Strategic Finance and Cost Management Paperback – 1 Sep 2005
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About the Author
Al Bhimani is Reader in Accounting and Finance at the London School of Economics where he has been teaching since 1988. He possesses an MBA (Cornell) and a PhD (LSE) and is a Certified Management Accountant (Canada). He has co-authored a number of books including Management Accounting: Evolution not Revolution (CIMA, 1989), Management Accounting: Pathways to Progress (CIMA, 1994) and Management and Cost Accounting (Prentice Hall, 2005). He has also edited Management Accounting: European Perspectives (OUP, 1996) and Management Accounting in the Digital Economy (OUP, 2003). He has written numerous articles in scholarly publications and serves on the editorial board of several journals. He has undertaken management accounting related fieldwork in a variety of global enterprises and has presented his research to corporate executives and academic audiences in Europe, Asia and North America.
Excerpt. © Reprinted by permission. All rights reserved.
Excerpt from Chapter 1
LIVING THE PARADIGM SHIFT
Since the end of the Second World War there has been a massive change in the way in which financial transactions are processed. The technical developments that have taken place may be summarised as:
- card-posting ledger machines with no calculating capability or card sorting/printing machines;
- calculation by comptometer operator;
- labour was cheap and plentiful, detailed standard costing systems were built, requiring large numbers of staff to drive them.
- punched card-driven computers and magnetic stripe ledger posting machines;
- electronic calculators;
- standard costing systems reached their peak.
- mainframe computers became widely used;
- beginnings of financial modelling;
- financial application packages became available for all ledger systems;
- computer performance/price capability escalated dramatically;
- personal computers/spreadsheets became universal with major increases in productivity of management accounting staff;
- standard costing systems became too expensive to maintain and started to decline;
- activity-based costing generated interest but was not widely applied;
- functionality of financial application packages became almost universally accepted.
- move from mainframe to distributed computer systems;
- trend towards financial transaction processing centres within distributed environment serving many subsidiaries/countries;
- functional transaction processing becoming more and more integrated and embedded in operational (e.g., manufacturing, sales and marketing) systems;
- escalating demand from management for better performance measurement systems and improvements to budgeting and forecasting, met in part by development of activity-based management, strategic cost analysis and the pursuit of more balanced scorecard measures.
2000 and beyond:
- the increased use of web-based technologies to link intra- and extra-organizational processes;
- altered economies of scale and scope being effected by organizational reconfigurations;
- enhanced core value focus and interconnectedness via different information routings and accelerated information exchange possibilities;
- systematic knowledge sharing and the management of knowledge assets.
The first decade of the twenty-first century continues to usher in further changes on a significant scale. The advent of internet-based commercial approaches are driven in part by technological changes in hardware structures, software platforms and the emergence of altered economics of information retrieval, processing and presentation. Technological advances and the application of innovative business models within the emerging digital economy will likely give rise to novel modes of enterprise management and, ultimately, new cost management practices. The digital economy is currently in its infancy, but in some organizations, it has already altered what was conventionally taken as necessarily an internal activity. For instance, numerous companies are assessing the feasibility of outsourcing transaction processing or database maintenance and storage important activities but not ones which are likely to yield competitive advantages for companies undertaking them in-house.!
Remote outsourcing is a growing option in the emerging digitised economy where it often makes sense to devolve operational accounting and information processing to an off-base application service provider (ASP). The ASP may provide services that leverage its core strengths more cheaply and effectively. The enterprise is then free to focus on its own core functions and expertise whilst containing costs. The role of strategic finance and cost management within such enterprise contexts will undergo important shifts as new orders of organizational excellence and corporate performance are pursued.
During the past fifty year-period of steep decline in the number of people employed in processing financial transactions, the number of qualified finance and accounting professionals employed in industry and commerce outside auditing has escalated. The management information input orientation within the finance function has grown just as there has been a trend towards greater demand in some sectors for enhanced participation by accounting and finance specialists.
Many professional accountancy bodies across the globe presuppose that these trends will bring about corporate structures with small numbers of:
- highly skilled finance and accounting professionals working as a part of management teams to develop strategy, plan the business and manage performance;
- specialists in tax, internal audit, etc.;
- specialist technicians responsible for ensuring that integrity of financial transactions and management information is maintained throughout distributed and integrated systems, most of which are run by non-financial personnel.
What seems evident is that time brings with it pressures for changing the finance function which accord with different views of what makes organizations excellent. The late 1990s heralded the notion of a "new economy" where past conceptions of proper organizational management and economic logic came to be viewed as being in need of change. Liberalisation from what had been deemed essential by many old industrial firms has been sought by new as well as established enterprises to enable faster, leaner and more effective performance. To some, the emergence of the Internet was to make many modern management techniques outdated. Bricks and mortar cardinal principles were in some firms eschewed and replaced by newly evolving "clicks and mortar" truths. In some contexts, life cycle costing (chapter 7) was to elevate evaluations of time-based decisions. Balanced scorecard (chapter 5) were implemented to tackle newly conceptualised forms of imbalance. Activity accounting systems !
(chapter 4) were designed around digitised operations. Target cost management (chapter 7) was to begin to capture the nuances of ephemeral markets. Whilst little can be said of where the twenty-first century will take the field, some commentators will continue to advocate change in search of enhanced enterprise performance. The following chapters discuss established and emerging strategic finance and cost management practices deployed by firms in their pursuit of organizational excellence.