Decision Support Systems


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Decision Support Systems

  1. 1. e ar at r ticl u e fe Decision Support—Do You Have It?Toby Hatch,William Stratton, Raef A. Lawson, and Denis DesrochesT o study the abil- channel, transaction, or ity of compa- Many organizations want to be able to make bet- value-chain profitability. nies to make ter decisions using their cost and profitability We began our inves-decisions using a cost system, yet are thwarted from doing so for a tigation of CPSs by ask-and profitability sys- variety of reasons. This article shows how orga- ing respondents for atem (CPS), and also nizations can improve their current systems. It general statement aboutto identify other discusses some unachieved goals, and also whether their CPSsissues related to the demonstrates how you can successfully support yielded significant ben-design and use of a business decisions using a cost and profitability efits. We noted withCPS, the authors system. © 2009 Wiley Periodicals, Inc. some surprise and con-formed the Business cern that only 44 per-Research and Analy- cent of all organizationssis Group (BRAG) managers (23 percent), and that responded agreedand conducted a survey spon- others (14 percent). or strongly agreed that they hadsored by several professional received significant benefitsassociations.1 Exhibit 1 shows DECISION-SUPPORT BENEFITS from their CPSs. We expected 3the distribution of survey this percentage to be muchrespondents by region, type of While some2 have identified higher given our expectation thatunit, and business sector. Data 80 different decision-support organizations develop their CPSswere collected during the period tools, there is actually no gener- based on identified benefits. Aof March–November 2008. Of ally accepted definition for deci- CPS is intended to be a majorthe more than 400 responding sion-support systems (DSSs). source of useful and relevantorganizations surveyed, slightly But we believe that an organiza- information from which to makemore than half were located in tion’s cost and profit measure- operational, financial, and strate-North America. The survey was ment system is a key DSS. We gic decisions. If 56 percent ofmost frequently completed from define a cost system as a system the surveyed organizations’ man-the perspective of the respon- established to monitor an orga- agers believe they do not receivedent’s entire entity. Fifty percent nization’s costs, providing man- significant benefits, what qualityof the respondents were in the agement with information on of information are they obtain-service sector, and 35 percent operations and performance. A ing, and what is causing thiswere from manufacturing. The profitability system is established lack of usefulness for decisionposition held by respondents was to measure and monitor the prof- making?fairly evenly distributed among itability of an organization or Beyond a general statementexecutives (16 percent), directors subset thereof (i.e., profitability about benefits, we asked for(13 percent), senior managers by products, services, or cus- information concerning specific(16 percent), analysts (19 percent), tomer). Other subsets include by benefits. Exhibit 2 lists the most© 2009 Wiley Periodicals, Inc.Published online in Wiley InterScience ( 10.1002/jcaf.20516 63
  2. 2. 64 The Journal of Corporate Accounting & Finance / July/August 2009 that they received the next seven benefits: Exhibit 1 1. Provides an accurate assess- ment of costs; Demographics of Survey Respondents 2. Helps for customer-profitabil- ity analysis; By geographic region: Percent 3. Helps us make operational North America 52% improvements; Middle East 14% 4. Helps us control costs; Asia 13% 5. Provides good information for South America 12% managerial decision making; Africa 7% 6. Helps us make product deci- Europe 2% sions (e.g., pricing, design, By organizational level: Percent and outsourcing); and Whole company 54% 7. Helps us perform budgeting, Department 16% planning, and evaluation. Group/division 9% Finally, only approximately Subsidiary 9% 25 percent of organizations indi- Plant 5% cated that they had received the Unit 4% following three benefits from Branch 3% their CPS: By business sector: Services Percent 1. Accurately traces the cost of Financial 11% overheads to final cost objects Wholesale/Retail Trade 8% (e.g., customers, products/ Business 7% services); Consulting 7% 2. Accurately traces cost of Communications/Utilities 5% activities to final cost objects Computer/Software 4% (e.g., customers, products/ Healthcare/Medical/Legal 3% services); and 3. Provides accurate information Transportation 3% on the costs of all activities. Education 2% 50% Manufacturing In this study, the term accu- Metal/Rubber/Plastics 8% racy had a very specific mean- Electronics 7% ing. It did not mean being pre- Food/textiles 6% cise to a number of decimal Machinery 6% places. Rather, it was defined as Chemicals 5% being: Paper/Printing 3% 35% Public Administration/Government/Not-for-Profit 6% • relevant—it must make com- Conglomerate 2% mon sense; Other 7% • reliable—it must have a Total 100.0% valid cause-effect relation- ship; and • reasonable—it must pass the cost/benefit test. frequently cited benefits. Of the agreed that their CPS is helpful With this definition in mind, 11 benefits included with the for product/service profitability the results of the last three bene- question (there was also a free- analysis. Between 41 and 49 per- fits are very worrisome, because form answer), only 50 percent cent of organizations indicated 75 percent of the organizationsDOI 10.1002/jcaf © 2009 Wiley Periodicals, Inc.
  3. 3. The Journal of Corporate Accounting & Finance / July/August 2009 65Exhibit 2 Benefits Received From Costing/Profitabilitythat responded said they could USEFULNESS OF CPS ity decisions that were listed innot accurately trace overheads or the survey, 40 percent or moreactivity costs to their final cost To investigate the useful- of the organizations felt thatobjects, and could not get accu- ness of cost/profit information, they could not make the fol-rate cost information on the cost we asked what kinds of deci- lowing profitability decisionsof their activities. In order to sions managers were able to with their existing systems:make sound business decisions, make. Sixty-three percent ofthese three attributes of cost and respondents felt able to make • targeting new customers,profit information are quite cru- significant financial decisions • targeting new markets,cial. The argument can be made using their existing systems. • making acquisition deci-that information on activity costs Fifty-nine percent felt able to sions, andshould be absent in any CPS that make significant operational • writing employee perfor-is not using an activity-based decisions, while only 49 per- mance evaluations.cost method. However, while cent indicated the ability toalmost all types of CPS perform make significant strategic deci- Between 18 and 35 percent ofsome form of overhead-cost sions based on their current respondents indicated they couldallocation, only about half actu- CPS. not make these profitability deci-ally use an activity-based cost Exhibit 3 lists those deci- sions with their existing systems:method. We conclude, therefore, sions related to profitabilitythat lacking the ability to accu- that organizations felt they • product-line rationalizationrately trace the cost of overheads could and could not make with (additions, deletions);to final cost objects in a relevant, their current CPS. Although • employee compensation,reliable, and reasonable way is a there are many organizations including incentive pay;primary cause of the lack of that indicated they could make • new product/service devel-benefit from CPS. most of the desired profitabil- opment; and© 2009 Wiley Periodicals, Inc. DOI 10.1002/jcaf
  4. 4. 66 The Journal of Corporate Accounting & Finance / July/August 2009 organizations felt they could and could not make. Exhibit 5 shows Exhibit 3 that respondents to the survey Current Decisions Made With a Profitability System could make many kinds of cost- ing decisions. However, there were still between 26 and 34 percent of organizations that could not make the following types of decisions using their current costing system: • process improvements, • headcount levels, • resource utilization and capacity, • inventory levels, and • outsourcing decisions. Additionally, 17 percent of the respondents indicated they could not make pricing decisions for products or services. The inability of CPSs to support this type of decision making is cause for concern because these types of strategic costing decisions are fundamental to running a busi- ness and to deciding which way • rationalization of customers costs both with and without cor- to go strategically. (e.g., let some customers go, porate overhead would make When we asked what the if need be). understanding costs and making ideal costing system should look profitability decisions much like, organizations again wanted Since many of these deci- more straightforward. to be able to make all the sug- sions are also strategic in nature, It is interesting to see that gested types of decisions, and it is possible that current CPSs there is a substantial difference they added a few more. Exhibit 6 are lacking in capability and per- between what CPSs of today indicates the difference between haps the flexibility needed to offer and what organizations feel what the CPSs of today offer and produce necessary information. CPSs need. The two largest gaps what organizations still feel they It is also possible that the infor- relate to information about cus- need. mation is available, but manage- tomers—targeting new cus- The difference is not quite as ment simply chooses not to act tomers and customer rationaliza- dramatic as for profitability deci- upon it. tion. This result was expected sions, but it is still noteworthy. Taking this examination a because of the relatively recent step further, we asked respon- development of methods to FACTORS HINDERING CPS dents what kinds of capabilities measure customer profitability. EFFECTIVENESS they felt their systems ought to Organizations should explore the provide—in other words, to various methods now readily To identify the key factors think about their ideal CPS. available to identify and measure that hinder CPS effectiveness, Exhibit 4 indicates that most customer cost and profitability. we asked respondents to iden- organizations wanted all of the tify their concerns with their suggested capabilities. They also Costing Decision Support CPS (see Exhibit 7). Respon- wanted other capabilities. For dents were given a set of ten example, a few companies sug- Let’s look more closely at capabilities and a free-form gested that being able to look at the types of costing decisions field. At least half of theDOI 10.1002/jcaf © 2009 Wiley Periodicals, Inc.
  5. 5. The Journal of Corporate Accounting & Finance / July/August 2009 67 Timeliness of Data Collection and RecalculationExhibit 4 Comparison of Current and Ideal Profitability From the list of concerns (Exhibit 7), it is clear that Decision Support respondents are frustrated with trying to make timely decisions and that updating data and recal- culating cost with their current systems is difficult. With this in mind, we asked survey respon- dents how frequently they update and recalculate a variety of costs with their current sys- tem, and how frequently they would want to update and recal- culate costs with their ideal sys- tem. The costs included: • activity costs per unit driver, • individual customer, • customer group, • individual product/service, • product/service group, and • individual activity. Exhibit 8 compares the cur- rent frequency of data collection and recalculation to how fre- quently they would want to col- lect data and recalculate withrespondents indicated that the The top two concerns (up their ideal system.following seven capabilities to 65 percent of the respon- From these results, it iswere either a major or moder- dents) are the need for better apparent that organizationsate concern: ways to accurately allocate costs want to calculate more costs and the fact that their current more frequently. We conclude1. We need better ways to allo- allocations did not distribute that organizations do not cur- cate cost accurately. costs the same way their busi- rently obtain updated informa-2. Allocations do not reflect ness processes consume tion often enough to support how our business processes resources. Again, these two their decision-making consume resources. capabilities are crucial to mak- processes. As product and cus-3. We cannot make timely busi- ing sound business decisions. tomer life cycles have short- ness decisions based on it. Without them, organizations ened, the need for timely data4. It is difficult to update the can make serious business in support of decision making model with new results errors. has increased. CPSs must data. The results in Exhibit 7 address this issue if they are to5. It is difficult to design, build, clearly indicate that organiza- meet the decision-support or maintain the allocation cal- tions are not satisfied with the needs of managers. culations. capabilities of their current CPSs6. We cannot allocate precisely for decision support. Not sur- Cost-Allocation Method enough (bad allocations prisingly, allocation is the most basis). frequently identified concern Accurate cost allocation and7. The reports do not provide (contained in six of the ten con- the relationship between alloca- useful information. cerns in Exhibit 7). tions and resource consumption© 2009 Wiley Periodicals, Inc. DOI 10.1002/jcaf
  6. 6. 68 The Journal of Corporate Accounting & Finance / July/August 2009 Exhibit 5 Current Costing Decisions Exhibit 6 Comparison of Current Costing Decisions and Ideal Costing Decision Support are the largest concerns (see sions? Exhibit 9 shows the pri- write in additional methods. Exhibit 7) of managers. Does mary cost allocation method Very few “alternative meth- the primary method of cost by the companies surveyed. ods” were provided, so they allocation used have an impact (We offered seven choices as have not been presented in on the ability to make deci- well as the opportunity to Exhibit 9.)DOI 10.1002/jcaf © 2009 Wiley Periodicals, Inc.
  7. 7. The Journal of Corporate Accounting & Finance / July/August 2009 69Exhibit 7 Concerns With Current Cost/Profitability SystemsExhibit 8 Current and Desired Frequency of Cost Calculations in CPS Current Frequency of Cost Calculations More Than Monthly Monthly Bimonthly Quarterly Semiannual Annual Individual customer 14% 31% 2% 16% 7% 30% Customer group 17% 39% 4% 13% 5% 22% Individual product/service 13% 44% 3% 13% 5% 22% Product/service group 16% 40% 1% 15% 4% 23% Individual activity 15% 43% 1% 17% 3% 21% Ideal Frequency of Cost Calculations More Than Monthly Monthly Bimonthly Quarterly Semiannual Annual Individual customer 26% 41% 3% 26% 4% 9% Customer group 27% 39% 1% 20% 5% 8% Individual product/service 22% 42% 3% 22% 3% 8% Product/service group 27% 42% 2% 19% 4% 6% Individual activity 25% 42% 2% 21% 2% 7% Exhibit 9 indicates that include use of this method in their Decision-Support Tools57 percent of the respondents ideal system. This result indicatescurrently use activity-based allo- that organizations want to use Finally, we looked at thecations to some extent, as com- activity-based costing to help tools that are being used topared to 90 percent that would them with their cost allocations. perform cost and profitability© 2009 Wiley Periodicals, Inc. DOI 10.1002/jcaf
  8. 8. 70 The Journal of Corporate Accounting & Finance / July/August 2009 Exhibit 9 Cost Allocation Methods Used: Current and Ideal Exhibit 10 Software Comparison of All CPSs to Successful Decision Support CPSs calculations and provide CONCLUSIONS methods of allocation for busi- results that support decision ness relevance, and frequency making. While the results are With respect to cost and and ease of data updates. not dramatic, it is interesting profitability systems providing to note that of the organizations decision support, it appears that Appropriate Methods of that indicated their system while some organizations are Allocation for Business successfully supported their having success, a significant Relevance decision making, slightly fewer number of organizations are not. of them used spreadsheets and In order for your organization to • There needs to be ways to in-house designed systems, have success with decision sup- allocate costs accurately and more used commercial port, some concerns need to be (that is, in a relevant, packaged applications (see addressed. They fall into two reliable, and reasonable Exhibit 10). main categories: appropriate manner).DOI 10.1002/jcaf © 2009 Wiley Periodicals, Inc.
  9. 9. The Journal of Corporate Accounting & Finance / July/August 2009 71• Allocations must reflect how • It must be easy to update tants; the American Institute of Certi- your business processes con- data models with current fied Public Accountants; the Chartered Institute of Management Accountants, sume resources. results data. Certified Management Accountants-• Allocation calculations Canada; the Consortium of Advanced must be easy to design, In summary with respect Management, International; the Finan- build, maintain, and to desired cost-allocation cial Executives International, the Insti- understand. methods, consider the use of tute of Management Accountants, and Oracle Corporation.• Reports must provide useful some form of activity-based 2. Source: University of Cambridge, Institute information. costing to increase the accu- for Manufacturing. The BRAG research• You need to be able to allo- racy of cost allocations, and team does not address the usefulness of cate accurately enough to consider using commercial any specific computer-based tool but make appropriate decisions. packages that are flexible and instead investigates how cost and profit measurement systems support financial, have some of the capabilities operational, and strategic decision making. mentioned above to increase 3. For many of the questions in the survey,Frequency and Ease the decision-support capabili- we used a seven-point decision scale. Forof Data Updates ties of your system. the remainder of this article, whenever the answer “agreed” is indicated, we have• You must be able to make combined both the “strongly agreed” and timely business decisions NOTES “agreed” answers. We have not included the answers “somewhat agreed” or “nei- based on up-to-date system 1. The associations include the Associa- ther agreed nor disagreed” in the results information. tion of Chartered Certified Accoun- for “agreed.” Toby Hatch is a senior strategist for enterprise performance management with Oracle Corporation and is involved with research, writing, and speaking about enterprise performance management topics. Pre- viously, she was involved with supporting and implementing business scorecards and activity-based management solutions in companies around the world. William Stratton, PhD, CMA, is a professor of accounting at the Udvar-Hazy School of Business, Dixie State College of Utah. Stratton has numerous publications in accounting and international business journals and is coauthor of a leading textbook on management accounting. Raef A. Lawson, PhD, CFA, CMA, CPA, is the vice president of research and professor-in-residence for the Institute of Management Accountants. He has written extensively in the areas of Chinese cost management practices, performance scorecards, activity-based costing, and cost and performance management. Denis Desroches is a Principal for the Enterprise Planning field with Oracle Corporation. Since 1993, Mr. Desroches has supported organizations with the selection, imple- mentation, and knowledge acquisition of scorecard, performance management, and activity-based management solutions.© 2009 Wiley Periodicals, Inc. DOI 10.1002/jcaf