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Doctor Decade – a musical twist on academic life, and for a good cause.

Okay, a first for this blog but it’s a good cause. Doctor Decade is serious and friendly academic whose advise, research and music has inspired me over the last 6/7 years. His music is quite good, and offers a bit of a tongue in cheek view of some academic things. And it’s all for a good cause too. Just subscribe to his YouTube channel and help him get ads there to make money for charity. It only takes a few clicks.

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Article in MAR – management accounting at Guinness over a century or so

Over the last year or two I have done some research on changes to management accounting practices over a century or so at the Guinness cooperage. This work is now available as a an article in Management Accounting Research see here

The importance of integrating cost and risk into decision making

English: The 2012 Summer Olympics Olympic Stad...

Olympic Stadium at Stratford, London (Photo credit: Wikipedia)

It’s always great to find and example of where some simple planning and management accounting type work would have done quite a bit for a particular company or decision.

During the summer just past, a great example came to life. The London 2012 Olympics have come and gone, but I’m sure you can imagine such an event needed a lot on planning. Mostly, the games went fine. However, a few weeks before the games kicked off, a story broke about how G4S would not be able to deliver the number of security personnel they were contracted to provide. You can read more on the BBC website here, but in a nutshell G4S racked up losses of £30-50m. Why? Well it seems to boil down to not been able to recruit enough new staff and train them within the timeframe, and thus G4S have to cover the cost of army personnel provided instead.  According to the BBC, the value of the contract was £280m and one would think there should be scope for profit in this. I wonder did anyone ever ask this key question: What if we cannot recruit enough staff? If this question was asked, then the next question might be: how much will it cost us if we cannot provide enough staff. These two relatively simple questions might have forced managers at G4S to think about the risk of this happening and the costs. This does not mean they would have not faced the problems and costs they did, but at least they may have been more prepared to deal with the problem as it happened – or better still planned better from the start.

A story of change – in a Dire Straits song!

Telegraph Road

Telegraph Road (Photo credit: Wikipedia)

As part of my research work, I like to study how organisations and their management accounting practices change over time. And, I particularly like to frame my research as a story of change. I like the stories of how things change (or don’t) as these stories quite often get to the bottom of things quickly, or summarise everything that happened in a brief and concise way. Of course, when I am in research mode, there are often many thoughts flying around in my head. Recently, I was doing some work on how technology has changed the role of management accountants. I put on an old CD I had from Dire Straits (Love over Gold, 1982) and as I was listening to the first track, I realised, hang on this is a story of change. The song is Telegraph Road, here are the lyrics:

Telegraph Road lyrics

Songwriters: Knopfler, M;

A long time ago come a man on a track
Walkin’ thirty miles with a sack on his back
And he put down his load where he thought it was the best
Made a home in the wilderness
Built a cabin and a winter store
He ploughed up the ground by the cold lake shore
The other travellers came walking down the track
They never went further, no, they never went back
Then came the churches, then came the schools
Then came the lawyers, then came the rules
Then came the trains and the trucks with their load
And the dirty old track was the telegraph road
Yeah, and then came the mines, then came the ore
Then there was the hard times, then there was a war
Telegraph sang a song about the world outside
And the telegraph road got so deep and so wide like a rolling river
My radio says, tonight it’s gonna freeze
People drivin’ home from the factories
Now here comes six lanes of traffic
Three lanes moving slow
Used to like to go to work but they shut it all down
I got a right to go to work, no work here to be found
Yeah and they say we’re gonna have to pay what’s owed
We’re gonna have to reap from the seed that’s sowed
When all the birds up on the wires and up on the poles
They can always get outta this rain and this cold
Then you can hear them singin’ out their telegraph code
All the way down the telegraph road
And I’d sooner forget but I remember those nights
Yeah, life was just a bet on a race between the lights
You had your head on my shoulder, had your hand in my hair
Now you actin’ little colder like you don’t seem care
But just believe in me baby, and I’ll get you away
I’m gonna get you out of this darkness and into the day
From all these rivers of headlights, from these river of rain
From the anger that lives on the streets with these names
‘Cause I’ve run every red light on memory lane
I’ve seen desperation explode into flames
And I don’t wanna see it again
From all of these signs, just sayin’, ‘Sorry but we’re closed’ all the way
Down the telegraph road

Telegraph Road is nowadays US Route 24 in Michigan. The song tells the story of how what was once a dirt track, became a telegraph line route, and ultimately a highway with all the associated development. When I actually realised the story this song tells, I started to think, okay it was only written 30 years ago, but look how much has changed in even that short time. I thing it’s time Mark Knopfler wrote a new version! By the way, if you don’t know the song, it’s about 15 mins long and has some really cool guitar pieces.

Is double entry accounting here forever?

Some time ago, I read a blog post on the Zoho website about double entry accounting. Zoho provide a number of business related applications. The essence of the Zoho blog post is conveyed in the title of this post. Double entry accounting has been around for the last six centuries and has been embedded in the most simple and most complex accounting software. And there are no signs of it disappearing. The have been some proposed alternatives, such as the Resources, Events, Agents model (which is sometimes used in teaching). But like the DVORAK keyboard, even if some alternatives may be an improvement on the double entry system, they are likely never to catch on. Why you might ask?  Well, in my institutional theory thinking the answer is probably because the practices around double-entry accounting have been repeated so many times by so many people, that they have become the accepted way of doing things in business. In other words, the double entry system of accounting is a routine. And, not only that, there are also rules about double entry. I regard rules as written, and there are plenty of written rules of the double entry system – in text books, in software for example. If a practice has both been repeatedly performed for 600 years or so, and it has been written as a rule, the as the Zoho blog post says ” the traditional double-entry model was deeply ingrained in the business person’s and accountant’s psyches, and it was never going to be easily changed”. And it will probably remain so.

Prices, costs and business failure – a few examples from Ireland

In recent years hard economic times have hit Ireland and other developed economies. According to an article in the Guardian over a year ago now, the number of businesses failing in Ireland was 5 times that in 2010 – a huge chunk of these being construction firms. I hope have some sympathy for many of the hard-working business people who perhaps have seen a lot of their money lost. But, there is a  part of me (probably the accountant) who is not at all surprised at so many Irish businesses failing.  Why? Am I getting more cranky (Yes, of course I am)? Well, let me give me a few of many examples I have encountered over the last few years which seem to show poor decision making.  But before I do,  I should say that many Irish businesses who started during the “boom” years were already doomed to failure due to a pretty high cost structure e.g. rent.

The first example dates back about 2-3 years now. In the area where I live, we collect an amount of money each year to help maintain the common greens in the area. The landscaping business doing the work was charging about €7000 per annum and a new landscaper offered to do the work for €4500.  Both were sole traders with similar costs (as best I could guess at least).  The original landscaper said he could not do the work for that price and would not even reduce his current price, so the business was lost. Now I don’t know what either landscaper was thinking, but it fairly obvious that the original landscaper was living in the boom years in my opinion. He could have reduced his price by some amount, say €1500. This would mean his net contribution would fall by €1500, but instead he lost €7500 – a bad decision.

The second example relates to a really nice bakery I visited recently in a more affluent part of Dublin. Yes, the price is of course going to be affected by the area, but having paid €4.60 (ok my wife bought it) for a loaf of sour-dough bread I thought this is not a sustainable business. Even people in affluent areas cut back on spending in lean times. The point here is that I thought the price was more reflective of a time four or five years ago.

The third example relates to an employee within a business. The employee left as €900 per week income was not “enough” for him. The job involved manual labour and some skills, but nothing that could not be replaced readily. The right decision was made by the business owner, which was adiós amigo.  The employees decision was rather silly though, as the immediate income from social benefits would be way lower.

These three examples to some extent portray how high prices may have become engrained in the minds of business people following many years of the Celtic Tiger.  I like to study how practices have become accepted/taken-for-granted, or institutionalised.  When practices become institutionalised, there are hard to change. So I wonder are businesses in Ireland failing because some business owners cannot make the change in their minds to reduce costs or prices? In other words, they are finding it hard to break the institutionalised practices associated with past more affluent times. I know there are many other factors, but based on my experience, at least some business failures in Ireland result from a failure to change mindset.

Institutionalised practices – a simple example

In my research work, I write and read a lot about how accounting practices become taken-for-granted within organisations. This taken-for-grantedness might be equated with the term “institutionalised”, based on theories from economics and sociology.  When we think of the term institutionalised, we often associate with things like being in jail for too long, or something that’s more physical like the an Institute of Engineers. But, it can be something far more fluffy. While driving to work in early December, a useful example came to mind as I listened to the radio. It was December 1st, and an Irish radio DJ called Larry Gogan is typically accepted as the person to play the first Christmas song on the Irish airwaves – it was Fairytale of New York for Christmas 2011 just in case you’re interested.  It is not written down anywhere that Larry does this, and to be honest I don’t know how this practice came about. But radio listeners know that Larry is expected to play the first Christmas song each year. In other words, it is an institutionalised practice. And what happens is something tries to change this? After a quick search I found some comments from 2006 on a boards site:


Every year on 2fm Larry Gogan plays the first christmas song on the radio, usually in the first week of december, Apparently Gerry Ryan went and broke the tradition thats nearly 25 years old, i’m a little bit pissed off about that, larry is like a national treasure, you shouldn’t mess with him, boo gerry boo i say

I hope he gets a rap on the knuckles / kick in the balls for stealing Larry’s thunder. If he wants to do it after Larry has gone to the Great Microphone in the Sky (not for many years yet, I hope, I hasten to add), fair enough, but he shouldn’t have upstaged Larry like that  

These quotes/posts above show that some people did not like the fact that another DJ broke the accepted practice. This is quite typical when change to any institutional practices is attempted. Similarly, in the world of accounting, there may be practices which are just accepted as how things should be done. Trying to change these can be tricky, but if we can understand why such practices became institutionalised, then we might be able to foster some change.

Routine activities – a source of waste and additional cost?

I don’t write too much on my blog about my research interests, but this one I just have to share. To be honest, I have been putting it off for a while too.  Brian Plowman (a consultant specialising in productivity management) wrote a short, but to me really inspiring piece in Financial Management in May of this year (pp. 29-30 if you have access to a copy).

Institutional and organisational theory would define a routine along the lines of; a routine is a repetitive, recognisable patter of interdependent actions involving multiple actors (see an article by Feldman & Pentland 2003, in Administrative Science Quarterly). The article from Financial Management takes a more practical approach to routines. It mentions the term “interfacing activities” which become routine. These interfacing activities are links between the tasks carried out by individuals in organisations. In themselves, these interfacing activities are not a problem, but what tends to happen is that lots of informal interfacing activities creep into organisations. These may be quite wasteful. For example, the article mentions a hospital worker looking for a particular piece of equipment. It is not where it should be or where a computer systems says it should be. So the employee has developed a whole series of interfacing activities to find it. This is turn have become so common place that they are now a routine and accepted activity. Wasteful? Yes of course it is. The article proposed that up to 50% of an organisations interfacing activities may in fact be wasteful (as in the hospital example). Can this be remedied. Finding these informal and potentially wasteful activities is difficult, but it could reap huge benefits.

Tacit knowledge in management accounting

I read a short piece by Bill Fischer in the April issue of Financial Management (CIMA’s monthly journal). The woes of Toyota was the main subject – in case you’re not aware, Toyota have had major safety concerns on a number of its models in the past year or so. Fisher quotes from a book by Paul Ingrassia (Crash Course: The American Automobile Industry’s Road from Glory to Disaster). In this book, Ingrassia writes how Toyota ignored its own “three nevers” principle when deciding to manufacture some of its models in the US e.g. the much reported on Camry model with its jamming brake and accelerator pedals. The “three nevers” principle is: never build a new product, in a new facility, with a new workforce. In the case of the Camry in the US, all three were broken. But surely, you might say, a company as large as Toyota would have rules and procedures about how things are done? They do of course, but a large amount of tacit knowledge – or know-how in the heads of experienced employees – never gets written down and passed on. In the case of Toyota, such tacit knowledge cannot be passed on in a new country, with a new plant, model and workforce in a short time period.
Any what’s the relevance of tacit knowledge for management accounting. Quite a lot actually. If you have studied accounting, do you remember those early first year lectures where management accounting was defined for you? Compared to financial accounting, management accounting is unregulated and loosely structured. While two management accountants having a chat about budgets will both know what a budget is, it’s quite likely that they do their respective budgets in very different ways. There’s a good chance too they do not write down how they prepare budgets or do any other work for that matter. Many academics have written in the importance of tacit knowledge and management accounting practices. For example, the work of Burns and Scapens (2000) uses institutional theory to help explain why management accounting practices remain stable. One reason they offer is that management accounting may become engrained and accepted. This does not imply that management accountants follow rigid rules saying what they should do, rather that the work they do becomes tacitly accepted.
So when you get you first job as a management accountant, sit back, listen, figure out what is going on. In other words, you’ll have to pick-up the tacit knowledge of what management accounting means in the organisation.
References:

Burns, J. & Scapens, R. 2000, “Conceptualising management accounting change: an institutional framework”, Management Accounting Research, vol. 11, pp. 3-25.

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