How to implement drastic changes in management

Context:

This paper explores how accounting information can be used as a tool to facilitate participation that is effective in the development of knowledge and in helping lower managers and workers to learn how to implement senior management’s new vision.

Results:

This paper proposes three specific forms of participation: formal participation, informal hierarchical participation and participation through the “organizational community”. The differences between these forms of participation concern the relationships among the organization’s members, the range of people involved and the (accounting and fine-grained) information that is exchanged. The differences between the proposed forms of participation is in the information that is exchanged and this has consequences for the development of the knowledge of the organization’s members and for their learning how they can contribute to the realization of the new vision.

Relevance:

The participation of lower managers and workers is often of great importance: lower managers and workers have to develop knowledge and learn how to implement a new vision. However, the expected positive effects of participation are often unrealistic and the academic literature is not clear about which forms of participation are effective. The normative accounting literature provides tools to match a senior management’s vision and accounting information.

Reference:

Jansen, E.P. (2015). Participation, accounting and learning how to implement a new vision. Elsevier, Management Accounting Research. http://www.sciencedirect.com/science/article/pii/S104450051500058X

 

Expert opinion Pieter Jansen

In making decisions, managers normally consider the future consequences of several alternatives they can choose from. In the early 1980s, management accounting was criticized for having a relatively short-term orientation. Traditional financial performance measures and management control, relying on ROI and the profit centre organization, had emerged with an excessive focus on short-term financial performance. US executives, especially, were accused of focusing too narrowly on short-term performance. Since the beginning of the 1990s, several concepts have been developed that imply both a more long-term and a more external approach to management accounting and management control.

Most car dealerships have a short-term orientation. The ambition of the managing director of Van den Udenhout (VdU), a large Dutch car dealer, to lengthen the time frame of its managers was the reason to start a research project. The Dutch cultural setting, in combination with VdU’s managing director’s ambition, provided an excellent environment to explore how new concepts, with a more long-term approach to management accounting, can help to stretch the timeframe of managers.

Long-lasting relationships

The research project focused on the most important asset of a car dealership that affecting its performance in the long run: customer relationships. An elaborate and growing network of loyal customers is the basis for a car dealership’s future performance. However, maintaining long-lasting customer relationships and expanding the customer network was an effort that was hardly appreciated within VdU. For the salespeople, only sales volume mattered and whether cars were sold to incidental or to loyal customers made little difference.

This is surprising, because incidental customers hardly generate any profit for the company. Profits of the sales departments are very low and in many car dealerships they are even loss-making. Profits on service, bodyshop and financial products are much better. As a result of fierce competition in the market, it is almost impossible to increase the profitability of selling cars. Using a longer term perspective, selling a car should be seen as an essential element in an ongoing customer relationship that also includes sales of the car dealership’s more profitable products and services.

To ensure sustainable profitability, VdU needed to develop from an organisation that was driven to maximise the profitability of its separate profit centres to one that maximises profitability across the whole business. The dealership’s salespeople have the most intensive customer contacts in the dealership their performance evaluation was mostly based on the volume of cars that they sold and, to a lesser extent, on customer satisfaction. With regard to the profitability of the company as a whole, the underlying assumption has been that satisfied customers who buy a car at VdU will ‘automatically’ also buy all their other automotive products and services at VdU, but this is no longer the case.

 

change

Customer profitability

What was the impact of this new vision? Although transaction profitability and profit centre profitability remained important, the main focus shifted to customer profitability. This was a drastic change for the salespeople with two important aspects. First, salespeople had to learn to maintain long-lasting customer relationships instead of just losing interest in a customer after selling them a car. Secondly, salespeople had to learn to sell the other company services which are more profitable, in addition to selling cars.

This redefinition of the dealership’s performance faced the research team with the challenge:

  • to develop a tool to capture customer information that enables salespeople to maintain their customer network;
  • to provide the salespeople with a tool to plan their activities in periodically contacting all their customers;
  • to provide managers with new management information that enables them to supervise salespeople in maintaining customer relationships;
  • to teach salespeople and their managers that the definition of their performance has changed;
  • to train sales managers and salespeople in the execution of their new tasks in maintaining customer relationships;
  • to really change their behavior.

key elements of management accounting that supported the change

Through the participation of managers and employees in the case of VdU, the ‘customer life cycle’ vision was implemented and this was supported a more long-term focus. ‘Performance’ was redefined from profit centre and transaction profitability to customer profitability. All employees needed to become familiar with this revised view on performance. Management accounting plays an important role in achieving the changes. First, performance indicators that express how many products an average customer buys at VdU emphasise that customer loyalty is important. Secondly, these indicators are used as a starting point in ensuring customer relationships are better maintained. Thirdly, process indicators support the change process towards actively maintaining and enlarging a customer network by indicating whether the customers are actually contacted according to the schedule.

 

Reference: 

https://www.cimaglobal.com/Documents/Thought_leadership_docs/2010-11-02-Using_management_accounting.pdf

 

 

Edited by Eline Ammeraal 

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