CIMA knowledge fast forward is a knowledge sharing initiative which strives to improve the conceptual clarity of the business community with regard to a core management/financial accounting or business related knowledge area, describing the concept, and explaining how it applies in practice. Emma Cunis, Executive Director Global Corporate Relations, Chartered Institute of Management Accountants (CIMA) [...]

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CIMA knowledge fast forward

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CIMA knowledge fast forward is a knowledge sharing initiative which strives to improve the conceptual clarity of the business community with regard to a core management/financial accounting or business related knowledge area, describing the concept, and explaining how it applies in practice.

Emma Cunis, Executive Director Global Corporate Relations, Chartered Institute of Management Accountants (CIMA) is a member of the senior management team and leads CIMA’s strategy to partner with global organisations to recruit, develop and retain quality talent that helps to drive sustainable business success through the application of management accountancy tools and techniques.

Beyond financials: the new dimensions of management accounting

In 2008, many successful managers in the West had only ever experienced rising markets and steady growth. But in the past few years we have seen the world’s economy go through a dramatic period of change, both economically and environmentally. No country or market is immune from the ongoing impacts of the financial crisis.

As part of CIMA’s joint venture with the American Institute of Certified Public Accountants (AICPA) to establish the Chartered Global Management Accountant (CGMA) designation to elevate and build recognition of the profession of management accounting, CIMA and the AICPA have carried out exciting global research. One of these initiatives was the launch report for CGMA, ‘Rebooting business: valuing the human dimension’, on which the theme for this year’s CIMA Management Accountants’ Conference was based.

When asked what the focus for growth is over the next 18 – 24 months, business leaders see the financials as key. This is no great surprise as there is no doubt that the financials are critically important – reducing costs is still a priority – but there has been a shift in focus and the human dimension of the business (customer and supplier relationships, talent development, and intellectual capital) is now a core focus as well. Importantly, business leaders rated this human dimension as being equally important to financial drivers amongst key actions for growth, making it vital that the human element not be relegated.

The majority of business leaders believe that most of their organisational value is non-financial. They see people’s ideas, skills, knowledge and relationships as more important than traditional, financial sources of value. The need to measure and manage the human dimension has never been more critical and we need the right people with the right skills to do this.
This increasing importance of non-financial value explains why it?s so important that businesses have the ability to capture and measure it. 75% of our business leaders want to put more emphasis on measuring and demonstrating the non-financial value of their organisations. 76% agree the current reporting system promotes an excessive focus on financials.
Interestingly, research shows that in 1975 a total of 83% of the market capitalisation of companies in Standard & Poor?s 500 index was accounted for by tangible assets. And by 2009, the figure was just 19%.

Our research also highlights another crucial factor – transparency. We live in a world where businesses must live with unprecedented transparency – where anything they do, or write, may become public. This has been exacerbated by the advent of social media. But global business leaders must learn to understand and harness the power of transparency.
The results indicate that there is a virtuous circle of transparency. Companies who embrace transparency as a core value find that it becomes a key driver of success and a source of major competitive advantage. But almost the same number struggle to find the right balance, which is a major challenge in itself.

Human capital and growth

The CGMA report, ‘Talent pipeline draining growth – connecting human capital to the growth agenda’, also examines the importance of non-financial value, and how CGMAs can ‘connect the dots’ and help embed a robust human capital strategy. It highlighted that businesses are missing out on performance targets and growth opportunities because of inadequate human capital management.

Although the contribution of human capital has always been valued, it was not seen to be a critical element. However, as the business environment becomes more complex and volatile, this view is changing. The context of the global economic crisis has produced new ways of understanding competitive advantage and how to achieve it.

For example, a recent study by the Boston Consulting Group, a management consultancy, found that companies that are ’highly skilled’ in core HR practices achieve up to 3.5 times the revenue growth and as much as twice the profit margins of less capable companies.

Our survey revealed that only 41% of firms are confident that their human capital strategy is truly embedded in their organisation’s strategy. The research shows that the growth prospects of many firms are blighted by their failure to make the most of their human capital. Over two fifths of respondents partially attributed the failure of their firms to achieve key financial targets to ineffective human capital management, and two in five remarkably say it has also reduced their company’s ability to innovate.

The co-relation between talent management and performance is particularly strong in the financial services and energy sectors: nearly three-fifths of financial services executives say their firm has been unable to start a major project or achieve key financial targets because of poor human capital management, while over half of executives from the energy sector say they have missed forecasted growth.

Jehan Perinpanayagam, CEO, Infomate (John Keells Group) makes a great point that ‘HR and finance jointly presenting their analysis to the CEO provides a balanced viewpoint and is best practice.’ However our research shows this isn’t happening enough.

It is worrying that over 40% of firms claim to have missed performance targets or delayed initiatives due to human capital issues, yet they appear to not be doing anything about it.

For those firms that fail to adapt and update, the impact of poor human capital management goes right up the organisational ladder. Current talent development tools are not effective, as rated by survey respondents, and many firms do not have a strong internal pipeline for senior and key roles, and this would seem to be supported by a lack of effectiveness in both talent development activities and current succession planning.

It seems that organisations may be making investments into human capital development activities without the necessary insight.

This is perhaps borne out of the lack of confidence in the human capital data available, for example, only 12% of CEOs are confident about the quality of metrics that senior management receives.

It is further impacted by lack of clarity on ownership and accountability for measuring and tracking the performance of human capital strategies.

CIMA and AICPA’s recommendations are that companies:

embed human capital strategy within the wider overall business strategy
focus on getting the right information and translating to actionable insight
leverage the relevant skill set for credibility and actions
structure the organisation to ensure alignment of human capital to business strategy.

The evolution of the finance professional

The CGMA report ‘New skills, existing talents: the new mandate for finance professionals in supporting long-term business success’ further examines the idea of finance having a broader remit and acting as business partners.

It focused on new research to establish if finance professionals are expected to take on a broader role and what the constraints might be to the role of finance being transformed in this way.

As many businesses demand more from finance, its role must continue to evolve to allow finance professionals to make greater contributions to the organisation’s success.

Finance professionals are driving some of the world’s leading corporations.

They are becoming key advisors by combining the traditional financial skills associated with accountancy with capabilities in areas such as corporate strategy and risk management.

Yet the shift of finance professionals away from a sole focus on traditional tasks linked to the reporting cycle has been inconsistent across the business world.

This may be because finance professionals can find it difficult to shoulder new responsibilities or acquire the new capabilities and develop new skills and leverage existing talent to apply their financial acumen to non-financial areas.
Leading companies appear from our research to be further along in deriving additional value from their finance functions. They have implemented measures such as:

increased efficiency of accounting operations by engaging shared service centres, standardising systems and streamlining processes

using developments in information technology and the science of management accounting to generate better management information for actionable insight

developing management accountants with commercial skills and deploying them as business partners.

The report ‘Improving decision making in organisations: unlocking business intelligence’ reveals that the organisations with the best prospects of emerging successfully from any recession are those that can balance cutting costs to improve efficiency with continuing to invest to develop their competitive position.

Achieving this balance requires a combination of better information and the engagement of talented individuals with a keen understanding of the drivers of cost, risk and value to improve decision making and performance management.
‘Big data’ needs to be translated into information and management accountants are particularly well placed to provide this support to management.

This is illustrated through a recent McKinsey Quarterly article – ‘Competing through data’. It highlighted a shift from using intuition toward using data and analytics in making decisions. This change has been accompanied by measurable

improvement in productivity and other performance measures. Specifically a one-standard-deviation increase toward data and analytics was correlated with about a 5-6% improvement in productivity.

The implication for companies is that by changing the way they make decisions, they are likely to be able to outperform competitors.

One compelling example of management accountants adding value is that of Tata Steel in Singapore.

The company focused on increasing cost efficiencies by leveraging the skill set of its management accountants.

It underwent a process of outsourcing its logistics operations and secured 100% accuracy for stock count, significant cost savings and above 95% customer satisfaction.

Providing evidence in the form of financial reports, management information and analysis has long been the basis for accountants’ role in the decision making process.

Management accountants who can combine their financial expertise with an understanding of business have the potential to support the decision making process in a wide range of roles, from how decisions are framed and informed through to helping to ensure they achieve impact.

A complex challenge is ahead for the corporate world and sustainable success involves encompassing capability improvements, changes in internal perceptions and mandates, and unleashing capacity to embrace new responsibilities.




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