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Tread a careful path between creative hope and blind faith
Robert Bruce

          One of the sources of friction between the finance function of a company and the rest of the management is the implementation of innovative management accounting systems.
Some of these work. Some do not. And often no one has a clear idea of why they succeed or not.
This is the problem that Joan Luft, professor of accounting at Michigan State University, attempted to address at the Chartered Institute of Management Accountants in a recent lecture in her role as 2006 Cima visiting professor.
The laid-back but incisive professor, in conversation at Cima's global headquarters in London, before addressing an audience of senior corporate accountants and accounting academics, goes through the problems and mistakes and sorts out the fads from the innovations.
"People feel they are wasted by one project after another," she says, evoking the sort of corporate comment that might run: "Before Christmas we did Total Quality Management, and after Christmas we did Economic Value Added."
It is small wonder that non-financial managers feel blitzed by acronyms as the TQMs and EVAs flit by. Prof Luft characterises the past 15 years of management accounting as the liveliest in the subject's history but also a period that has spawned "an alphabet soup" of acronyms.
"They have made us think and they have been creative but, on the bad side, failure rates run at about 60 per cent. People take up a system like the balanced scorecard, and then two years later say 'this isn't working for us, let's dump it'," she says.
The task now is to help managements build an ability to assess whether management accounting innovations have "provided the basis for productive partnerships, between accountants and managers, or whether they are merely fads, driven by the career concerns of consultants and journalists".
It is easy, as she points out, to chart cycles of adoption and abandonment. The real problem is identifying the bias in the predictions of success from management accounting innovations. Part of this problem is the difficulty caused by over-optimism. Research shows that people consistently place themselves in the top quartiles of ability.
"Managers do the same," she says. "This may seem harmless, but it is not." The result is that managers assume that their ability will carry the project through to startling success and hugely improved profitability. "People say 'don't worry, I'm very good' and they take the risks."
The trick, according to Prof Luft, is to build a recognition of this type of bias into the decision-making process. In other areas of everyday life people do not make the same assumptions. She cites the example of weather forecasts. "Professional weather forecasts may be wrong about whether the sun will shine tomorrow afternoon or not, but they do not predict twice as many sunny days as occur.”
“Even amateurs and optimists do not expect sunny winters in Michigan or Manchester," she says. "So the question is -- why do people in management accounting predict too many sunny days?"
The trick is also to recognise that traditionally these types of management assessments were founded on unrealistic bases. Prof Luft says: "Before people started doing this type of research, the serious theorising was based on economics, which assumes rationality and serious thinking." Recognition that decisions may have been taken on the basis of over-optimism and a misguided belief in management's abilities rather than supposedly rational and objective assessments is likely to be a better guide.
There is also the issue that management accounting innovations are expected to provide only good news. Part of this comes through the idea of a false consensus.
The management accountant heading the project assumes that because they are enthusiastic about a particular system everyone else will be too. They also tend to gloss over the downsides of the change that will follow.
"Accountants tend never to say there will be losers as well as winners," says Prof Luft. "Extensive co-operation is required to implement any new system, but if the new system creates losers as well as winners the result is conflict." If the understanding that it will not be in everyone's interests to co-operate is not built into the planning there will be disappointment and conflict and that may lead to the programme's abandonment. The company is likely to repeat the same disasters over and over again.
"If management concludes that the problem was with this particular innovation, and not a generic underestimation of conflict, it will try the next popular innovation and that will land it back in the same difficulty again," she says.
The question then is how companies can deal with what Prof Luft describes as "the cycles of over-enthusiasm and disappointment". A little less rationality and a great deal more sensible scepticism about the ease with which innovations will lead to greater profitability would be welcome.
There is a need for less enthusiastic dogmatism about proposed innovations, a little less hard sell, and a clearer awareness of probable simplifications in innovative systems and their consequences.
The problem also requires a greater understanding and acceptance of the bias within management accounting systems themselves.
"What matters most to us is the stuff that is hard to measure," says Prof Luft. But this is not always understood widely in an organisation.
It is also difficult for the accountants themselves, who formerly fulfilled the role of the stolid scorekeepers and sceptics. Now accountants are expected to be enablers, and inevitably that stokes the fires of over-optimism.
* The past 15 years have spawned many innovative management accounting systems
* Some have worked, others have not
* There is a need to recognise a bias in expectations
* Everyone should understand the likelihood of conflict during implementation
* There is a need for less rationality and more scepticism.
Under syndication arrangement
with FE


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