Avoidable costs – United Airlines

by admin on June 12, 2017 at 1:27 pm
Posted In: Ch 3 - Taxonomy of Costs

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Image from Bloomberg.com

Recently, it seems United Airlines got themselves into a bit of a bad public relations  scenario by ejecting passengers (with force) from a domestic US flight. I’ve never used United and based in this, I never will, as it seems they commonly overbook flights.

First, in the age of technology we live in, how the hell a system allows overbooking I cannot fathom. Maybe if a smaller replacement aircraft transpired in an emergency, I can understand, but this would not be an overbooking issue.

You can read an article about the event at the link above, but here’s a brief rundown:

  • United over book
  • They look for four volunteers
  • They offer $400, then $800
  • Nobody volunteers
  • They forcibly remove four passengers

And all of this to get their own crew to a location for the next day – this alone says a lot about their ability to manage the business, not having a standard way to get staff, or reserving x seats for staff.

Back to management accounting, and we know that an avoidable cost is one which can be eliminated by not doing something e.g. close a production line. We also know that in the long term, all costs are avoidable. So what about the United story.  Well, one thing that will no doubt happen is a string of expensive law suits – and I personally hope United get screwed. This is an avoidable cost, and surely are the costs associated with the apparent regular overbooking. I’d even have a wild guess that it may have been cheaper to charter an aircraft for the staff than what this will ultimately cost United. Even $5000 a passenger to entice volunteers would be cheap too, or maybe $50000. Regardless, United need to find a long term solution to avoid such costs. They have apparently now increased the offer to passengers to $10,000 to give to give up their seats.

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Goals gone wild (and hitting back) at Wells Fargo

by João on May 29, 2017 at 8:00 am
Posted In: Ch 16 - Performance Measurement: theories and principles

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The scandal around Wells Fargo’s opening of fake accounts continues to evolve. Last year, news emerged that bank employees opened up to 2 millions of bank and credit card accounts without getting customers’ authorization. And the reason was the adoption of high-pressure sales tactics, driven by “the bank’s pressure-cooker sales environment” – an intense pressure for sales people to meet their goals, requiring them to work extra hours to meet widely unrealistic sales goals – otherwise, they would lose their jobs.

After the scandal emerged, the much-criticised sales goals were dropped, the CEO apologised and soon afterwards retired and employees were fired “for improper sales tactics”. New account openings and bank traffic have sharply reduced. Although distinguishing between the reduction caused by the end of the irregular practices and the reduction caused by negative publicity and badwill is difficult, it is likely that the second effect is quite significant.

And there are very significant and direct “out-of-the pocket” costs. After paying $185 million to federal and California authorities in 2016, they have just announced that they will pay an additional $110 million to settle a class-action lawsuit.

“Goals gone wild”, is the title of a very interesting 2009 paper by Ordoñez, Schweitzer, Galinsky and Bazerman (published version here; HBS WP here), alerting about the “systematic Side Effects of Over-Prescribing Goal Setting”. Its list of examples of aggressive goal setting in large organizations going terribly wrong can be easily updated throughout the years, as many organizations are lured by the promise of better performance if they set very (too) ambitious goals. The Well Fargo’s scandal provides a recent, and very notorious, addition to such list of examples of goals going terribly wrong – indeed, of “goals going wild”.

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Viewing management accounting change as ongoing processes

by John on May 17, 2017 at 6:37 pm
Posted In: Ch 22 - Management Accounting Change (Implementation), Ch1 - changing contexts, General management accounting

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Most of the literature on management accounting (MA), both practitioner-oriented and academic literature, views ‘change’ rather as a means to an end, with emphasis on the ‘end’. The majority of business schools also teach MA change as a phenomena for which there is assumed to be some optimal design, so simply design it!

So, conventional MA approaches not only see its subject as a neutral bundle of tools and techniques which will inform managers’ rational decisions, but also that any changes necessary in MA systems, techniques and/or roles for accountants are borne out of a state of disequilibrium and a need to re-establish optimal MA practices.

Furthermore, in the conventional, mainstream view of MA, change is generally assumed to be unproblematic, straight-forward and ‘simply’ a case of good (i.e., rational) design.

An alternative way to view MA change, however, is to treat it as constituting complex, frequently irrational in nature, and ongoing processes over time. One such alternative approach, though certainly not the only one, would be the ‘institutional framework’ of MA change, proposed by Burns and Scapens (2000).

The Burns and Scapens (2000) theoretical framework of MA change assumes that much MA practice is underpinned by rules (e.g., budgets are underpinned by the budgeting manual), which over time become routinized practices, and can eventually become ‘institutionalised’ such that their use becomes rather unquestioned and taken-for-granted. As such, over time, this routinised and potentially institutionalised nature of MA practices can bring a degree of predictability and stability to their form and use.

That said, it is held in the Burns and Scapens (2000) framework that changes can occur, in particular when powerful people in organisations force or coerce change. But, changes in rules (e.g., changes to particular systems, techniques, roles) tend to be easier than forcing change in routines and institutions. Importantly, and probably more than anything else, an aim of the Burns and Scapens (2000) framework is to emphasise that it is important to view the ‘life’ of MA practices as ongoing processes over time rather than as static outcomes.

Reference: J. Burns and R. W. Scapens (2000), Conceptualising management accounting change: an institutional framework, Management Accounting Research, 10(1), pp.1-19.

Multi Ethnic People Holding The Word Change

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New public management and management accounting

by John on May 3, 2017 at 2:06 pm
Posted In: Ch 22 - Management Accounting Change (Implementation), Ch1 - changing contexts, General management accounting

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New public management (NPM) is a bundle of management tools and techniques adopted within a public sector organisation, which together are aimed at emulating the ‘best’ practices of big, private-sector business enterprises. In particular, NPM aims to use a configuration of management accounting (MA) practices which assist and maximise benefits from the organisation, coordination and day-to-day management of public sector organisations.

A good paper to read is Hyndman and Lapsley (2016), who state that “[NPM] portrays a set of ideas and practices which modernising reformers actively pursue as a solution to the challenge of making the public sector more economical, efficient and effective” (p.404).

So, how is MA implicated in the roll-out of NPM in many of today’s societies? Here are some examples:

  • NPM introduces market-like structures to public sector organisations; this includes the use of budgets on a resource competitive basis for different units within the organisation. For instance, many UK hospitals are forced to compete with each other for their portion of the Government’s health sector budget and, in turn, there are competitive tendencies within hospitals, across different clinics and departments;
  • It is not unusual to observe numerous MA practices in the public sector which resemble practices that are more common in the private sector. So, for instance, as mentioned above, budgets are commonplace in all kinds of public sector organisations – in particular because the latter are constrained by limited state funding. And there has also been evidence to suggest that some public sector organisations are turning to the balanced scorecard to steer its strategic, planning, decision-making and evaluation processes;
  • It is quite normal to witness a focus on frugality (e.g., a keen eye on control and often cutting costs) in the public sector these days; and a focus on – sometimes an obsession with – performance measurement and results-oriented management controls is equally commonplace in the contemporary world.

Reference: N. Hyndman and I. Lapsley (2016), New public management: the story continues, Financial Accountability and Management, 32(4), 385-408

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The role of management accounting in globalisation

by John on April 19, 2017 at 2:00 pm
Posted In: Ch 18 - Multinational Organisations, Ch 2 - information, Ch 22 - Management Accounting Change (Implementation), Ch1 - changing contexts, General management accounting

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Globalisation is associated with the extensive mobility of products and services, information and people across national borders. It has existed for centuries but, fostered by advances in communications and travel technologies, for example, it has had a meteoric increase in recent decades.

For a long time, it has been assumed that globalisation has been a primary driver of changes in management accounting (MA) practices. But how much do we really understand about how and in what ways MA becomes implicated in the globalisation process?

Here are some examples:

  • MA practices are at the core of most organisation’s governance structures – e.g., reporting lines and accountability can be underpinned by such tools as budgeting, variance analysis and benchmarking
  • MA tools such as forecasts, customer profitability analysis and the balanced scorecard are amongst the inputs for (re-)designing and implementing an organisation’s strategies and forward plans
  • MA information, both final- and/or non-financial-oriented, is central to how a globalised organisation (e.g., a Multinational) both allocates responsibility amongst, and makes comparisons of performance, across different (subsidiary) units.

All in all, MA practices comprise and represent key mechanisms for aligning ‘localised’ (e.g., subsidiary, units) activities with globalised (e.g., head office, owners) strategies.

A good article to further explore how MA becomes implicated in the dynamics of globalisation is: C. Busco et al. (2008), ‘Managing the tensions in integrating global organisations: the role of performance management systems’, Management Accounting Research, 19, 103-25.

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