MANAGEMENT ACCOUNTING – PERFORMANCE EVALUATION

MANAGEMENT ACCOUNTING – PERFORMANCE EVALUATION

Herbert, Ian

Ian Herbert analyses the pros and cons of employee empowerment and discusses the role of the management accounting function.

The idea of allowing workers to take more responsibility for operational decisions seems to represent the very essence of the modern, dynamic organisation. Tom Peters, the author of bestselling business book In Search of Excellence, put it this way: “If you don’t know where your people are today, that’s probably a good sign. It means that they’re working beyond functional walls.”

If a company’s management style moves away from top-down command and control to bottom-up empowerment, there are implications for organisational design, employee motivation, management control systems, operational risk and information reporting systems. But, while this “wonder” approach may be appropriate in some situations, at other times managers might still need to supervise and control workers more directly. Elements of these issues also appear in papers P2 and P5.

Giving workers the authority to do their jobs in the way that’s most appropriate to their local circumstances has been one of the most significant developments in management thinking over the past 20 years. The basic idea is that those on the front line are best placed to understand changing customer/production requirements. They should, therefore, have the discretion to react accordingly. Other terms to describe this empowered approach include “participation”, “autonomy” and “entrepreneurship” (in the last case, people are encouraged to think and act as though the business were their own). It contrasts with the traditional command-and-control approach, whereby senior managers are assumed to know best and their main task is to decide what to do and tell their subordinates how to do it.

Both approaches have pros and cons depending on, for example, the complexity and variability of local conditions/customer requirements; the competence of the workforce; the ability of the company’s information and control systems to retain control; the risks of things going wrong; and the overall strategic objectives.

Empowerment is primarily intended to make the organisation more responsive to changing consumer needs and/or foster employee-driven innovation. It is usually accompanied by a flattening of the managerial hierarchy so that the scalar chain, and hence the communication time between the bottom and the top of the organisation, is shortened. But sometimes such delayering is done simply to save cost – and empowerment can become abandonment.

Empowerment initiatives have been applied widely, from car factories to doctor’s surgeries. In essence, they seek to promote flexibility of thought and action among employees. Often this is an ideal to be worked towards, rather than an absolute state. Most people enthuse about the notion. Giving power to those who face the problems at the sharp end of the business feels right intuitively. In my own research, a plant manager explained that “empowerment is like pulling 200 small levers rather than one big one. It’s about the company trusting us.”

But it can mean different things to different people – and there is scepticism. Another manager in the same company told me: “I am empowered to solve any problem, as long as I don’t spend any money doing it.” In other words, senior managers can use empowerment as a convenient way of shifting responsibility without a commensurate increase in discretion over resources. Other studies have raised questions about this issue. According to Adrian Wilkinson (“Empowerment theory and practice”, Personnel Review, Vol 27, No 1, 1998), most empowerment initiatives “are purposefully designed not to give workers a very significant role in decision-making but rather to enhance employee contribution to the organisation”. He went on to suggest that the term “empowerment” could cover a range of styles (see panel).

Empowerment may involve flexibility in what workers do and how they do it, as long as the output criteria are met. But there may also be times when strong central control is required for example, when the organisation has to produce cheaper goods than the compeitition or when a regulatory regime demands conformity to set procedures. In many industries both approaches might exist, which can be confusing. In these circumstances the manager’s job is to guide employees so that they can work within what at times might seem conflicting demands for both flexibility and control. On an airliner, for example, the crew may have considerable discretion over how they deal with passengers during a flight. This may range from upgrading a disgruntled passenger to first-class accommodation right up to making an emergency landing – which could cost tens of thousands of pounds. Considerable authority may be given to the aircrew, but overall responsibility still rests with the airline’s directors. In other aspects, the crew has little discretion over what they do, as the industry is strictly regulated. If the manual states “follow this procedure”, then that must be done, no matter if individual crew members see a better way of doing it.

Changing from a top-down, bureaucratic regime to an empowered organisation is likely to have significant implications for the style and processes of management control. Less direct supervision should be necessary, but the unleashing of entrepreneurial flair might expose the company to excessive risk or compromise its operational integrity.

Changes in the management control regime will have implications for management accounting, which has tended to develop as an instrument of the vertical, command-and-control style of management – ie, reporting upwards to a small number of senior managers rather than downwards to a larger number of junior managers and workers. Indeed, both the method and the outlook of the management accounting function are likely to be different under an empowered system, where decision-making is distributed and the emphasis of control is on self-monitoring by workers. For example, the format of accounting information, the style of communication and the objectives of the management accounting control system will probably differ if the recipients are junior managers and workers who want detailed information that’s relevant to their individual areas in real time, rather than senior managers, who prefer summary information aggregated across the organisation.

Management accountants need to appreciate that these different requirements are likely to co-exist. They also have to be sensitive when designing accounting and control systems, since the information they produce needs to be tailored to the recipient. In the case of the airline, it would not be helpful to highlight to managers how much the aircrew might have cost the company by upgrading unhappy passengers if other factors are not balanced against that cost or at least linked to it. Perhaps the flight was delayed by maintenance problems. Perhaps the catering budget had been reduced by central management and there weren’t enough meals on board. Management accountants have to be able to see the issues behind the numbers and be careful in the way that they present information.

Rodney Coyte (The Role of Management Accounting in the Emerging Approach to Teamwork, IFAC, 1995) suggested that management accountants can help to develop self-directed work teams by providing “resource consciousness” including:

* More timely measures and different communication media, together with the interpersonal skills needed to aid the transfer of key performance information to front-line employees.

* The facilitation of direct data collection and its use by operations managers and staff, rather than responses to requests for information. (Note that improvements in enterprise resource planning systems since the mid-nineties have greatly helped operational employees to take ownership of their data.)

Robert Simons (“Control in an age of empowerment”, Harvard Business Review, March-April 1995) proposed that the senior managers in an empowered organisation should seek to retain control using four tools: diagnostic control systems (detailed operational performance data); interactive control systems (strategic monitoring); boundary systems (limits to empowerment); and belief systems (core values/culture). Management accountants have a particular role to play in designing diagnostic systems and boundary parameters through the budgeting and capital appraisal processes. While such systems might seem to reflect the centralised, bureaucratic approach, participative planning sets out a framework within which workers can then work on their own without constantly having to seek authorisation from above.

Ian Herbert is a lecturer in accounting and financial management at Loughborough University Business School.

Copyright Chartered Institute of Management Accountants Jun 2008

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