The Technological Development and Outsourcing - Essay Example

December 20, 2007 Management accounting and inter-organisational relationships Globalisation has opened up the world market. With an impetus to growth, it has facilitated inter-organisational way of working which allows better access to resources; build competencies and redesign strategies keeping pace with the market. This decade old phenomena encourages direct, non- hierarchical interaction between firms that fulfil the trust criterion. Heightened competition has driven firms to the edge seeking better access to scare resources and new capabilities through networking and inter-organisational alliances. The diminishing product and market life-cycles too are responsible for firms scurrying for partnership to share cost and risk of modernisation, while responding to the emerging competitive threats. Cuganesan (2005) in his research paper clearly hints at the global compulsions that had attributed to this new phenomenon. “With new possibilities relentlessly created within networks, organisational survival outside the networks is becoming increasingly difficult,” he opined. However, it’s not sunny all the way. The technological development and outsourcing may have increased dependence of firms on external relationships. With it come several challenges such as joint maximization, coordination and cost control. To attain efficiency and productivity, such inter-organisational relationships have to be governed and controlled, suggests Charlotaa et al (2007). This growing evidence of failure in inter-organisational relationships can be attributed to inadequate control. According to Mouritsen and Sof Thrane (2006), “Accounting and management control would appear counter-intuitive to such an arrangement. The empirical observations of firms rallying around projects relating to control implies at better durability and predictability. Self-regulation and orchestration mechanisms help run the network built to develop and exploit complementarities in the diversity of network competencies and resources in different ways.” The principles on which a relationship is built and governed are not solely based transaction cost economics. Such structural and functional approaches are not adequate while formulating control system. The stress was on “self-regulating and orchestration mechanisms” through which accounting pressed for viable inter-organisational relations. Self-regulating mechanisms allow for smooth interaction and exchange of views weaved around the orchestration mechanisms. Trust it seems reign higher and its absence raises concern in a network, the study concluded. Based on a survey implemented in Finland involving industrial companies, Ukko, Juhani & Tenhunen, Jarkko (2003) came up with different types of co-operation between companies. The study also took into account the confidential information the companies in network would like to share. They have classified the cooperation between firms on the basis of vertical or horizontal relationships. “Vertical relationships usually focus on the transfer of resources between partners across different levels of the value-added chain (buyer-supplier). When in horizontal relationships the partners, such as competitors, directly participate in the performance of the activities by pooling resources and acting collectively across the same level.” Foremost, the study focused on supply networks where material inflow is the focus of the relationship. The network interaction includes the operating core of the members. This relationship is targeted at realising operational synergy between the units. Networks constituted by supply relations give rise to two kinds of configuration, the main contractor, and the complex of his subcontracting units and production chains, depending on the nature of the end product, the study opined. In agreements and joint ventures, the companies strive to attain functional synergy. R&D, distribution, and marketing sector are the focus area. Such ventures aim at expertise flow and exchange of skills between the firms. The regional industrial systems links firms at a technical-productive level. This happens at a local level where firms look for profit through synergy of forces such as marketing initiatives, technological efforts and common service structure, according to the study. A development circle is a co-operative type arrangement among entrepreneurs. In the meeting, which they hold by turn, they converse no strategic points. Such a relationship requires no investment nor do they look at cost saving options. The success of development circle solely depends on participation of the entrepreneurs and the seriousness of such meetings. Similarly, the success of a loose co-operative circle depends on sharing of common resources and the principles laid down by the units. The relationship revolves around sharing of resources jointly acquired for transport or production or the expertise of a manager. In contrast, a project group, the study says, aims at developing relationship with firms with complementary resources and skills. A more intensive type of co-operation, here the firms are interdependent for success. They also face the music together. Sustainability of such networking depends on company selection, the study concluded. Another strategic alliance is a joint venture, where the participants start from the scratch developing business plans start and running the venture together. It’s a risky preposition and profit has to be measured on a long time basis. Choice of strategic alliance is what makes or break this cooperation. Last, but not the least, a joint unit where the boundaries between the partners fades giving rising to a more formal co-operative arrangement. Network organisations work on a barter system to achieve their varied objectives. Such networks, says Cuganesan (2005), thrive on positive reciprocation and mutually support. This give and take relationship allows greater level of flexibility. The most important aspect of such relationship, however, is trust on which the foundation of the governance mechanism is laid. The management accounting studies the financial aspect of such relationships which help increase efficiency and effectiveness in an organisation. Companies go for an inter-organisational relationship to reap profit. With profit being the decider in the choice of partnership, three aspect of counting need to be looked into for making a venture fruitful. Ex ante and ex post assessment of a proposal will help in deciding how lucrative it is (Dahlgren et al. 2001). The ex post evaluation includes costs and revenues. The partners need to toe a similar line trying to synchronise their respective budgets after studying their economic planning of activities for a certain period. Cost reduction can increase efficiency, which need to be studied from an inter-company perspective. Dahlgren et al. (2001) have use systems of accounting management to study three different networks namely a business network, a strategic network and a functional network. The study elaborated on integrated budget process for network product, a joint network product costing that advocated full openness, a common invoicing system and common investment for jointly owned companies. Each process comes handy in a particular type of relationship. Based on examples from four SMEs, Jan Mouritsen, Allan Hansen & Carsten Ørts Hansen (2007), derived that management accounting calculations justify a inter-organisational relationship on the basis of division of labour and related technology and innovation. It works on the organisation space available and the impact of technology in use and the need for modernisation. In short, management accounting help transcends growth through sharing of technology, scare resources and organisational competencies, as the boundaries between firms blurs. According to the study, “the flow of space comprising information, technologies, products and customers is constituted by knowledge developed by management accounting calculations. But management accounting calculations do not contain all knowledge. Management accounting calculations add to the concerns of technology and organisation but cannot copy their dimensions. This is important because then the management accounting calculation – the informational space –can help to summarise certain aspects of innovation – the technological space –and some aspects of organisational boundaries – the (inter-)organisational space.” To classify the mechanism of cooperation, Cuganesan (2005), conducted a survey based on a questionnaire. The questions aimed to study the need management accounting and controlling systems at the network level. According to Cuganesan (2005), main attention is paid to the questions: What type of co-operation do the companies have at the moment and will have in the future, and how often do the companies share confidential information and how important is this information? It was a reality check. The correspondence showed most firms went for subcontractor network. While there were few or no takers for joint ventures, joint units and franchising, the development circle was the deal for the future. As far a sharing of information goes it is restricted to quality, customer needs, customers and prices. The product calculation was the most guarded secret. “Anyway the gap between the mean of frequency and the mean of importance was widest in the product calculation. So it can be assumed that open-book accounting is not familiar to these companies. Because of the very low means of frequency it seems that the companies share the information very occasionally”, the survey indicated. Bilateral cooperation was still the in-thing than multilateral and acquiring tangible assets was a rare case. To establish a relationship between management accounting, innovation and organisation, Jan Mouritsen, Allan Hansen & Carsten Ørts Hansen (2007) studied four firms engaged in high-tech sophisticated measurement system. The similarity in the organisational set up helped them to better access the technology flow. The study was conducted keep organisation up in the ladder above management accounting calculation and product technology. It investigated the flow of technology and information in the visible organisation space with its own set of capabilities and competencies. The three entities vied with each other with a focus on innovation. The flow of knowledge, information, and management accounting calculations was guided by competitiveness among the entities. This competitiveness, the study suggests, helps in the decision making process. The analyses pointed at the information flow as the deciding factor in the choice of partnership with technology being the concern area for striking a deal. The study showed that the term ‘innovation’ comes with different attachment for the four firms. The analysis helped them “draw out two propositions about innovation and two associated management accounting calculations in each enterprise.” The firms defined the relationship between innovation and competitiveness in their own terms, which was quite contradictory. They, however, restricted their study to the control of innovation. Their study revolved around four elements of competitiveness, a translation between products and customers; dimensions of the product, boundaries of what is ‘internal’ and 11 ‘external’; and the management accounting calculation. The last element support the decision making process taking the other elements into account. The paper proposes, “Management accounting calculations influence decision making about technology and in turn about inter-organisational design, but they do not determine these choices. The involvement of management accounting calculations in innovation and inter-organisational management is as a mediator. It helps to transform and displace technology and organisational boundaries, but it does not substitute the design of technological and organisational entities.” The management accounting calculations, thus, help in modernisation plan, sharing of space as far technology and skills between firms is concerned. The calculation based on inputs on technology and mdernisation plans help in better understanding of an inter-organisational space. What make the calculation pertinent are the fading inter-organisational space courtesy globalisation and the need to stay at the top despite stiff competition. They opined that since technology is an organisation problem, the calculation show firms the way while introducing new designs. It only affects the “organisational motivation and co-ordination mechanism” with responsibilities remaining the same. This study helped the new understanding of management accounting calculation that influences organization and technology. According to Sahlin, Charlotta ; Vretenbrant, Anders (2007), there are no constant in an inter-organisational set up. Inter-organisational management control system that guides a network is a variable component, so is an inter-organisational relationship that is bound to change over a period. There is a need to continuously update the system. The aspects, they suggests, that should be taken into account while devising a control system are, “the match between the relationship and the control system, the openness within the relationship, the balance between control and commitment, as well as the trade- off between the costs and the benefits of a certain system.” External factors should also be considered while developing a system. References: Jan Mouritsen, Allan Hansen & Carsten Ørts Hansen 2007, ‘Innovation Management and Inter-Organisational Relations in the Context of Management Accounting Calculations’, Centre for Management Studies of the Building Process, Department for Operations Management Copenhagen Business School, http://www.clibyg.com/publications/ Suresh Cuganesan 2005, ‘Re-examining the Role of Accounting, Contracts and Trust in Inter-Organisational Networks’, Journal of Law and Financial Mangement - Volume . Sahlin, Charlotta ; Vretenbrant, Anders. ‘Ekonomistyrning i interorganisatoriska relationer [Management control in interorganisational relationships]’. http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-1542 (2007-12-19) Jan Mouritsen and Sof Thrane, 2006, ‘Accounting, network complementarities and the development of inter-organisational relations’, Accounting, Organizations and Society Volume 31, Issue 3, April 2006, Pages 241-275 Dahlgren, Jörgen; Holmström, Magnus & Johansson, Peter. 2001. ‘Management accounting in networks’. 24th EAA Annual Congress Proceedings Book, A254. 18-20 April, Athens, Greece. Read More