In the volatile wake of the global financial crisis, costs remain top-of-mind for many businesses. Professor Margaret Abernethy, a globally recognised management accounting expert, suggests businesses go a step further and embed a culture of corporate frugality.
“Future-proofing” involves building agile organisations that “flex” their workforces and rely more on contractors and outsourcing, Abernethy says. Important to this shift is resisting the temptation to create permanent positions and extra management layers in the event of an upturn. “Don’t build slack into the budget in the good times,” she warns.
The concept of corporate frugality stems from a research study of US and Australian firms by Abernethy’s University of Melbourne colleagues, professors Anne Lillis and Shannon Anderson. They found good firms have a culture of avoiding excesses, “with sufficient flexibility to cut back when necessary without destroying the company and its morale”.
A range of cost management practices become part of the DNA of some companies, helping them ride through downturns. “Firms with cultural frugality pay much more attention to investment decisions, investing strategically and still pursuing innovation,” she says. Companies such as Ikea and, in the US, Southwest Airlines not only successfully embrace frugality but reward their people for working smarter, observes Abernethy, who holds the Sir Douglas Copland Chair of Commerce and the Chair in Managerial Accounting at the University of Melbourne.
She looks askance at drastic staff cutbacks by some Australian organisations, including Fairfax Media’s plans to axe 1900 jobs in order to adapt to the digital age, lamenting “it’s not like they didn’t see it coming!”.
Scenario planning and compiling the what-if information to explore ways to make organisations more frugal and flexible is within the remit of management accountants, whose support role for decision‑making today is critical and essential, Abernethy says.
Ironically, the position of management accountant rarely rates a mention on the organisational charts of big businesses these days, “but hopefully they’re helping to shape the future of businesses in the guise of strategists, business and policy analysts, and planning and performance managers”.
“I think of a management accountant as an information manager or a business analyst and, with the move to integrated information systems, the role is more important than ever,” Abernethy says.
Should the information they work with be strictly financial? Definitely not, she says.
Good firms have a culture of avoiding excesses, with sufficient flexibility to cut back when necessary without destroying the company and its morale.— Anne Lillis & Shannon Anderson
“Management accounting plays two primary roles in an organisation. One is to support the decision-making of managers at all levels, both operational and strategic, which means they need external data to predict the consequences of situations.
“The second is helping to influence behaviour within an organisation, designing performance management systems and determining how compensation is tied into them.”
This gives a management accountant influence over what’s arguably the board’s most crucial decision – the most effective way to remunerate the CEO – and also over the information the CEO uses to make decisions.
Abernethy has considered the management accountant’s role from many angles. As an educator, she sees the importance of imparting knowledge and know‑how to the next generation. As a researcher, she has a keen interest in compensation systems and the links between accounting and organisational culture.
As Dean of Melbourne University’s Faculty of Business and Economics for more than eight years until early 2012 – during which time the university changed its business model and the new Graduate School of Business and Economics was established – she saw the benefits management accountants deliver first-hand.
“When trying to plan programs, I needed information about incremental costs and revenues, to know what our competitors were doing and about the potential market in Australia and internationally,” Abernethy explains. “It’s not just the costs in financial reports, but the forward-looking incremental costs. I had to anticipate where China might be in five or 10 years – that’s very uncertain. What we’re good at doing as management accountants is sensitivity analysis.”
It’s a discipline for which the time has truly come. Forecasting will always involve guesstimates, concludes Abernethy. As economic volatility will continue for some time, she suggests as a catchcry for a new age of corporate frugality: “Try to avoid increasing fixed costs.”
This article is from the August 2012 issue of INTHEBLACK magazine.