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British Accounting Review (2001) 33, 243–261 doi:10.1006/bare.2001.0168, available online at http://www.idealibrary.com on

EXTENDING THE BOUNDARIES OF MANAGEMENT ACCOUNTING RESEARCH: DEVELOPING SYSTEMS FOR PERFORMANCE MANAGEMENT DAVID OTLEY Lancaster University

INTRODUCTION It will be my contention today that much management accounting research has lost its way. In particular, I will argue that it has concentrated too much on accounting and not enough on management. One of the consequences of this misplaced emphasis is that much management accounting research has become detached from real issues and problems facing managers in organizations. For management accounting research to regain its relevance, I will propose that it should widen its boundaries and become concerned once again with the issues involved in designing and operating systems of managing performance. In short, the sub-title of this address might well be ‘putting the management back into management accounting’. MANAGEMENT ACCOUNTING PRACTICE So, where shall we begin? I will first consider the practice of management accounting and go back to the mid-1980s when it was becoming recognized that the practice of management accounting, even within those Anglo–American organizations where it had taken deepest root, was in decline. There had been little by way of new developments in management accounting practices for decades. Not only was it argued that management accounting was therefore becoming irrelevant to contemporary organizations, but worse that it was often actually counter-productive to good management decision-making. By using inadequate management This paper is the text of a plenary address given to the 2nd Globalization Conference, jointly organized by the American Accounting Association and the British Accounting Association on 15–17 July 2000 in Cambridge, England. 0890–8389/01/030243+19 $35.00/0

 2001 Academic Press

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accounting data, managers were running a serious danger of taking inappropriate decisions. Worse, the use of inappropriate performance measures in organizations encouraged junior managers to behave in stupid ways so as to report apparently good performance. The use of management accounting information was thus inimical with good management practice. Or so argued Johnson & Kaplan in their famous 1987 book ‘Relevance Lost: The Rise and Fall of Management Accounting’. It is interesting to note how each of the two authors responded to their own highly influential critique. Johnson clearly gave up on accounting altogether, and in his book ‘Relevance Re-gained’ moved towards emphasizing the ‘softer’ side of things, such as employee training and empowerment. Kaplan, by contrast, has become a leader in the re-invention of management accounting practices, beginning with Activity-Based Costing (which spawned many offspring, such as Activity-Based Budgeting, Activity-Based Cost Management, and ultimately Activity-Based Management!). Perhaps it is in the Cost Management process itself that the biggest adaptation has taken place. Building on roots which had actually been developing over the previous decade, one of the major contributions of the Cost Management movement was to recognize that effective cost control could no longer take place if one waited for cost accounting systems to produce the information required. This was not a defect of the operation of the cost accounting system itself, but a recognition that real-time cost control was out-dated in the context of a manufacturing operation that involved relatively little direct labour expense in contrast to a great deal of investment in plant, machinery and employee skills. Under such conditions, cost management could only be effective if it occurred at the planning stage of operations (product design, production process planning etc.), before routine cost reports could be generated. Kaplan’s work can be seen as part of a more general movement to change practice which rejoiced in the title of Strategic Management Accounting. Although the term was coined by Simmonds around 1980, he is the first to admit that it was not taken seriously until the late 1980s. Perhaps this was, in part at least, caused by the fact that there were very few specific techniques that could be attributed to the label. It represents a change in emphasis in the use and application of management accounting information, rather than in very many specific new techniques. But the change in emphasis was quite pronounced; management accounting was to develop its traditional strengths with complementary emphases: ž ž ž ž ž

From historic to forward-looking From control to planning From internal to external (customers, competitors etc.) From cost to value From production to marketing

Now this clearly overstates the impact of SMA. Previous practice was not quite as bad as the initial statement suggests, nor are the new practices

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adequate to deliver all of the promise suggested. Nevertheless, SMA has had a major impact on the thinking of practising management accountants. In the UK, the Chartered Institute of Management Accountants (as the old Institute of Cost and Works Accountants is now known), has enthusiastically grasped the concept as a means of advancing the career prospects of its members. As one of its past presidents (Michael Bromwich) put it in 1989, it provided a means of ‘releasing the management accountant from the factory floor’ and perhaps provided a route to the boardroom table. Clearly, there is a deal of rhetoric surrounding the ideas encapsulated in the term, but it does capture the essence of a significant movement in management accounting practices. This is nowhere more apparent than in the second major innovation to come from Kaplan, this time in conjunction with management consultant David Norton, the Balanced Scorecard. Introduced in the early 1990s as a framework for performance measurement that included both financial and non-financial elements, it had been developed by 1996 into an allencompassing framework for the practice of management. At this time, it came into head-on conflict with another technique, Economic Value Added, as developed by the Stern Stewart Corporation, which can be seen as a re-assertion of more traditional accounting values. Nowhere is the potential conflict between these two approaches seen more clearly than in their attitude to strategy. Business unit strategy is at the heart of the Balanced Scorecard. Organizations are exhorted to focus on developing an appropriate strategy (no doubt aimed, at least in part, at increasing shareholder value) and to develop a set of measures, both leading and lagging that will reveal to senior managers the effectiveness of its implementation. However, as I argue elsewhere (Otley, 1999), the literature on the Balanced Scorecard has little to say about target-setting, resource allocation, reward systems design, and the separation of tactical and strategic feedback, despite the appearance of boxes in diagrams containing all these items within the pages of the 1996 book. By contrast, EVA pays no explicit attention to strategy. The central objective of a business organization is taken to be the generation of shareholder value, but as no formulaic process can exist to develop strategies which will achieve this objective, then this is a matter that is left to the creativity of individual managers. However, adherence to this objective is assured by close attention to each stage in the management process. First, an adequate performance measure is required, and extant financial accounting practice is to be ‘corrected’ by a series of adjustments to figures produced by GAAPs, so that a more economically meaningful measure is constructed. Next, the level of performance targets for the EVA measure is addressed in some detail, and a system of performance-related rewards devised that will help mitigate any inappropriate behaviour that the imperfections in the measure might allow. Finally, feedback processes are devised to update the targets each accounting period.

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What I have found fascinating over the past five years has been the movement from head-to-head competition in the mid-1990s when the proponents of EVA dismissed Balanced Scorecard approaches as being mechanisms that distracted line managers and ‘took their eye off the ball’, and proponents of the Balanced Scorecard claimed that the technique was not a stakeholder model, but clearly designed to generate shareholder value, albeit with little empirical evidence to back either statement. This conflict has been clearly influenced by the ‘Value-Based’ movement which has become increasingly influential over the past decade, with each set of management consultants marketing their own variant (invariably containing the letter ‘V’ in their TLA). But, more recently, a more collaborative attitude has prevailed, with Stern Stewart recognising the value of Balanced Scorecard type approaches at lower management levels where profit centres cannot sensibly be established, and EVA figuring as a major performance measure in the Financial box of the Balanced Scorecard. The point of this brief summary has been to indicate that management accounting practices have changed radically over the past fifteen or so years. Indeed, one could argue that many of the developments are not strictly ‘management accounting’ as the underlying techniques are often not wellspecified and many of the performance measures are of a non-financial nature. But, by contrast to more traditional accounting techniques, these developments appear to have been of considerable use in practice and, at the very least, have preserved the role and career prospects of management accountants within Anglo-Saxon organizations. But what of management accounting research? How has it adapted to the changing world within which the management accountant appears to live?

MANAGEMENT ACCOUNTING RESEARCH My brief answer to that question is, ‘Not very well’. I get the feeling that much current management accounting research is becoming sterile. This is evident is a number of different ways. First, there is a distinct lack of any management accounting research. The major journals, especially in the USA, are becoming increasingly concerned about their lack of submissions, certainly submissions of ‘good’ quality. Why this should be is clearly a matter for debate, but one element lies in the lack of PhD students pursuing management accounting topics, which is a cause for concern in itself. Another element may lie in the standards of what has been termed ‘rigour’ in the methods used by management accounting researchers. I will return to this point later, but will suggest for the moment that there may be a conflict between rigour and relevance that is particularly pronounced in this field. We need to be careful that we do not drive out work that strives to connect with real organizations and their practices, in a misguided attempt to apply


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standards of scientific rigour that are inappropriate. In promoting excessive ‘rigour’, we may be hastening the onset of ‘rigor mortis’. Second, our practices of reporting appear to be moving in an unhelpful direction. For example, in every article I read, the statistical significance of the results is clearly stated. Of course, there is nothing wrong with that, but in many cases it is difficult or impossible to deduce what the substantive significance of the results is. That is, the size of the effect observed is sometimes not reported or presented in an obscure fashion. It seems that a small effect that is statistically significant is valued more highly than a potentially major effect which, for reasons of sample size or variability, does not reach conventional levels of statistical significance. Even more significant is our apparent attitude to replication. Replication is the foundation of what I will term ‘hard’ science. In the ‘hard’ sciences, just because an effect is reported which has attained conventional levels of statistical significance is not the end of the story. It is not regarded as a ‘fact’ until other scientists have successfully replicated the result, and probably gone on to investigate the limits of its applicability. Not so in management accounting research; we rarely, if ever, replicate previous work, and findings of a single small sample study become the ‘facts’ with which we work. Let me give an example from the area in which I have worked, that of studying the impact of Reliance on Accounting Performance Measures [RAPM]. This is the area which Alan Dunk and the late Peter Brownell rather generously described in 1991 as ‘the only organized critical mass of empirical work in management accounting at present’. Excellent reviews of the work conducted on this topic can be found in Briers & Hirst (1990) and Hartmann (2000). The outstanding feature of the work reviewed by both these authors is that virtually none of it has ever been replicated. Even when something approaching a replication is examined, it is invariably found that other features of the research are simultaneously changed, most often the measurement instruments used to measure the underlying variables. Not that I have anything against the development of measurement instruments, but it would not be too onerous a task, in many cases, for both an old and new instrument to be used together, so that results could be compared more closely. In my own study with Raili Pollanen (2000), where we replicated five previous studies using identical measurement instruments to the original authors, our results were very mixed. Some findings were replicated, but most were different to the original studies. But the real significance of this study, I believe, lies not in its results but in its methods; it is the first replication in over 20 years of work. There are two possible conclusions that can be drawn from this evidence. If we adopt the methodological approaches of the ‘hard’ sciences, our work is deficient. It is sometimes argued that our journals are reluctant to publish ‘mere’ replications. I cannot judge how true such a statement is, as I am not aware of any such work actually being undertaken and rejected, but it would be remarkable if those journals that most aspire to following the

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model of the ‘hard’ sciences are also those which are most reluctant to publish replication work! Of course, there is alternative view that can be taken of this evidence. That is that our subject matter is not amenable to the methods of the ‘hard’ sciences; our ‘facts’ are social ‘facts’ generated by the perceptions and attitudes of the participants themselves, and coloured by the social and cultural context within which they are set. Further, these conditions change (quite rapidly) over time, and the methods used to study such social phenomena therefore need to be different to those used in the ‘hard’ sciences. I would tend towards the latter position, but am happy to hear a debate on the issue. What worries me is that we seem to have taken an extant position for quite the wrong reasons. An emphasis on ‘rigour’ and statistical significance has tended to lead us towards studying a very restricted set of issues. The areas most suited to the ‘hard’ science approach are those which focus on individual behaviour isolated from its social and organizational context (i.e. psychological, individualistic approaches or agency theory models). The methods most easily applied are those of the laboratory experiment and arms-length questionnaire survey. We train our PhD students in these methods, because it is the quickest and most reliable way of obtaining the qualification, and they continue to adopt the approach in which they were trained so as to make the necessary progress along their tenure track. Finally, this is the work that is published in our journals because this is the sort of work our journals have submitted to them! So, if there is any element of truth in this line of argument, is it surprising that much management accounting research has failed to address issues of current relevance and concern to organizations which are attempting to grapple with the problems of adapting to the modern business (and public) environment? No doubt I overstate the case. Not all management accounting research has the characteristics I describe. But I do believe that much management accounting research has lost its relevance, in much the same way as management accounting practice became disconnected from real organizational issues two decades ago. How then can we make management accounting research more relevant? PERFORMANCE MANAGEMENT Rather than attempting to give a global answer to this question (which would be presumptuous, and beyond my competence), I will restrict my attention to just one line of enquiry, that of performance management. Why do I choose this focus, apart from the fact that it is an area in which I have been personally interested for many years? First, it has been the focus of many of the ‘new’ techniques of management accounting that have been developed over the past twenty years. Even


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Activity-Based Costing, which was initially sold on the basis of being a ‘more accurate method of product costing’ and thus appears to be a technical improvement to traditional cost accounting practice, proved to be more far-reaching in its consequences. Many of the benefits of ABC implementations have resulted not from better knowledge of product costs, useful though that may have been, but in developing better methods of overhead cost management and business process improvement. ABC opened the door into Activity-Based Cost Management [ABCM] and even Activity-Based Management [ABM] [true by definition]. Strategic Management Accounting [SMA] focussed attention upon parties external to the organization, most notably customers and competitors, so that operations could be effectively adapted to meet customer requirements in a way that equalled or exceeded that provided by competitors. The Balanced Scorecard is a means of measuring organizational performance along a variety of dimensions, so that an organization might ensure that it is implementing its strategic intent. And the latest popular technique, Economic Value Added [EVA], although in some ways just an adaptation of a well-known (although little used) accounting measure (Residual Income), gains its value from incorporating the measure into a much wider philosophy of performance management (in this case, designed to deliver shareholder value). Thus, I think it can be fairly argued that much of the thrust of the ‘new’ management accounting has been centrally concerned with the issues of measuring and managing organizational performance. Second, despite the more recent attention devoted to it, performance management has been a central focus of management accounting over the years. Even Simon et al. (1954) defined the three functions of management accounting information as: ž Decision-making ž Attention-directing ž Scorecard

(What should I do?) (What should I pay attention to?) (How well am I doing?)

The role of management accounting information in performance evaluation became a central focus of much management accounting research, initially focussed around the area of budgetary control. Indeed, much accounting practice can be seen a method of reporting on the financial performance of an enterprise; the move from ‘measurement’ to ‘management’ is a small but important one, however. I come across many organizations who have no shortage of performance measures, accounting and other, but are still lacking the connection between the measures and subsequent management action. Clearly, much of my approach derives from the pioneering work undertaken by Robert Anthony stemming from his initial work on Management Control Systems (1965). This work has been very influential, but I have two problems with it in our current context. One concerns the

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language used. All three words are problematic! Control has always been a word with a multitude of meanings and connotations. Back in 1957, Rathe catalogued 57 varieties of meaning for it, ranging from ‘dominate’ (perhaps the Anglo-Saxon usage) through to ‘feedback’ (perhaps the French connotation). When combined with ‘management’ a range of possibilities come to mind, ranging from the domination of the management class over the workers (at the Marxist end of the spectrum) through to the adaptation of organizational activities to meet environmental exigencies (from a systems theory approach). Lastly, the term ‘system’ is probably too strong, implying a degree of co-ordination and integration that is likely lacking in most real organizations. Back in 1980, I recollect heading a box in a diagram I was constructing as the ‘organizational control system’ which I eventually changed to the ‘organizational control package’ as being more descriptive of the extant state of affairs! I have recently taken to enquiring from my MBA students what they believe the content of my option on management control systems is likely to contain; the three terms most often mentioned are ‘quantitative’, ‘accounting’ and ‘boring’. When offered the alternatives of ‘strategy implementation’ of ‘performance management’ their interest increased significantly. Perhaps, Bob Simons has got it about right in the title of his new text (2000): ‘Performance Measurement: Designing Control Systems for Implementing Strategy’. I would only add that I believe we need to look beyond ‘measurement’ to the use of the information in decisionmaking and control, so would personally have preferred to use ‘performance management’. My second concern with Anthony’s approach is more fundamental. One of the clear purposes of his original work and textbook was to focus on the use made of management accounting (and other) information, and to emphasise the behavioural dimension of management control. Indeed, he cites social psychology as an underlying core discipline. Despite this intention, however, it has never received the prominence it deserves. I believe this largely stems from Anthony’s deliberate intent to avoid the areas of strategic planning and operational control, which he deliberately uses to define the area of management control. Undoubtedly, this was a reasonable limitation as he began his endeavour, and avoided a number of troublesome issues. However, by seeking a set of universal control practices, defined in isolation from both strategic intent and from operational practices, it now seems rather inevitable that the approach led to an excessive concentration on traditional management accounting practices. This is too narrow a focus, for reason which I have explored in greater depth elsewhere (Otley, 1994). For my purpose performance management provides an umbrella under which we can study the more formal processes that organizations use in attempting to implement their strategic intent, and to adapt to the circumstances in which they have to operate. The hostage to fortune that the term ‘performance management’ contains, however, lies in the word ‘performance’ which also seems to have a wide


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variety of connotations to different audiences. My anticipation is that to an accounting audience it may imply only financial performance, whether measured as profitability, EVA, or the generation of shareholder value. This is too narrow a view for my purposes and it is worth spending a little time developing the idea of ‘performance’ before turning to its management. THE CONCEPT OF PERFORMANCE The word ‘performance’ is something of a weasel word in that it appears to mean very different things to different people. Thus we use it quite freely, apparently understanding its meaning, but actually often using it to cover a lack of shared understanding. I will consider it only in the context of the performance of a business or public sector organization. In this context, it is the public sector that, I think, gives us a useful start in their use of the three ‘E’s’ of performance, namely: ž Effectiveness ž Efficiency ž Economy

[delivering desired outputs, and even outcomes] [using as few inputs as possible to obtain these outputs] [buying inputs as cheaply as possible]

Thus, different aspects of performance encompass the production of outputs, the conversion of inputs into outputs, and the procurement of inputs. Of course, from an accounting point of view, in a commercial organization, all of these aspects of performance can be represented in financial terms. Results can be represented by sales revenue, inputs of all kinds can be represented by their costs (including the cost of various types of capital), and a measure of overall performance constructed that will look remarkably like EVA. As EVA is benchmarked on a value of zero, this raises the question as to who gets any excess EVA that is produced, or its converse, who bears any losses that may be incurred. The strict legal answer is the shareholders, in both cases. But a pause for reflection indicates that this is, at best, a short-term answer. In an unprofitable enterprise, actions will inevitably be taken that will impact customers, suppliers and employees, as well as shareholders. In an enterprise that is successful in generating shareholder value, it seems almost inevitable that some of this value will be appropriated by the same groups. So, even with a strict legal definition of ownership rights, it is not at all clear who the residual beneficiaries of either surplus or deficit actually are. This issue is clearly linked to issues of corporate governance, and I would flag this as a major area for research, although not one that I will develop further today, although I should mention the recent book by Epstein & Birchard (2000) which sets out these issues in an interesting way. A more fruitful approach than a strictly financial emphasis lies, I believe, in a stakeholder framework. The operation of an enterprise depends upon

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the co-operation of disparate groups of people, most notably providers of capital, providers of labour, customers and suppliers, whose relationships are managed differently in different economic systems. In addition, there are also impacts of organizational activity that may be the concern of national governments, local communities and pressure groups of various kinds. Finally, there is the role of managers, who may be both owners and employees, and whose task it is to construct feasible patterns of activity that will satisfy the desires of all the interested participants. Keeping each stakeholder group ‘on board’ to support the implementation of a specific plan of action is a central managerial activity. One of the most clearly stakeholder-oriented techniques currently on offer is the Balanced Scorecard, where at least two stakeholder groups are explicitly mentioned (providers of finance and customers) and one is implicitly lurking is either the business process box or the being trained innovation and learning box (employees). Suppliers are notable by their absence, although many BS implementations actually specifically identify them, together with impacts on the wider community (such as pollution and other environmental issues, impact on local economies, and relationships with government agencies). The BS approach can thus be seen as being guided by a concern for sustainability of operations, albeit in a restricted sense. However, having drawn such an interpretation, it is incumbent upon me to mention the denial of being a stakeholder approach made by Kaplan & Norton in the Introduction to their 1996 book. Here they claim that the BS is not a stakeholder approach, but is designed to increase shareholder value. Not only are these two statements not necessarily in opposition, it seems almost self-evident that the BS is a stakeholder approach and can be fruitfully developed down this track. However, in a US context, it appears that when in competition with EVA, it is necessary to make such statements. By contrast, I would argue that its ability to deal with the different dimensions of performance, including dealing with stakeholders having partially conflicting interests, is a major strength of the BS approach. By making such a claim, I do not mean to suggest that issues of resolving potential conflicts between stakeholders are unimportant; clearly they are not, and the ways in which accommodations are reached and the relative power of each stakeholder group will differ between cultures, countries and industries. Reaching such accommodations is, in itself, a major managerial task. But I would also assert that the objectives of even a commercial enterprise operating in a market economy cannot be reduced to the purely financial, even when glorified in terms such as generating shareholder value. This is clearly a controversial statement to some, and I am not intending to present the full case for it here; I will content myself by observing that most of us here are consumers, employees and shareholders (even if only through our pension arrangements), and that the purposes of economic organizations include meeting our needs in each of those


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roles. What is necessary for my argument is to assert that ‘performance’ is inherently multi-dimensional; different aspects of performance are relevant to different stakeholders. Further, effectiveness can be assessed only in terms of objectives and strategy; it is unlikely that there will be common measures of effectiveness across organizations having different objectives and strategies, unless at the very basic level of survival. As an aside, it may be worth mentioning that I have taken an essentially ‘Profit & Loss Account’ approach to effectiveness, treating it as a flow measured over a defined time period. There is perhaps also a ‘Balance Sheet’ aspect as well, relating to the state and capability of an organization at a point in time. Perhaps better referred to as ‘Capability’, representing a potential to perform in future periods, this is also a relevant variable to monitor in terms of assessing the sustainability of an organization’s pattern of activity. This is closely connected with the issue of extracting increasing efficiencies from organizational activities at the expense of adaptability. Many organizations have made great strides in becoming more efficient; however, some have done so at the expense of losing much of their adaptive capacity and are now significantly more exposed to the risk of changes in their environment which they have failed to predict. BUDGETARY CONTROL: ANOTHER ROUTE IN Another, and seemingly more direct, route into this area is that adopted by the literature on budgetary control. I would choose as a starting point Chris Argyris’s, 1952 article on ‘The Impact of Budgets on People’, which was interestingly followed nearly two decades later by Schiff & Lewin’s 1970 piece entitled ‘The Impact of People on Budgets’. These two articles neatly encapsulate the, essentially behavioural, work being done in this period, albeit of a universalistic flavour. This is well summarised in Geert Hofstede’s 1968 classic book, ‘The Game of Budget Control’. Much of this work, and indeed much of the later, more contingent, work which followed it essentially made the assumption that the budgetary control system was the main integrative control system in most business organizations. The implementation of a business plan could be monitored and controlled by using the financial implications of that plan (the budget) as a performance standard, and the actual revenues and costs as the main measures of results. Although a uni-dimensional representation of a more complex reality, budgetary control appeared to work reasonably satisfactorily in a relatively stable environment with well-codified business plans. However, more recently, increasing problems became evident. Hopwood had noted as early as 1972 the problems of short-termism that over-rigorous emphasis on budgetary targets could engender. I was recently reminded by Frank Hartmann of a comment Clive Emmanuel and I made in our 1985 text, namely that budgetary control was most feasible where it was least

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needed and vice-versa. More recently, Bunce et al. (1995) have made a most cogent critique of the usefulness of budgeting as a means of management control in contemporary organizations, due mainly to the increased rate of change most organizations now have to cope with. The somewhat depressing conclusion for management accounting researchers is that, having put in much work coming to a fuller understanding of how budgetary control systems are deployed in practice, and the impact of different patterns of use of such systems, organizations are giving up budgetary as a primary means of effecting overall control and are having to resort to other techniques. It is not clear what those techniques should be. Despite Kaplan and Norton’s claims in some of the more ambitious diagrams in their 1996 book, the BS does not completely replace all other control techniques. The challenge is perhaps how to combine some of the new approaches with the more tried and tested schemes of yesteryear. However, there is also good news, I believe. The various approaches to studying budgetary control systems can often be adapted to study the use and impact of the newer techniques without too much difficulty. Moreover, many of the fundamental issues remain unchanged. Performance measures concentrate attention on the short-term; how can adequate weight be placed on longer-term aspects? What is measured gets done; how do we control important aspects of performance that are more difficult to measure? How should targets be set to maximise their motivational potential? How can the multiple purposes served by any performance management system be resolved? However, I cannot leave this topic without a passing reference to reward systems. Clearly, motivation is affected by rewards, both financial and nonfinancial. Much work in the US has been based on studying the impact of performance-related financial rewards, and a deal has been learned about the effect of such systems on managerial behaviour. We are now seeing many of the same systems being applied in the UK and in continental Europe, but it is not clear that they impact in the same way. In the UK, performance-related pay for middle managers is a relatively recent phenomenon; in the late 1980s virtually no middle managers received any such remuneration; a fixed salary was all but universal. Today, around two-thirds of such managers receive some element of PRR, although the amounts of money involved are typically much smaller than in the US. However, there is evidence that such schemes work differently here; one potential reason is the secrecy surrounding pay in the UK compared with the relative openness with regard to pay in the US. In one scheme we monitored here, many managers who had received above average bonuses for their area of work, believed that they had received below average bonuses. This was possible because there was no public information concerning the size of bonus payments other than an overall company average figure. Thus rewards are clearly an area where cultural differences are of great


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significance, and where research results are not easily transferable across national boundaries. My conclusions are therefore quite stark. Management accounting research has, in a number of respects, lost touch with management accounting practices. Where contact has remained, it has been more at the level of accounting techniques, rather than at the level of managerial uses of management accounting and other information. In short, we need to put the ‘management’ back into ‘management accounting’. Moreover, organizational needs have changed. Whereas previously much reliance was placed on systems of budgetary control to act as the foundation stone for systems of overall management control, the budgetary control system can no longer meet the pressures being put upon it. Organizations have been developing other ‘systems’ of performance management, and management accountants have been changing their role into performance measurement experts. This clearly affects the subject matter of relevant management accounting research. What I will finally argue is that it also affects the practice and methodology of management accounting research. IMPLICATIONS FOR RESEARCH So far, I have argued that management accounting research is not as closely connected with management accounting practice as might be desirable. In particular, there are control practices being developed academics, consultants and practitioners, and which are being implemented in organizations that we have yet to study in any depth. I believe that this is true across a whole range of management accounting topics, but I will concentrate upon the area that has traditionally been described as management control systems, although my preference is now to describe this as the area of performance management packages. Clearly, this topic encompasses not only traditional and ‘new’ management accounting, but casts its net into a wider range of control practices that may well extend beyond the boundaries of management accounting as traditionally defined. However, accounting measures and non-financial performance measures are increasingly being integrated in real-world control practices, so it would be foolish to maintain an artificial distinction that no longer represents the reality of practice. How, then, might we best study the operation of performance management and control systems? I should make it clear at this point that I do not wish to be prescriptively narrow; there is undoubtedly scope for the deployment of a wide range of research methods, all of which have the potential to throw some light on this topic. Nevertheless, I would also wish to argue that the methods which seem to me most likely to give some of the necessary insight are those which have been relatively neglected. I will therefore concentrate on these methods in order to redress the balance which I see as unhelpful in current research. My general position on

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research methods is that there are not ‘good’ or ‘poor’ research methods of themselves, but rather that it is a matter of ‘horses for courses’ and that it is research problems that need to be matched with appropriate methods. Thus, if we wish to study the operation of systems as complex as systems of organizational performance management, we need to deploy research methods that are capable of picking up a wide range of organizational phenomena. Control practices are pervasive across a wide range of organizational activities and it would be foolish to assume that particular control techniques can be easily associated with performance outcomes. For example, we know some deal about budgetary control practices and their deployment, such that we might well be able to hypothesize about the likely effects of different practices in a given set of circumstances. But I also know that I can point to organizations in the same industry, with similar characteristics including generally good performance, some of which make extensive use of budgetary control techniques and others which make little or no use of them. Arguably, the latter deploy other control mechanisms that ‘fill the gap’ not now filled by budgetary control. But if I focussed solely on the study of budgetary controls, I would be unlikely to pick this up. My preference for research method is now becoming clear. In my view, intensive, field-based methods are much more likely to pick up on the wide variety of control mechanisms deployed by organizations in practice and to ground theoretical development firmly in empirically observed practice. This is not to uncritically accept all practice as appropriate, but to carefully document the observed effects of different practices in different circumstances. What would hopefully emerge from such work is inductively generated theory that could be subjected to further testing and development. Now this agenda could be developed from a variety of epistemological points of view, although again this is a debate in which I do not wish to become too embroiled today. Suffice it to say that it is not inconsistent with the model of scientific development implicit in most extant accounting research, that is, what I have described as the ‘hard’ science model. However, it also sits happily with more interpretative approaches to theory development and understanding of organizational activities that are more generally found in the social sciences. I think we have a lot to learn from organizational theorists, sociologists and anthropologists, in addition to what we have taken on board from psychologists and social psychologists. Indeed, some of my more critical theory oriented colleagues might believe they are witnessing my conversion to their point of view! Let me make it clear that I have no doubt that critical approaches can give us a great deal of insight into organizational activities. My main reservation about much ‘critical’ work is that it sometimes tends to regard organizational behaviour only as an interesting phenomenon that shows the falsity of the simplistic assumptions made in practices they would regard as ‘managerialist’. In my


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view they pay too little attention to the issue of designing organizations as sustainable entities which need to reach accommodations with a wide range of interested parties in order to survive. This is probably seen as a ‘functionalist’ stance, but I would argue that the integration of these two points of view might well yield some important insights. But the reasons why we do not engage in the type of work that I am suggesting are generally not theoretical or epistemological, but practical. There are considerable pressures, particularly on young researchers, to publish or perish, both in the US and the UK. And here, even traditional management accounting research is at a disadvantage because of the lack of publicly available data. The availability of large databases for research in finance, and to some extent in financial accounting, may make management accounting researchers feel disadvantaged because we generally have to collect our own data. There is thus a tendency to choose those research methods that allow this data to be obtained as easily as possible, leading us into the realm of experiments and arms-length mail surveys (despite the increasingly poor response rates associated with the latter). Perhaps we also yearn for a degree of generalisability that is probably unrealistic. But this approach leads us into a self-defeating loop; our data is both small-scale and superficial. A more whole-hearted embrace of more intensive studies would turn the issue into an advantage, in that we could use the very rich data that more intensive studies generate to yield much more insightful theories. But this leads us directly into the issue of research training. Here I part company with the often expressed view of my late friend and colleague, Peter Brownell. Peter’s later position (for his training was basically experimental and psychological) was that he saw the benefits that could be obtained from a more field-based set of research methods, but that PhD students should first be trained in more rigorous methods (as he saw them), and only more established academics could afford the luxury of dabbling in the more esoteric methods. Tempting though that argument may be, it is unlikely to be too successful. Having trained a researcher in one set of methods, is it not likely that they will see their comparative advantage in continuing to do more of what they are already good at? I would argue that the seeds of better management accounting research have to be sown in more appropriate research training for our PhD students. I sometimes encounter the argument that it is impossible to train students in inductive methods and for them to conduct empirical fieldwork of an intensive and longitudinal nature within the normal three year timespan of doctoral training. I would dispute this. Although I agree that if we precede fieldwork with a year or more of coursework, and try to confine the empirical data collection to a short, often six month, period, then this rules out field-based work. But by making a relatively early start into negotiating organizational access, and running coursework in parallel with fieldwork, it is quite feasible to complete an inductive PhD within a three year period. I have supervised students who have successfully done this,

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both in conducting conventional research and in conducting a type of ‘action research’ that involved being associated with the implementation of a management accounting innovation. The major issues with this type of work are, I think, most importantly those of riskiness and ‘back end loading’. Field-based PhDs are undoubtedly subject to more risk than the more controlled alternatives of experiments or surveys. In particular, it is often time-consuming to negotiate research access into real organizations, and such access may not be maintained over the hoped-for time period. Contingency plans are therefore required, and it may be better to think in terms of work involving a small number of organizations rather than just one. There are also issues of confidentiality and clearance to publish, although in practice I have not found that these lead to insuperable problems. The timescale of most academic research is still considerably longer than causes an issue for most organizations, especially when a degree of anonymity is possible. More pressing is the ‘back end loaded’ nature of inductive work. By this I mean that the output of inductive research is essentially new theoretical insights and/or hypotheses. By contrast hypothetico–deductive work is front-end loaded. That is, the hard work occurs during the research design and the construction of measurement instruments, generally in the first year or two of the project. Data analysis and the drawing of conclusions is relatively routine. In inductive work, the real crunch point occurs when the vast amount of data that has been collected has to be synthesized into insights and conclusions. This is at least as stressful for the supervisor as for the student, for there is little one can do to help at this point; the student is far more familiar with the data than you can ever be, and can only be guided and supported as they seek to elucidate connections and develop explanatory frameworks to codify their observations. We need to develop more ways of supporting our students in dealing with these issues. A final issue is the supposed reluctance of journal editors to publish field-based case studies in comparison with other types of work. I am not sure how great a problem this is, although it may be more pronounced in the US than in the UK and Europe. During the ten years I was general Editor of the British Journal of Management, the most common type of question I was asked usually involved an accusation of bias against certain types or topics of research. Upon enquiring on what evidence such an accusation was based, it was usually asserted that I had shown such bias by not publishing any of the type of work cited. Almost invariably, I was able to respond that I had not published anything because no-one had submitted anything of that type! Although I think we have some way to go in establishing appropriate norms and standards for the conduct of field-based and inductive work, there does not now seem to be a great shortage of journals willing to publish work of this type. Indeed, the situation I alluded to earlier with regard to


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the shortage of submissions to management accounting journals in the US, may go some way to resolving this perceived problem. I do not wish to minimise the potential problems involved in developing alternative approaches to research. But there are models available in many of the social science disciplines which surround accounting. What I find most compelling is the sterility that will overwhelm us if we do not make some such changes, and study management accounting and control systems in the context within which they operate. CONCLUSIONS My theme today has been the changing and widening role of management accounting within organizations, both public and private. I have argued that whereas the context and use of accounting and other control techniques has changed radically in the last decade, research in management accounting has tended to remain rather traditional in both the areas it chooses to study and the methods that are deployed. Some of my comments may have seemed critical, and indeed they are, but the situation is not one that is beyond remedy. Indeed, it might fairly be argued that there is now a considerable amount of work of the type that I have proposed already being conducted. There is, and probably more so in Europe than in the USA. My plea is that this type of work should be encouraged and developed, rather than being regarded as the esoteric interest of a small minority. The study of management accounting, I have argued, has (perhaps unwittingly) concentrated upon accounting. It is time we redressed the balance and put the management back into management accounting. I believe that this is an opportune moment to become involved in such studies. The interest amongst real organizations in understanding and developing their systems of performance management has never been greater. One only has to look at the huge enthusiasm with which techniques such as EVA and the Balanced Scorecard have been seized upon and implemented in organizations, initially in the US (for both these techniques were developed in a US context), but more recently in Europe. As an aside, I would also urge a degree of caution here, in assuming that these techniques will work in similar ways on the two sides of the Atlantic. For example, EVA recommends the linking of managerial pay to performance; because of the greater openness in the US concerning pay compared with the secrecy that surrounds the topic in the UK, and even more so in continental Europe, care has to be taken to ensure that performance management systems are adapted to local circumstances. From a research point of view, this extends the topics that can usefully be studied, and cross-cultural comparisons form a fertile ground for studies of these topics. The rapid pace of change also makes longitudinal studies more feasible; organizations are implementing a great number of changes with some rapidity, so the researcher is likely

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to find many opportunities for longitudinal field studies and even action research. Accounting systems are often implicated in the wider processes of organizational change, providing both a vehicle through which some changes can be promoted but also a potential rigidity and barrier to change. Increasingly organizations appear to be recognising the importance of performance measurement systems as both a tool which can be mobilised in support of more wide-ranging changes, and as a mechanism which must be adapted if other change initiatives are to be successful. So there are important connections to be made with those who study the processes of change management within organizations. Equally, performance management systems can be seen as a major plank in the process of implementing strategic intent. I still find it strange that those involved with the study of strategy pay so much attention to strategy formation, and relatively little to the processes involved in making the strategy become real. So links with those who study corporate strategy might well provide a fruitful two-way interaction. I have tried to give some indication of both the topics and the methods that might be built upon in re-vitalising the study of management accounting and its more general extension into the realm of performance management more generally. Accounting has long been described as the language of business, and those who speak this language can often gain privileged access into key areas of organizations to study how it is deployed in attempting to adapt organizational practices to the needs of a rapidly changing environment. I therefore believe that as management accounting researchers we have a wealth of exciting opportunities open to us; let us seize these opportunities enthusiastically to make a real contribution to the study of vital organizational issues. REFERENCES Anthony, R.N. (1965). Management Planning and Control Systems: A Framework for Research. Boston, MA: Harvard Graduate School of Business. Argyris, C. (1952). The Impact of Budgets on People. Ithaca, NY: The Controllership Foundation. Briers, M. & Hirst, M. (1990). ‘The role of budgetary information in performance evaluation’, Accounting, Organizations and Society, 15(4), pp. 373–398. Bromwich, M. & Bhimani, A. (1989). Management Accounting: Evolution not Revolution. London: CIMA. Brownell, P. (1995). Research Methods in Management Accounting. Melbourne, Australia: Coopers and Lybrand. Bunce, P., Fraser, R. & Woodcock, L. (1995). ‘Advanced budgeting: a journey to advanced management systems’, Management Accounting Research, 6(3), pp. 253–265. Emmanuel, C.R. & Otley, D.T. (1985). Accounting for Management Control (1st edition). England: Van Nostrand Reinhold, Wokingham. Epstein, M. & Birchard, B. (2000). Counting What Counts: Turning Corporate Accountability into Competitive Advantage. Cambridge, MA: Perseus Books.


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Hartmann, F. (2000). ‘The appropriateness of RAPM: toward the further development of theory’, Accounting, Organizations and Society, 25(4/5), pp. 451–482. Hofstede, G. (1968). The Game of Budget Control. London: Tavistock. Hopwood, A.G. (1972). ‘An empirical study of the role of accounting data in performance evaluation’, Empirical Research in Accounting, Supplement to Journal of Accounting Research, pp. 156–182. Johnson, H.T. & Kaplan, R.S. (1987). Relevance lost: the rise and fall of management accounting. Boston, MA: Harvard Business School Press. Johnson, H.T. (1992). Relevance Regained: From Top-Down Control to Bottom-Up Empowerment. New York, NY: The Free Press. Kaplan, R.S. & Norton, D. (1996). The Balanced Scorecard. Boston, MA: Harvard Business School Press. Otley, D.T. (1994). ‘Management control in contemporary organizations: towards a wider perspective’, Management Accounting Research, 5, pp. 289–299. Otley, D.T. (1999). ‘Performance management: a framework for management control systems research’, Management Accounting Research, 10, pp. 363–382. Otley, D.T. & Pollanen, R. (2000). ‘Budgetary criteria in performance evaluation: a critical appraisal using new evidence’, Accounting, Organizations and Society, 25(4/5), pp. 483–496. Rathe, A.W. (1960). ‘Management controls in business’. In D.G. Malcolm & A.J. Rowe (eds), Management Control Systems. New York: John Wiley. Schiff, M. & Lewin, A.Y. (1970). ‘The impact of people on budgets’, The Accounting Review, April, pp. 259–268. Simon, H.A.H., Guetzkow, G., Kozmetsky & Tyndall, G. (1954). Centralization vs. Decentralization in Organizing the Controller’s Department. Ithaca, NY: The Controllership Foundation. Simons, R. (2000). Performance Measurement and Control Systems for Implementing Strategy. Upper Saddle River, NJ: Prentice Hall. Simmonds, K. (1981). ‘Strategic management accounting’, Management Accounting (UK), April.