9 Implementation and Change

Stijn Masschelein

In previous chapters, I have talked about how management accounting tools support organisations to create a competitive advantage by coordinating the different functions within the organisation, managing human capital and specific knowledge, and aligning the interest of the employees and business units with the organisation’s goals and strategy. Unfortunately, implementing or dramatically changing budget processes,  cost accounting systems, or performance measurement systems takes time and effort and is prone to implementation costs which are a specific example of transaction costs. You can find a nice, practical overview of implementations problems by Deloitte in Deloitte’s perspectives series. In this chapter, I will provide my own list of implementation problems and tie them back to the different theoretical perspectives from the previous chapters. Not only will it be useful to think of implementation problems as transaction costs, we will again see that specific knowledge is necessary to successfully implement new accounting tools, that institutional forces can resist or hasten change, and that organisation sometimes need bonuses to convince employees to adopt the new system. The goal of this chapter is not to provide a guide on change management but to show how the core stories I have introduced can help to diagnose the difficulties when overhauling a management accounting system.

Change resistance

It is not unusual that changes to a company are met with resistance or hesitations. One of the reasons is that people are generally averse to uncertainty and risk. A feeling that is best captured in the saying: “Never change a winning team”. A more developed argument is that institutional forces in organisations are focused on the survival and stability of the organisation and not necessarily on economic efficiency. These institutional forces can take the abstract form of the bureaucratic process in the organisation or they can be more concrete like the power of the senior medical staff in a hospital (Abernethy and Chua, 1996).  Another related factor is that changes in the organisation can create more risk for the employees. The introduction of a new cost accounting system changes how the profit and thus the performance of business units is measured. In the chapter on agency theory, I explained that employees generally demand a risk premium when they have to bear more risk in their compensation. One way to convince the employees to accept the risk in the new system is to pay higher wages or bonuses which is one example of a transaction cost for the organisation. If at all possible, the organisation would prefer to not pay this cost.

A different reason for employees to resist new management accounting systems is that these systems often try to replace the employees’ subjective judgements with objective information. As I explained before in Chapter 5, this can be the explicit purpose of a management accounting tool for the organisation. Often, the employees will argue that the accounting system does not adequately capture all the nuances or they might feel their influence diminished because their judgement is less important. The difficulty for management of the organisation is to distinguish between legitimate claims of flaws in the new system on the one hand and employees trying to protect their power over the decision or production process on the other hand. If employees have superior knowledge about what works and what does not work in their specific circumstances, they also know best whether a new management accounting system will work but they will not always be motivated to reveal that knowledge [1].

The last reason for resistance is that management accounting systems can clash with established unspoken rules and norms in the organisation. Individual business units will often develop informal norms based on the day-to-day operations that top management is not aware of. New formal systems can disrupt and harm these norms. Sometimes that is the intention of the company because they want to change the culture of the business unit. However, in other situations, the implementation of a formal system can also disrupt an otherwise smooth running business unit because top management does not understand the culture of the business unit [2]. It is often not easy for an organisation to decide whether a business unit’s resistance to a formal system is motivated by their own interests or by the legitimate fear that the new system will impair the functioning of the business unit.

Fit with the environment

In the previous section, I emphasised that the success of a new cost accounting or budgeting system depends on the existing firm culture and norms and this line of reasoning can be further extended. There exists a large body of academic studies that focus on how the benefits and costs of accounting systems depends on the environment in which the firm operates. In this section, I provide some examples of how the organisation’s circumstances influence which accounting system is more appropriate. The message of this section is not that there are rules for which accounting system fits with which environment. The take-away message is that finding the right fit is complicated and can easily go wrong. The correct way to interpret the three subsections is to interpret them as micro case studies. An important consequence of  the importance of context specificity is that a one-size-fits-all approach is rarely going to work [3]. A cost accounting system that is successful in one firm is not necessarily the best approach for another firm. Similarly, if a firm’s environment changes, the accounting system that was adequate in the old environment might no longer be optimal in the new environment.

The goal of this section is to make you aware of the difficulty to adapt the accounting system to the firm’s environment. The following examples illustrate that there are not even simple one-to-one relations between the environment and the right management accounting system. That makes it all the more important to investigate the specific circumstances of an organisation that help or hinder the implementation of a new accounting system. Unfortunately, I cannot and will not give you any easy answers in this textbook. The reality is too complex for that. Once we accept this complexity and the difficulty in finding the right system for each organisation, we can focus on tactics to gather information that make it more likely that we come up with a system that works good enough for the organisation. Specifically, when we develop a new accounting system, we will want to take into account the knowledge in the organisation and we will want to learn about what works and what does not work through direct experience and experimentation.

Illustration 1: Competition and cost accounting

One issue that we will revisit later on in more detail is when a more complex cost accounting system is more useful. The advantage of a more elaborate and detailed cost accounting system is that the estimated cost prices for individual products are more precise (Labro and Vanhoucke, 2007 ). Better cost estimates allow organisations to set smarter prices. Some textbooks have argued that in competitive markets, better cost systems are more valuable because profit margins will be smaller. On the other hand, in competitive markets, organisations will not be able to charge more than the price that competitors charge because customers can easily defect to the cheapest producer. In other words, organisations do not need an elaborate costing system to find out the right price for their products. They only have to match the price that competitors are setting.

Illustration 2: Uncertainty and budgets

Another controversial issue is whether budgets are more valuable or less valuable when the firm operates in a more uncertain environment (Hartmann, 2000). In an uncertain environment where it is difficult to predict consumer demand, the firm will have difficulty in setting up a realistic budget at the start of the year. The uncertainty makes planning more difficult because expected demand and expected purchasing prices can change substantially. On the other hand, the budget and actual deviation from the budget during the year might provide information on these changes. If we plan to sell 100,000 units and half-way through the year we have sold only 40,000 units, we know that we should adjust our plans for the year. Uncertainty clearly affects how firms can use budgets but this does not necessarily mean that budgets are useless in high uncertain environments.

Illustration 3: Strategy and cost accounting

The strategy of a firm has also been highlighted as a factor that might influence the use of an accounting system. For instance, the argument has been made that cost control and consequently cost accounting systems are more valuable to firms who are following a cost leadership strategy. One important technical issue in cost accounting systems is how to assign costs from inventory and unused capacity. Most accounting textbooks devote a whole chapter to this issue (see chapter 20 in Horngren et al., 2014). The following example will demonstrate that firms with a similar [4] cost leadership strategy can have totally different investments in inventory and capacity and hence in the need for an inventory costing system. The example shows why I define the strategy of the organisation based on its critical investments.  Amazon is a very aggressive price cutter in almost every domain and they guarantee fast delivery by having a very extensive network of warehouses where inventories are constantly updated. OnePlus is a manufacturer of high end Android Smartphones at below market prices. Their strategy used to be to keep costs low by requiring potential customers of a phone to sign up during a limited subscription period. On regular intervals, they produce just enough of the phones to satisfy the demand of the customers who have signed up [5]. OnePlus is fully aware that they might miss out on some potential sales but they prefer to have no unsold inventory. From a cost accounting perspective, Amazon has to have a good grip on the cost of its inventories and warehouse capacity to keep its margins sustainable while OnePlus does not even have to consider the issue. While both companies try to be a cost leader they have a totally different cost accounting system with respect to inventory management.

Specific knowledge and employee involvement

In the absence of clear one-to-one rules of which accounting tools work best in given environment, the organisation will have to rely on the specific knowledge and experience of its employees. Often the introduction of a new system will require specific knowledge about the new system and that knowledge will be difficult to communicate. This knowledge can take two different forms. First, for instance changes in the budgeting process will require the technical knowledge of how budgets work. This is also the knowledge that this textbook is trying to teach you. When firms do not have the required experience in the form of a finance department or a dedicated management accountant, they can turn to professional or academic consultants. The role of these specialists is to understand the goal of the new system and translate it into a functional accounting system. The cost of hiring these professionals is an example of a transaction cost of implementing a new budgeting system.

This is not the only form of specific knowledge that is needed for the introduction of a new accounting system. Because the success of a new system is context specific, the implementation requires intimate knowledge of the specific environment in which the accounting system will operate, i.e. operational knowledge. For instance, the measures in a new performance evaluation system need to be relevant and understandable for the decision makers who will use the system. The design of the system has to take into account what the needs are of the users of the system. Often the employees that will be using the new system may have already developed their own unofficial accounting or budgeting system in spreadsheets. One danger of a top down implementation of a new system is that it ignores the experience and unofficial systems of these users. One risk is that the new system will ignore valuable information that might inform the design of a better system. The local, ad-hoc data or metrics that have already been collected could help to develop a prototype of the new system because these are actual measurements from the actual operations.  Another disadvantage of ignoring existing unofficial systems is that the local users are more familiar with their own accounting system and are not always willing to switch over to the new system (Wouters and Wilderom 2008, Wouters et al. 2009). Implementations that take into account the operational knowledge of current users will encounter less resistance to change of these users.

In short, to ensure that users of the new system are using it, the implementation of the new system will require their involvement in the design of the system. This means that the more knowledge employees have, the more they will interact with the new system, or the more they are accountable for the measures in the system, the more their input will be important for a successful implementation. This consultation process is time consuming and will constitute an important transaction cost of the implementation process.  A successful implementation also requires to get the communication right between the employees with operational knowledge and management accountants and consultants with technical skills. These two groups often have different expectations and backgrounds which makes this a non-trivial problem to solve. Lastly, the use of a more complicated accounting system might require additional training for the users. All these changes and implementation steps are of course another source of transaction costs of a new accounting system.

Learning by doing through trial-and-error

So far, we have seen that developing an accounting system that is appropriate for the organisation’s environment is far from straightforward. The organisation will also have to consult with different people and integrate their specific knowledge. As a result, it is unlikely that at any point in time one person will know exactly what the best system will look like. All these considerations highlight how difficult it is to account for all possible obstacles in the design and successful application of a new management accounting system. Taking into account all these factors makes the development of a new accounting system highly complicated. If an organisation relies on specific knowledge from the rank-and-file, has an integrated strategy, and operates in a complex environment, implementing a new accounting system is equivalent to an optimising problem with a lot of moving parts that are best understood by different people.

It is unlikely that an organisation will design such an optimal system in one try. Organisations usually implement accounting systems through a process of trial-and-error. For instance, organisations will design a prototype for a cost accounting system and trial it in some of their divisions or for some of their products. Often the prototype is being used in concert with the existing system to compare and contrast the differences. If the differences make sense and can be explained, the new system is probably an improvement. For instance if a labor intensive product is allocated more costs in a new costing system, the organisation will feel more confident. However, if the differences between the old and the new cost prices are difficult to explain, the organisation will want to investigate the hidden assumptions behind the new costing system (Wouters and Wilderom 2008).

The use of prototypes and a gradual rollout will be especially useful if many different rank-and-file employees have to be involved in the system’s development. In the gradual approach, the organisation can include the specific knowledge of the employees when it is most needed. For instance, while the overall strategy and design of the balanced scorecard is mostly driven by top management, lower level employees might have better knowledge of how to design specific performance measures in their area of expertise. As an example, the sales people might have a better idea how to measure repeated sales as an indicator of customer loyalty. That is, do we need to count the number of customers that buy from our company every week, every month or every year?

Because it is almost impossible to decide whether a new accounting system is perfect,  the organisation needs to regularly evaluate and refine the system. Changes in the environment or in the strategy might require the development of new measures or render some measures obsolete. A cost accounting system can turn out to be too complex and evolved to use and it needs to be simplified. Incentive contracts or budget procedures might have unintended consequences where employees can game the policies for their own best interest without contributing to the organisations’ goals. For any sufficiently complex accounting system, it will be difficult to predict the behaviour of all employees that interact with the system. As a result, the firm will need to monitor any unexpected reactions and gradually improve upon the existing accounting system.

Looking back and forward

In earlier chapters, I explained how organisations replace market mechanisms such as price signals and incentives at a cost, i.e. transaction costs. The above discussion on the difficulties of implementing management accounting system revealed some examples of transaction costs of running a firm. In this specific case, they all refer to explicit and implicit implementation costs such as paying higher wages, the opportunity costs of trial-and-error, the time lost through involvement of rank-and-file employees or the fee to be paid to external consultants.

One obvious but often ignored cost of the implementation of new systems is that employees might need convincing to accept the new system. One way to overcome initial reluctance to a change is to increase the wage of the employees. Especially changes to the compensation structure go hand in hand with increases of the labour cost. Another related cost is the time of retraining and communicating the changes to employees. These activities often negatively effect short-term productivity of the employees because they can no longer pay full attention to their main tasks.

The current chapter also shows why management accounting systems are not always able to fully replace market mechanisms. It can take a lot of incremental improvement before a management accounting system is sufficiently fine tuned. Both an imperfect fit with the environment and frictions with the existing company culture can lead to more disagreement and less cooperation and communication. These transactions costs are the result of the less than optimal design of the system.

In addition, the size and complexity of some systems will make the use of the system more costly. Budgets, even when they work well, are often criticised for being (too) time consuming. The time to ask every division at all levels of the organisation for their budget needs and to reconcile these needs with each other and the overall business strategy is a daunting task.

The current chapter gives a range of costs that organisations have when they replace market mechanisms with accounting systems. If organisations can keep these transaction costs under control they will be able to reap the benefits of integrating different investments.  In the following sections, I will discuss three accounting systems. In each chapter, I will focus on how accounting can help with replacing market incentives and price signals by coordinating different divisions and investments outside of the market, translate subjective knowledge into objective information for better decision making, align the incentives of the employees with the strategy of the organisation, or communicate with powerful institutions.


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Gneezy, Uri, and Aldo Rustichini. 2000. “A Fine Is a Price.” The Journal of Legal Studies 29: 1. https://doi.org/10.1086/468061.
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Labro, Eva, and Mario Vanhoucke. 2007. “A Simulation Analysis of Interactions among Errors in Costing Systems.” Accounting Review 82: 939–62. https://doi.org/10.2308/accr.2007.82.4.939.
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  1. There is a very clear parallel with the reaction to large language or AI models such as ChatGPT and Bard. To understand the influence of AI on organisations, one useful lens is to think of these systems as formal management tools such as budgets and cost accounting system.
  2. A well known example of this phenomenon is documented in a study on day-care centers. Surprisingly, the introduction of a penalty for late parents increased the number of late parents. Before the introduction of the penaly, the parents would feel shame because of a social norm against being late. With the penalty in place, they felt they could just pay for the convenience of showing up late (Gneezy and Rustichini, 2000)
  3. Note that the search for best practices implicitly implies that there is a one size that fits a certain group of companies. In my personal opinion, the search for best practices is often misguided. Your mileage might vary.
  4. At least similar at the surface
  5. The subscription model has changed but the phones are still not easy to buy and fairly rare. OnePlus has abandoned its tactic of using subscription but it still has a strategy where it aims to match production as close as possible to actual demand for the phones.


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Principles of Strategic Management Accounting Copyright © 2024 by Stijn Masschelein is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License, except where otherwise noted.

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