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A new framework for managing business is needed

By Peter Spence, Associate Technical Director — Management Accounting, Association of International Certified Professional Accountants

The world of business has changed. And the pace of change continues to accelerate. Some of the world’s most valuable companies produce few tangible outputs. Their value is largely derived from their technology. Organisations like Google, Facebook, Amazon and eBay coordinate the activities of others and provide virtual services like cloud services and trading platforms. The emergence of this virtual world has lowered barriers to entry as physical assets play a lesser role than in the past. 

Data is the input of the virtual business. Insights are the outcome. Costs are decoupled from scale. Producer power has morphed into consumer power. Value chains are no longer vertical. Companies now have globally interconnected value chains. 

Cooperation between interdependent businesses in these value chains is not just fashionable — it’s necessary for the continuity of production. For example, Boeing’s unexpected reduction in the production of the 737 Max in response to its grounding by regulators requires them to cooperate with their suppliers to adjust to this reduction

Businesses can no longer afford to hold value chain partners at arms-length. They need to work together to manage shared risks. Relationships between companies are now strategic. The tactical, adversarial relationships of the past are too risky in many of today’s volatile, uncertain, complex and ambiguous, globally connected business ecosystems.

Consequently, the ways in which we manage businesses today should be commensurately different from the ways in which we managed them in the past. Fundamentally, they are not; the science of enterprise performance management lags the pace of change of our global business ecosystem.  Added to this change, the inexorable development of nations, peoples, and societies has brought environmental challenges and raised societal awareness of the environmental and societal damage being done by the industrialisation of nations, growing wealth and inequality, and globally spreading consumerism.

So how do we better manage businesses today considering the pace of change?

A new framework is needed

It’s no longer possible for businesses to succeed with a dominant focus on financial information using management tools borrowed from the last century. However, despite billions of dollars of investment and priority positioning on the C-suite agenda, the gap between the information CEOs need and what they get has not closed in the past ten years.

More than 80% of the value of S&P 500 businesses are locked up in intangible value — brands and other intellectual assets. And brands can be burnished or tarnished by association with what old school managers would consider externalities — like environmental impact, societal perceptions (whether justified or not) of a company’s culture, how it treats its employees, customers and suppliers, and ratings by customers and employees. Think about the Volkswagen emissions scandal, which cost the company an estimated $30 billion. And the PPI misselling scandal in the United Kingdom — over £34 billion. These practices destroy shareholder value.

If you don’t think any of this applies to your company yet you struggle to attract and motivate young talent, think again. According to a Global Tolerance report, 62% of millennials want to work for a company that makes a positive impact, and 50% prefer a job with a purpose rather than a high salary. More than any other generation before them, millennials care about ethics, the environment, a company’s culture, how it treats its employees and how it engages with the societies the influence.

It’s not all doom and gloom! Many companies are tackling many of these challenges head-on, improving outcomes for both stakeholders and our environment, while continuing to enhance shareholder value. CIMA is now partnering with the World Council for Sustainable Business Development to explore what these pioneering companies are doing differently.

The time is right to evolve finance performance management practice to better integrate relevant “externalities” into our business decision-making.