aspects of strategy that have implications for the internal value chain & horizontal accounting – The content of strategy • Conceptualizing strategy – Conceptualize more specifically than archetypes (e. g. defenders-prospectors, build-harvest, cost-differentiation) – Specific strategic priorities (e. g. quality, service, reliability, etc) » shows clearer links to value chain • Hard and soft aspects of strategy as content – Hard = relatively concrete, comprehensible, tangible – Soft = relatively indefinite, elusive, intangible

– Hard aspects of strategic content – Resource based view (competencies, capabilities, innovation capabilities) (Barney, 1991) – Digitization: internet-enabled commerce relationship, digitalising business relationships (Bhimani, 2003; Sanchez et al 2006) – Governance & enterprise risk management: examining governance and risk within the internal value chain (Collier et al, 2007) – Globalization: convergence or diversity (Drori et al, 2006)

– Soft aspects of strategic content – Tangibles and intangibles (good progress in MCS research) – Intellectual capital, knowledge-based organizations (good progress in MCS research) – Exploration (pursuit of new knowledge) & exploitation (past knowledge). » Consider together or do they follow each other ? (Gupta, Smith. & Shalley, 2006) – Innovation/creativity and their linkages » Some MCS research on innovation » Not much on creativity » How does creativity link to innovation? (getting from creativity to innovation [von Oetinger, 2004])

• The process of strategy • Dynamics of strategic fit – Modelling the dynamics of changes in strategic fit (Zajac, Kraatz & Bresser, 2000) • Organizational dynamics: – Organizational inheritance (group think, strategic drift: constraints on new strategies) or managerial initiative (proactive role of managers on strategy) – Chaos or control (predictable, unpredictability) • Organizational learning & unlearning (Huber, 1991) • Dynamic capabilities (Teece et al, 1997; Winter 2003) – resource development and renewal ( c. f. resource- based view that is a static approach) – evolution of the knowledge base

• Change processes – continuous or discontinuous – revolutionary or evolutionary – rational or unpredictable – incremental or comprehensive » role of MCS as move between different modes • Strategic decision speed – speed of decision making (Baum, & Wally, 2003) – presumptive adaptation (fast or gradual) (Gabriel & Jensen, 2006) – the dynamic resource-based view, or capability lifecycles (Helfat & Peteraf 2003)

– Networks • Networks & accounting (good MCS research): e. g. Mouritsen & Hanson, 2006; Mouritsen and Thrane, 2006 & following citations: Mouritsen et al. 2001; Tomkins, 2001; Seal and Vincent-Jones, 1997; Langfield. Smith and Smith, 2003. • Wide diversity of network theories (Oliver & Ebers 1998; Grandori, & Soda, 1995 ) – See integrating theory: a balancing strategy between three pairs of competing forces » cooperation Vs competition » rigidity Vs flexibility, » long-term Vs short-term orientations. (Das & Teng, 2000). • Idea of ‘strategic communities’ & their integration – strategies to emerge from collaborative action to raise knowledge, create innovation & markets » virtual teams between various organizations (Kodoma Mitsuru, 2005, 2006) • Combining external networks with internal resource -based view (Choonwoo, Kyungmook & Pennings , 2001)

• Researching how MCS relates to broad strategic context is still important & presents research challenges – If SCM is not delivering on its promise, why? • Is it technically problematic? – do management accountants lack knowledge on a strategic perspective (background, training)? • Are accountants poorly positioned in terms of authority and power? – do senior strategists resist the message of SCM that operational managers are involved in strategy? – do management accountants not have the ear of senior management?

– Is the essence of SCM captured outside the accounting function, why? • Is SCM alive but done by the strategy (development) team with or without management accountants (Lord, 1996; Anderson & Young, 2001 ) ? • Are different aspects of SCM done by other specialists (are other specialists more ‘strategic’? ) – Operations Management: value chain analysis, ABC – Organizational Behaviour: horizontal accounting – Human Resource Management: performance management – Strategists: » the dynamics of strategy » overview other specialists

– The question for the future is whether MCS will be focused on control & short term business results, not broader strategic management • focus on supplier management, governance, accounting to support structure & remuneration (themes of this conference) OR • does MA have a strategic partner role (see HR literature)?

• An organizational structural perspective • Structures to manage interdependencies – Processes can generate interdependences within the organization that create a need to manage the interface between discrete parts of the process • pooled • sequential • reciprocal – Occupied the attention of many early organizational theorists (seen as essence of managing the value chain) • Thompson (1967), Perrow (1970) Galbraith (1973, 1994)

– Recent approach by Galbraith(2005) • Customer centric approach and how the organization can supply customers with solutions – Customer-based profit centers – Customer relationship management (Lateral networking capabilities to link all processes to customers) » Customer business unit » Coordinators for key customers » Customer business team » informal processes » e-coordination – Performance evaluation: » Share of customers business that is won

– Structural tension between hierarchy and managing interdependent processes across structural units • Differentiated, divisional structures that involve high levels of interdependencies between divisions create control issues derived from a need for integration: – high differentiation and the need for integration between divisions. • How do MCS work to achieve integration (e. g. budgets, non financial performance measures) yet be consistent with decision rights that exist within high levels of differentiation (e. g. Profit, ROI)?

• Organizational structures have evolved to move away from tall hierarchical structures to manage horizontally – Business unit reconfiguration (Karim 2006) • What organizations do rather than what they have – linked to dynamic capabilities and resources – The dynamics of restructuring: • Understand changing structural relationships: structural forms and processes of changing these structures – patching » remapping structure (add, combine, split) to match resources with turbulent conditions – organizational modularity » links to modular product systems, altering responsibilities & reusing resources – divisional charter changes » realigning divisions around the addition, deletion or movement of resources within the firm to add value

– Development of teams • What are the dynamics of teams? – Social network theory has been applied to small group research studying the emergence & change of informal structures & patterns of relations (Burt, R. 1978) – Combining teams and hierarchy (Romme, 1996 ) • Virtual teams – Teams, but people work independently across geographic boundaries using IT (e. g. media richness theory) (De. Rosa, Hantula, Kock & D'Arcy, 2004). • Clusters: – The establishment of high trust relations among companies within a cluster » the exploitation of joint purchasing services as well as of shared dedicated facilities (Van de Ven, A. 1991)

• Relationship governance to manage lateral relationships within the organization (Meerkooistra & Scapens, 2004; cited in Scapens, 2006): – Governance needs to be: • firm but flexible • trust encouraged when structure mitigates risks of cooperation between individuals with different interests. – Guiding considerations: • • information sharing and knowledge exchange cooperation and competition flexibility and standardization sharing and shifting leadership roles.

• Research opportunities? – MCS for differentiation and integration • are non financial measures inconsistent with delegation of decision rights? – Dynamics of teams & role of MCS – Dynamics of business unit reconfiguration & implications for MCS (Karim 2006) • patching, organizational modularity, divisional charter changes – Horizontal management: (Ostroff, 1999) • structure based on processes that deliver desired outcomes • units do not have hierarchical controls over each other – challenges for accountability and performance measurement – How does governance & risk management provide direction & correction for value chain management?

• An operations management perspective – Developments in manufacturing strategy have identified the value chain as providing the basis to develop strategy – Operations management provided the basis for a value chain approach as it stressed the primary concern of management is to manage lateral (horizontal) facets of the value chain, this generated practices such as: – lean manufacturing & lean accounting (translating management accounting to the shop floor: Culter, 2006; Mouritsen & Hanson, 2006) – flexible manufacturing – TQM – JIT – MRP

• Research opportunities: relate horizontal accounting to developments in operations management – Agile manufacturing (Gunasekaran & Yusuf, 2002) • It highlights the development of dynamic capabilities – – the strategic use of new technologies, the integration of strategies and operations, customer satisfaction through new forms of interfirm cooperation knowledge management – Modularisation (Baldwin & Clark, 1997) • the building of a product from smaller subsystems that can be designed independently, yet function together as a whole • manages variety, flexibility & task uncertainty – Six sigma as an organization wide approach (Antony & Banuelas 2001) • cultural change – needs project reviews & tracking – Networks • understanding control within and beyond the value chain (Mouritsen & Hanson, 2006)

– Developments in TQM • How is TQM considered? (Kaynak 2003) – – – process management, and in addition: leadership, strategy and planning customer focus information and analysis people management • TQM and knowledge based theories • TQM and horizontal organizations • Strong interest in applications to not-for-profit organizations: – government – NGOs – community

Leadership Vision & change Style Elements of Best Practice External factors Secure funding Collaboration & networking with external bodies Historical Context Cultural enablers self esteem identity Program outcomes Substance abuse Crime MCS Strategic planning Internal factors – Objectives – Action plans Program delivery: Indigenous community Performance Learning & training: controlled measurement technical & social organizations Costing Governance process quality assurance

Human Resource Management Perspective • HRM has moved from concerns with employee welfare to consider the influence of HR initiatives on profitability – However, note the role of industrial relations on the implementation of MCS – Areas that have been employed to understand how employees work with MCS: • • • Empowerment Commitment Some good MCS studies in this area Trust Justice Leadership: – Leadership as style: » MCS has studied style (initiating and consideration)

– Research opportunities • Leadership as process – Transformational leadership (work of Bass, B. M. ) (Zaccaro, & Banks, 2004) » Develop ‘strategic flexibility: involves organizational visioning and ability to manage change » Predicts: trust, commitment, self and team-efficacy (Arnold et al, 2001) – Changing mental models, facilitating collaboration – Attracting & selecting employees – In flat structures, consider shared and shifting leadership roles (Scapens, 2006, 346)

– Soft assets (some good MCS research) • intangible assets (Grojer, 2001), • knowledge-based organizations (Ditillo, 2004), • intellectual capital ( Andriessen, 2004). – role of intellectual capital and the design of MCS (Widener, 2004), – using intellectual capital for managing knowledge (Mourisen, Larsen & Bukh, 2001) – for mobilizing change (Johanson, Martensson & Skoog, 2001). – Performance measurement (some direct links to MCS) • corporate social reporting (triple bottom line and environmental reporting (Gray, 2002; Patten, 2002; Al-Tuwaijri et al 2004) • human resources balanced scorecard (Becher & Huselid, 2001) • 360 o performance evaluation (Brett & Atwater, 2001; Hazucha et al 1993)) – combining hard and soft measures (objective & subjective) • how to combine multiple measures – multi attribute utility analysis (Roth & Bobko, 1997) – total performance effectiveness (Kane, 1996)

– Organizational culture & climate – Meaning of culture (Ravasi, Davide; Schultz & Majken, 2006; Tagiuri & Litwin, 1968). » Organizational culture is a pattern of knowledge, belief, and behaviour that includes social forms. » Culture circumscribes and includes organizational structure: it is the form, beliefs, norms, social patterns, the way things are done, the symbols and rituals » Culture affects the way employees see the organization. » Limited MCS research (Ahrens & Mollona’s, (2006): ethnography of culture; Henri (2004): specific aspects of culture, control & flexibility)

– Climate as psychological climate • psychological climate is a set of global perceptions held by individuals about their organization's internal environment, feeling about actual events based upon the interaction between actual events and the perception of those events (James & Jones, 1974): . • It has been measured along dimensions such as – – – – disengagement hindrance esprit intimacy aloofness production emphasis trust consideration – Culture is organizational while climate is at the individual level.

Conclusions on horizontal accounting • Strategy is still important – We need to study more complex notions of strategy related to both content and process • Attributes of SCM are still important as they help understand the value chain – If we give up others will do this (or are doing it): IT, HR, marketing, operations management • Note: Many management disciplines are considering themselves more holistically (boundaries between disciplines are breaking down)

• Studying the dynamics of horizontal accounting – Pick up on studies of dynamics in strategy, operations management, organizational behaviour & human resource management • Governance & risk management are key areas given corporate collapses – implications for managing the value chain and designing horizontal accounting are important areas for research.

• Implications of external networks on the internal value chain need to be explored (other literatures provide interesting directions) – E. g. organizational clusters, agile manufacturing, horizontal management • Innovations in organizational structure need to be explored – E. g. dynamics of changing and using structures, teams, patching and modular structuring, horizontal management, organizational culture & climate

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