«Paul M. Collier Aston Business School, Aston University Accounting for Managers Accounting for Managers: Interpreting accounting information for ...»
Our ideas were constrained because we were... well I was going to say traditional railwaymen. We were coloured by the views of the complexity of running a railway. No one foresaw the present state as a possibility. Our minds were opened.
It takes time to change an organization like the railways and to change attitudes. There’s 150 years’ history. You don’t overturn that lightly. Nor would you want to, or the railways would cease to operate... The Business Managers recognized that. First, they convinced a small group, then gradually widened that group until everyone was aboard...
They operated in stages... Incremental changes were easier to sell. It was easier to build commitment and minimize opposition from those who stood to lose... They took each stage to the limit.
Creating an alternative account For the Business Managers the purpose of the railway was to make a proﬁt. The signiﬁcance of customers was revenues; the signiﬁcance of operations, that is, trains, infrastructure and staff, was cost. Upon their appointment, however, there was no account of the railway’s activities in each market sector consistent with their reality. While proﬁt or loss was measured for the organization as a whole, and was used in dealings with government, no such measures existed for component parts of the railway.17 In fact, during the 1970s, primarily for analytical purposes (rather than for responsibility accounting), the railway had moved towards a system of contribution accounting, matching directly traceable costs to revenues for various market segments.18 Common costs were not allocated to the segments. The railway is a remarkably integrated activity, with common staff, infrastructure and, to some extent, train-related activities, so these unallocated costs were very substantial.
Under existing systems, costs were accounted for by region, corresponding to the physical location of the operational activities concerned. The regions were thus essentially cost centres.
Revenue responsibility was more diffuse, for passengers and freight were frequently transported across two or more regions. In fact it was not as simple as this, but in practical terms, the railway network alone was a huge proﬁt centre.
These did not precisely correspond to the present market sectors, but provided a basis on which to build the subsequent measures.
ACCOUNTING AND ORGANIZATIONAL CULTURES 349Senior accounting executives had long argued, both privately and publicly, that allocation was neither possible nor meaningful. Fundamental to the Business Managers’ appointments, however, was not just a proﬁt-contribution responsibility, but a ‘‘bottom line’’ responsibility, and this called for the allocation of common costs.
In a deﬁnite way, this ‘‘bottom line’’ responsibility had a normative symbolism – private sector managers were concerned with the ‘‘bottom line’’. But there was a more practical logic: this was to ensure that one or other of the Business Managers would be responsible for all costs, and motivated, as events unfolded, to ask questions about the necessity and consequences of incurring cost. A Senior
You appoint a Business Manager and say: ‘‘We believe this is freight’’.
The ﬁrst thing he says is: ‘‘What’s mine? What are the boundaries of my business?’’ Then he pursues questions such as: ‘‘How are costs being allocated to me? I want to know more about it. Let me analyse and ﬁllet all the cost you are suggesting is mine’’... Then he asks: ‘‘How do these costs relate to my revenues’’.
An individual within the accounting department was appointed to develop proﬁt or loss measures by business sector. This person was in rather an invidious position. Given senior ﬁnance ofﬁcials’ former public repudiation of the possibility
of developing these measures, he had to tread carefully. He later recalled:
At ﬁrst I was not convinced that it was either sensible or feasible. There’s a whole history of avoiding cost allocations in the railway. But if the Business Managers were to take responsibility, they needed different Management Accounting. I was persuaded of this new way to run the railway. I wanted Finance to play a fundamental part in supporting it.
When I was appointed I spent several months bouncing ideas off walls – walls not people – because ﬁnance people didn’t believe you could or should develop the information they needed.
He became involved in intensive discussions with the Business Managers, and with representatives of the Chief Executive’s ofﬁce. Different ways of apportioning costs were discussed, and a ﬁrm of accountants consulted. The guiding principle was ‘‘cost exhaustion’’ – all costs incurred by the railway had somehow to be attributed to one or more of the businesses.
The precise details of the method of arriving at the proﬁt or loss for each business are unimportant here. It sufﬁces to say that it was founded on principles reﬂecting the primacy of use of resources, and that the development of computer systems to operationalize the principle in full took some while. The signiﬁcant point is that these measures were introduced, manually at ﬁrst, and that they were fundamental to the emergence of the new culture.
Business Managers were appointed without any operational authority. Their positions were an abstract economic construct. They were made meaningful
ACCOUNTING FOR MANAGERSthrough the new accounting constructs. Moreover, the accounting measures provided a means through which they could later couple debate on operational and physical concerns to an economic calculus. Reﬂecting on the penetration of the
new account of organizational activities, one Business Manager observed:
It’s my impression that the engineers, and after all we are an engineering company, had no real understanding of what they were doing in terms of the ‘‘bottom line’’... Now the engineers know what a ‘‘bottom line’’ speciﬁcation really is and they can respond to it.
One regional General Manager commented:
I always behaved with the ‘‘bottom line’’ in mind. But the Business Managers took it further. They challenge to a much greater extent. Making the railway proﬁtable is the real meaning of the Business.
I didn’t realize the extent to which budgets would be challenged, and challenged so vehemently.
Coupling railway activities to the new account At the head of the railway is the ofﬁce of Chief Executive. Attached to this are various staff functions – Finance, Engineering Directorates and so forth. Reporting to the Chief Executive in a line-management relationship are the General Managers of the regions. Underneath these are the railway operations. Overlaid on this management structure are formal planning and decision-making systems of various kinds.
The Business Managers were appointed in staff positions outside the formal linemanagement structure of the railway organization. They wished to explore their reality with others. But, there was, at ﬁrst, no formal context for them to interact with others. Neither did they have the formal status they perceived necessary to inﬂuence others. In a sequence of moves, they sought, ﬁrst, to institutionalize their status, and then to secure bases for participating in an increasing range of dialogue and debate.
Securing status. First they lobbied the Chief Executive and his advisors for a change in reporting relationships. If he was serious about the idea of marketing and business planning in the railway, they argued, then they had to have comparable status to the regional General Managers. After some considerable debate, a new management structure was introduced. The Chief Executive appointed two Joint Managing Directors, one taking a responsibility for the regions – the operations side of the railway, the regional General Managers; the other taking a responsibility for planning and marketing – in effect, the Business Managers. In a symbolic sense, although not at ﬁrst in practice, this gave the Business Managers parity with the regional General Managers. It also stood for the Chief Executive’s acknowledgement of the legitimacy of the ‘‘business’’ reality, the reality of the
ACCOUNTING AND ORGANIZATIONAL CULTURES 351railways being managed for proﬁt. Commenting on the signiﬁcance of this, one
Business Manager observed:
The General Managers used to report directly to the Chief Executive. The joint Managing Directors gave us parity.
Creating contexts for interaction. Later, in subsequent episodes, they lobbied for successive changes in the formal planning and decision-making systems. Changes, they argued at each juncture, were necessary to provide a balance to the overbearing inﬂuence of the regional General Managers and engineers. Over the period of the study, three changes were forthcoming. Each change secured opened up possibilities for perceiving the potential of the next. Firstly, the corporate planning system was revised. This dealt with longer-term matters. Formerly, regional General Managers prepared plans and presented them to the Executive Committee for ratiﬁcation. The change gave Business Managers a formal input into the preparation of plans. In fact, the planning process became ‘‘business-led’’, with these managers setting ﬁnancial and other objectives for the regions, the regions being required to identify actions to achieve those objectives. Next, capital expenditure approval procedures were amended. Formerly, regional General Managers and engineering chiefs had signiﬁcant autonomy in the approval of capital expenditures. The new system required expenditure proposals to be underwritten by one or more Business Managers, and effectively gave them a right to veto if they thought the proposals were uneconomic. Finally, budgeting systems were revised. Budgets emanating from each region were analysed by market sector. Business Managers became involved in their review.
The signiﬁcance of these changes is that, in the context of ER’s formal management style, formal systems and procedures imply rights to participate in and inﬂuence decisions and actions. The Business Managers’ participation in the operation of these systems gave them a context to interact with others and question the rationale underlying railway decisions. In meetings, they could be seen translating operational and engineering concerns into the new proﬁt calculus, feeding their ﬁnancial vocabulary back into the stream of discourse. Appealing to the ‘‘ideal’’ of the proﬁt-conscious customer-oriented private sector manager, they challenged and sometimes ridiculed beliefs.
Thus, participation in the planning procedures enabled them to reinterpret longer-run engineering and operational initiatives in business terms: what does it mean for the customer? Will it improve journey times and punctuality? What implications does it raise in terms of costs and revenues? Their sponsorship of capital investments enabled them to ask: will it improve train reliability, eliminating the need for back up resources? Can the businesses afford it? What are the investment options? The redesign of the budgeting system gave them opportunities to challenge the cost effectiveness and proﬁt implications of operational issues like train routing, train scheduling and the programming of maintenance.
Moving from the remote concerns of long-term planning, through capital investments, to immediate issues of train scheduling and maintenance programming, they recast management debate into a language of the ‘‘bottom line’’. Others began to take up their vocabulary. Railway matters gradually came to be discussed as
ACCOUNTING FOR MANAGERSﬁnancial matters. Furthermore, planning and budgeting activities began to assume a new signiﬁcance. Formerly, they were introverted acts of cost containment. Now they came to symbolize the search for proﬁt-maximizing opportunities.
Commenting on the importance of these changes in formal systems, a Business
We had responsibility for improving the proﬁtability of the railway. But it wasn’t clear who was in control – I think there was some difﬁdence in spelling that out with the utmost clarity. We lobbied to get control of the planning process. Clarity has emerged, now that we have taken responsibility for planning and budgeting. That’s become our power base.
Over time, these changes cumulatively extended the opportunity for Business Managers to interact with engineers and operators far beyond their original remit. Through this interaction, their ideas became more speciﬁc. But they were still located in the Head Ofﬁce. Accordingly, in a later episode, they set about extending their inﬂuence into the regional organizations. They appealed to the Chief Executive for the appointment of individuals to represent their interests within the regions. These Regional Business Managers, once appointed, carried the economic perspective deep into the regional organizations, carving underneath the regional General Managers and giving Business Managers a direct line of
inﬂuence to operational activities. One commented:
People in the regions are used to doing things without asking. They ﬁnd themselves subject to our scrutiny. I can take things up in a big way, if necessary, and howl for their blood.
And commenting on their inﬂuence, an operations manager in the regions
Five years ago it would have been revolutionary to challenge what an engineer wanted to spend money on. Now it happens frequently.
Consolidating the emerging reality through symbolic events. Through interaction in meetings and elsewhere, many in the organization began to understand the Business Managers’ emerging reality. Most also found it appealing. The continual attacks on the competence of public sector managers had worn morale down. To be business-like was ‘‘good’’, it gave them pride, and made the railway modern.
Increasingly people came to share the normative symbolism of the ‘‘bottom line’’.
But to a large extent this was uncoupled from their concrete day-to-day activities.