Strategic Management Accounting

Fall 2019
Group 8, Essay 1

Alnoor Bhimani & Leslie Willcocks (2014):

Digitisation, ‘Big Data’ and the transformation of accounting
information

Mira-Kaisa Mankinen (454258)

Miia Ojala (572716)
Veera Romppanen (489825)
Introduction

The article discusses a model for understanding data, information and knowledge
relationships. Bhimani and Willcocks (2014) applies the model to examine developments in
strategy, organisational and cost structures, digitisation, business analytics, outsourcing,
offshoring and cloud computing. They also consider the traditional links between enterprise
strategy, structure and finance function activities and how digitisation is altering both their
dynamics and the consequences for internal financial reporting, analysis and
decision-making.

The produced data is growing rapidly, it doubles every 18 months. That is why organisations
are increasingly processing data. The way we work is changing all the time because of the
technological change. Working tools are also changing and they offer new opportunities for
work. For instance, many workplaces already have a variety of phone applications that can
be utilized.

Digital technologies shape the business. The cloud enables to store, access and share data
at lower costs and flexibility. However, most of the data organisations collect today are
unstructured and they are difficult to utilize. Digital development has also affected to
outsourcing possibilities. Due to technical development, place-specificity has in many cases
been removed and enabled the emergence of an outsourcing market.

Increasing data is not without challenges, for example data security issues need to be
solved. The amount of data leads to a data explosion which can also pose challenges.

From data to knowledge

According to Bhimani and Willcocks (2014), in order to understand the impact of

digitalisation on management accounting activities it is useful to consider documented
conceptualizations of how data and knowledge relate to each other. Data can be seen as
distinct pieces of information that is formatted in a special way, whereas there are various
perspectives on knowledge available that we will discuss later. The authors point out that it is
important to understand the relationships between data, information and knowledge in a
system used by agents. These agents are whether individuals, organisations or society. One
conception of linkages between data, information and knowledge is to regards data as

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record, information as message and knowledge as a model. These factors form an
information system that processes data into information and produces outputs.

Bhimani and Willcocks (2014) focus especially on the concept of knowledge. There are
many various definitions for this concept. According to the authors, knowledge is a set of
expectations held by an agent and this will be modified during the arrival of information.
Knowledge can be divided into tacit knowledge and explicit knowledge. Explicit knowledge is
readily articulated, codified, stored and accessed, whereas tacit knowledge is difficult to
transfer to another person. In other words, tacit knowledge can be seen as difficult to
articulate and formalize unlike explicit knowledge. This tacit knowledge can also be
assimilated to uncodified knowledge. Typically, people who think that technology will replace
all human actions will see all knowledge as in codifiable form.

Strategy, structure, and management accounting

Bhimani and Willcocks (2014) discuss how changes in the relationships among strategy,
structure, data, information and knowledge impact each other, and face the challenges
caused by digitalisation. Typically, the organisations have strategies to identify long-term
goals that are linked to courses of action and allocate resources to achieve organisational
goals. The organisational strategy in turn shapes the whole design of accounting system.
According to Bhimani and Willcocks (2014), the firms have invested heavily especially in
administering resource allocation, coordination and performance monitoring from the end of
the nineteenth century to respond changing technology and market requirements.

Bhimani and Willcocks (2014) remark that the linearity between strategy which defines
structure which in turn shapes the design of information systems plays a lesser role than
traditionally has been assumed. In reality strategy, structure and information system design
all interact with one another. The new sources of information have also affected to the
change. For many organisations, new types of business information began to displace
traditional sources of information. Nowadays strategic information has started to spread
through unstructured channels such as social media, smartphone applications and
internet-based gadgets. These new forms of information can change strategic aspirations
that are transforming organisational forms. In the future stronger convergence between
information systems and strategic domains is predicted. It is also plausible that accounting

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information systems will continue to see changes, such as taking advantage of valuable ‘Big
Data’.

Changing cost structures

The current trend towards digitised investments highlights the importance of fixed costs as
such investments result in fixed cost incursions exceeding variable cost elements.
Compared to traditional organizations, digitised organisations typically operate on unique
business logic and commercial models. They provide a wide range of different products and
services often in web-enabled commercial contexts, challenging the traditional ways of
determining individual product costs. In such context, the definition of a product is not always
clear and customers causing the generation of revenue may be different from the key
consumers of resources. Hence, traditional approaches to financial reporting analysis and
cost management offer limited value. Instead, tracking income and costs requires financial
intelligence traditionally incorporated only in few accounting systems.

Bhimani and Willcocks (2014) argue that this presents a need to develop advanced
accounting systems that are able to capture the changing dynamics of revenue and cost
sources to income statements generated for managerial usage. Accountants need to be able
to handle and process data from diverse sources, but are not, however, required develop
special technical expertise in data analysis and manipulation. Rather, they need to
understand the potential of such analysis for the financial intelligence they produce for
decision-making processes. New technologies may unveil changes in product cost
structures and cost behaviours that accountants are expected to capture and translate into
an updated organizational strategy.

Moreover, novel accounting techniques, such as strategic costs analysis and target costing,
currently deployed in many service-based and manufacturing companies are losing their
relevance in digitised organizations. As an example of this Bhimani and Willcocks (2014)
introduce Li & Fung group, a virtual company coordinating a network of 10000 suppliers
without any own manufacturing capabilities. The main function of such an organisation is
coordinating activities as well as connecting inputs and outputs between entities in a
resource efficient manner. In such a context, cost management consists of considering
factors related to coordination rather than manufacturing.

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Big Data: a changing role for accountants?

The value of data traditionally discarded by accounting information systems is now

increasingly understood as new technologies reveal its links to economic transactions. Trails
of data left behind by web users may be analysed to find novel pricing policies, cost
containment prioritisation as well as working capital management strategies. Moreover,
real-time data can be collected within products and processes themselves through the use of
various devices such as micro-cameras and industrial sensors. At the same time, entire data
sets become analysable instead of mere samples, offering broader questioning options.
Such development requires reconsidering the roles of accounting professionals and whether
they need to develop new domains of expertise to retain relevance of information provision.

Hence, Bhimani and Willcocks (2014) argue that accountants should aim for larger roles in
strategy, decision-making and driving change. Finance function may become the receptor
and assessor of information for decisions. With the help of advanced technologies and
analytics tools, accountants may conduct deeper and broader analysis faster than before,
developing financial intelligence and identifying new key trends to extract prescriptions from.
By co-operating with data analysts, controllers can leverage their knowledge and ask the
right questions to extract data that is most relevant to the organization.

With the application of the novel technologies, the traditional top-down management model
is becoming increasingly replaced by a collaborative and trust-based approach, resulting in
managers increasingly requiring real-time feedback about their activities. At the same time,
managers are able to act on both structured and unstructured empirical information. As a
result, decision-making and action are becoming increasingly integrated as actions can be
executed whilst defining organizational objectives. Accountants are expected to redesign
performance metrics and incentive structures to match these demands.

Big Data risks and limitations

Despite all the emerging possibilities offered by the new analytics technologies, Bhimani and
Willcocks (2014) note that only little empirical evidence of the finance function harnessing
them exists. ​Moreover, caution should be exercised when moving towards Big Data
analytics. The constantly increasing amounts of data available may lead to data and
information overload. Moreover, larger sets of data are not necessarily more valuable than

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smaller sets of data. The importance of data quality should be remembered as larger
samples don’t make up for any inherent biases in data collection and analysis. Finally, it
should be noted that for some phenomena historical data may be as relevant Big Data.

Outsourcing and cloud developments: whither digitisation?

Outsourcing, both domestically and offshore, has become more widespread due to
economic developments in Western economies. Technical development has given more
opportunities on how to organize and increase level of effectiveness in accounting and
financial department. However, also dilemmas arise.

It is often argued that routine tasks with low added value can be outsourced (e.g. payroll) if
supplier can provide cost effectivity and deliver required levels of quality and security. While
more value-added functions requiring advanced skills need to be closer to the company.
Sourcing decisions contain a significant amount of data, information and knowledge that
organisations need to consider which functions are core and which functions can be
outsourced. Data storage and processing raises security and privacy concerns. Fast
movement to Big Data may lead to considerable and expensive dangers. In the future,
outsourcing decisions become a key issue facing accountants in determining what to
continue/begin to undertake in-house. Often the activity is still best done in-house.

Another challenge is the shape-shift of back office functions from pyramids to diamonds. The
pyramid has a lot of employees at the bottom who has a strong knowledge, but the problem
is the cost. At the bottom of diamond-shaped organisations are providers who offer
workforce and automation. Diamond-type of organization needs more quality assurance and
governance skills because of the outsourced activities. Benefits include lower costs and
flexibility. Moving from pyramid to diamond structures can have redistribution effects,
accelerated by digital technologies, on where data, information and knowledge reside and
how they are utilised. These changes need to be very carefully managed.

In the future back office functions may be smaller but more high performing. The article
presents a model including nine core capabilities that need to be retained. Relationship
building, business systems thinking, service delivery and leadership look towards the
business and its requirements. The technical, process and knowledge architecture is
secured by the architect and technical/process “fixer”, while external supply is leveraged
through contract monitoring, provider development, informed buying, and service delivery

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roles. All of these roles require knowledge in a specialist area. Moving to this kind of model
creates large challenges for managers. Security, privacy and regulatory dimensions must be
considered.

Another challenge is offshoring outsourcing. Due to cost and performance pressures,

companies have increasingly looked to outsource more of their knowledge-based work.
Obvious risks involve losing vital knowledge, compromising information privacy and data
security. However, knowledge work requiring polymorphic actions cannot be outsourced
effectively unless there is strong cultural and institutional compatibility.

Cloud computing presents also a significant challenge. Uses of digital technologies will
produce concomitant management and accounting dilemmas such as privacy, and
legitimacy of use. Big Data and analytics include many benefits, but much depends upon the
quality of data and automated and expert analysis, and cultural changes in how information
are collected and exploited. Moreover, Bhimani and Willcocks (2014) argue that adoption of
cloud computing is not so fast and simple as the hype suggests. Many adopters were
seeking to fit cloud with their existing technology trajectories and business plans, rather than
organising around cloud as the panacea presented.

Outsourcing continues to growth in the future. Service providers will offer new services
including Big Data and business analytics. Real-time, accurate data will increasingly require
deeper and more detailed financial analysis. Cloud computing presents fundamental
challenges to business and accounting functions. Many different risks arise, and
management challenges will occur.

Discussion and conclusions

Will the current developments in digitisation be truly transformative for the finance function?
If we are to believe some consultancy reports then Big Data, analytics and visualization
mean that the businesses and finance departments of tomorrow will be very different from
those of today. Bhimani and Willcocks’s (2014) paper helps us to understand some of the
challenges involved in answering the question. In particular, the paper prompted us to think
about three main areas: 1) the hype versus reality 2) the impact of digitisation on some of
finance’s long running challenges 3) the impact of digitisation on the skills required of
accountants in business.

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Digital development contains many challenges. Few things to mention are IT investments
and the quality of data. Firstly, IT investments are expensive and risky for companies. Failing
in a critical business area investment may even jeopardize the life of people, as happened in
the case of Oriola’s ERP system failure when drug deliveries were disrupted. Companies
don’t always renew the whole old system because they want to save money by building the
new system on the top of the old one. However, increasing data utilization requires efficient
and up-to-date systems.

Secondly, with the increased data, organisations are getting more information that they can
use in their business. However, the quality of data is key as if users can't rely on data quality,
it's no use having more data. Poor data quality has a significant business cost – in time,
effort and accuracy. If users don’t trust the quality of the data, they won’t start using the
systems. As the number of data sources increases, the question of internal data consistency
becomes significant.

It has been quite generally agreed on in the accounting literature that the finance function
has evolved from mere historical reporting towards more business-orientation. As Bhimani
and Willcocks (2014) suggest, digitisation may further this trend and accountants may
co-operate with the IT function to extract meaningful insights from data. We also see that the
tacit knowledge of business accountants possess may complement the more analytical
approach of data analysts. This lowers the risk for misinterpretations and making decisions
on false information, as the expertise of both parties is combined (Al-Htaybat &
Alberti-Alhtaybat, 2017). However, as the two parties have different approaches, some
friction between them may be unavoidable.

The relationship between decision-making and action is changing with the increased
digitisation. Similar changes can be found in the relationship between action, knowledge and
the exercise of judgement in decision-making processes. Traditionally, data has been
discussed and questioned during the whole decision-making process until the execution of
desired action. However, with the emergence of new analytics technologies, we believe it’s a
relevant concern that decision-makers might end up over relying on numerical data, limiting
the space left for human judgement and discussions. (Quattrone, 2006) Thus, we believe
that accountants should retain a level of scepticism and ensure that data is critically debated
during the whole decision-making process instead of treating it as a mere input.

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What comes to outsourcing, quality control should be built into the production process itself,
and the competence and reliability of the service organization are of paramount importance.
Problem is that the quality of the contracted item is especially difcult to dene because it
often bears no tangible outputs. Outsourced accounting functions must be performed in
compliance with regulatory requirements (e.g., GAAP) as they are subject to external
monitoring by regulatory authorities and may result in sanctions and signicant penalties for
noncompliance. Moreover, news about noncompliant or incorrect nancial statements
evokes negative market reactions and leads to other negative market-related outcomes.
Organisations must carefully consider the abilities of their service providers to ensure
regulatory requirements are met and must compare the potential benets of outsourcing with
the risk of penalties for noncompliance or inaccurate data processing.

All in all, we believe that digitisation is a current theme that is already apparent in many parts
of accounting such as transaction processing and financial accounting. Accountants should
be ready to adjust to this development. This may require developing new sets of capabilities,
but above all, we underline the need to stay critical instead of looking for truths in data.

Sources

Al-Htaybat, K., & Alberti-Alhtaybat, L. (2017). Big data and corporate reporting: impacts and
paradoxes.​ Accounting, Auditing & Accountability Journal, 30(4)​, 850-873.

Quattrone, P. (2016). Management accounting goes digital: will the move make it wiser?
Management Accounting Research, 31​, 118-122.

Bhimani, A., & Willcocks, L. (2014). Digitisation, ‘Big Data’ and the transformation of
accounting information. ​Accounting and Business Research, 44​(4), 469-490.