In my view, even though some accountants may not agree, big data will effect how accounting is done. This is particularly true for management accounting.
I was going to write an outline of my thoughts on big data and management accounting, but I found this great post on diginomica. It gives some really good practical insights. It notes how the following, for example, gets accountants interested in big data- it is being used to:
- Improve the quality of budgets, plans and forecasts
- Enhance top line revenue
- Reduce operational costs
- Detect fraud
- Assess the viability of a company as an on-going concern
Changes in technology is regularly a top issue for management accountants when asked. Of course in recent years, the pace of technology change has been so rapid compared to previous. How can management accountants deal with such change? An article from the CGMA provides some useful tips.
As an accountant, when we think of the costs of letting staff go, we probably think redundancy costs and so on. These can be quite substantial. But maybe these short run costs are better than longer term damage costs. I know the example I give here may be less likely to work in Europe for employment law reasons, but I’m just trying to think about costs, not the HR side.
I read recently that Amazon (and others) are offerings employees a cash sum of up to $5000 if they wish to leave. Maybe this is a bit strange, but there may be an argument which suggests such a payment actually saves money longer term – employees who are not engaged with their company are probably less productive. I don’t know if companies like Amazon have done a cost analysis on this, but it seems to make sense.
To give another example, a few tears ago an employer told me that a substantial redundancy payment made to an employee probably was a good deal. The employee in question was creating a poor image with customers, which was starting to effect turnover. Again, maybe no cost analysis was done, but the short term cost of redundancy was compared with unknown longer term effects.
The term “hidden cost” is one which we are probably quite familiar – the media like to use if a lot. But what is a hidden cost? Where do these costs hide? Can we avoid them in decision-making? Too many questions to answer in a single post, but let’s start with the term itself.
If you do a google search, you will get many definitions which define hidden costs as a similar concept to opportunity costs. I disagree with such definitions as if you have identified an opportunity cost, then it is not hidden is it? Ok, perhaps I am being a bit unfair here, but to me hidden costs are those which you may not foresee when making a decision. Of course, it’s never possible to foresee all costs when making a decision, but perhaps the hidden costs might emerge if more time is given to the decision – easier said than done in a business scenario.
Take the example of a house purchase decision. This is a big decision in anyone’s life, and we normally take the time to make the right decision on location, size, internal layout, price, amount to borrow and so on. After a few years in the house we might discover we are far from schools or work, or that it is hard to heat the house – these would be hidden costs of our house purchase as we probably did not factor them into our initial decision. There’s a good chance though that we would include such things in a second house purchase decision.
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
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;
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.
The fact that many businesses capture vast amounts if data is not brand new (see this article from The Economist in 2010), but the focus of collecting and analysing what marketing people call big data is now beginning to come firmly under the radar of management accountants too. Before looking briefly at what big data means, we need to define. First, back to basics. Data is simply facts, numbers, statistics etc. For example, 175,80,40 are just numbers. They are in fact my approximate height, weight and age. This is information, as you now know some facts about something i.e. me. The problem with big data is getting the information value from it.
Here is where a management accountant can help – assuming of course (s)he has some technical proficiency. Here is an extract from an item on CNET back in May of this year (bold is added by me):
Put simply, the analysis that big science brings to the table makes big data relevant. I envision big science combining with big data to create big opportunities in three significant ways: real-time relevant content, data visualization, and predictive analytics.
When I read the above, I immediately thought isn’t this what management accountants have been doing for years now? If you remember the basis definition of what management accounting is, you’ll remember it is about providing decision-relevant information to managers. This includes real-time data, forecasts and predictions and is often aggregated (or visualised). Personally, I believe management accountants, IT people and marketeers (who might be responsible for collecting all this big data) can all work together to make big data work as information. In particular, management accountants are well placed to assist as they know what information drives a business.