The scope of management accounting is continuously growing in the competitive business environment. In the consultancy sector, the management accounting is widely used to mange and improves the performances. Management accounting is broad term which is commonly used by mangers in order to perform well and control the business activities (Bardy, 2006). The Integrated Technology Services is a UK based technology company which provides technology solutions to international firms and the US government. The study reveals that balance scorecard may be useful for the businesses in achieving their strategic objectives. Further, the report also describes the role of accountant in the managing the financial performance of the business.
Balanced scorecard can be defined as a strategic planning and management tool which is used for streamlining the business activities in order to achieve business objectives. It is most widely used tool in contemporary organizations for managing operations and performance. A balanced scorecard seeks to translate vague expectations of an entity into vision and mission statements (Belkaoui, 2001). Thus, it takes a holistic view in the company which co-ordinates Metric Driven Incentives (MDIs). It is essential for a company to follow its mission and vision statement in order to embarking balanced scorecard path. Primarily it is characterized for presenting financial and non financial measures for comparing a target value within a precise report. Integrated Technology Services (ITS) can use the tool for achieving its business objectives. There are four major areas of balanced scorecard including finance, internal business processes, learning and growth and customers. All these areas in context to ITS have been explained under the following heads:
In this department, various areas including cash flow, Return on Investment, profits from particular contract, return on capital employed and various other accounting records. ITS can keep watch on financial performance by analyzing this department in balanced scorecard. As ultimate objective of an organization is to maximize the profitability therefore, this is major areas where aforesaid company is required to keep watch on (Bernstein Research, 2012).
ITS is one of the leading consultancy companies in US which has paved the move in United Kingdom as well and therefore, its UK subsidiary has been benefited from the same. In this department of balanced scorecard, various sub areas are covered including activities per function, duplicate activities per function, streamlining the process for providing right services from right department, process automation etc. Major internal services of Integrated Technology Services include providing consultancy regarding IT services and outsourcing the business processes (Brigham, 2001). In addition to this, analysis of case study also reveals that its organizational structure is based on three major activities including:
• Consultancy business as a small separate unit
• Service outsourcing on a matrix organizational basis
• Staff services including Finance, Human Resource, Administration and Commercial
Thus, all these business activities of ITS can be integrated by other departments such as finance, research and development etc. using appropriate use of balanced scorecard.
In this section, another important area focused by balanced scorecard is innovation and learning prospective in the organization. The industry in which Integrated Technology Services operates in UK requires more intellectual and expertise therefore; it is essential for company to achieve its organizational goals (Burns, Hopper, and Yazdifar, 2004). It can track the level of learning within the organization for its staff member by ensuring that there is correct level of expertise for the job being performed. In addition to this, this area of balanced scorecard is concerned with staff turnover, job satisfaction and training opportunities at workplace.
For any organization, customers are most important stakeholders for the company because they are ultimate source of income to the organization. Therefore, delivery performance to customer, satisfaction rate of clients, customer percentage of market, retention rate etc. should be considered by the companies to develop appropriate corporate strategies. A balanced scorecard can be helpful for Integrated Technology Services to retain its client for long term in order to deliver repetitive services (Burns, Hopper and Yazdifar, 2004) The case study provides that major clients of ITS are US government and other multinational corporations. From the above evaluation, various principles of balanced scorecard have been critically evaluated in context to selected case study here under:
Balanced scorecard can be helpful for the company to translate the strategy into operational terms because it provides the way of achieving business objectives. Thus, it is major task of balanced scorecard to provide management with comprehensive picture of business operations. In addition to this it also improves internal and external communication within the organization (Friedlob, and Schleifer, 2003). However, it is criticized on the grounds of its implementation because often it is poorly designed which lack a formal review structure in the organization. This works better when reviewed on daily basis but it is quite impractical.
There is a big corporate role of this strategic tool for Integrated Technology Services because it is the major principle of balanced scorecard to provide business unit and shared services synergies to the company. Nonetheless, there is a high implementation cost of balanced scorecard software in the organization (Hopwood, 2007). As provided in the case study that company is presently facing difficulties with low net margins therefore, in short run profitability can be affected.
This is also one of the key principles of balanced scorecard approach which assumes that change within the business enterprise can be initiated with effective leadership, governance process and strategic management system. Thus, Integrated Technology Services can reap the benefits of this tool in driving change for corporate excellence. Additionally, this approach can also be used for effective communication across various departments of the company (Kastantin, 2005). Therefore, it is effective enough to enable above cited to reach its business objectives. However, the approach is useful but it is criticized on the ground that it does not provide recommendations to improve business process. In addition to this, balanced scorecard implementation is time consuming which can divert business to achieve its goals (Kate-Riin Kont, 2012).
From the above discussion, it can be stated that however, balanced scorecard is relevant to streamline business process for attaining business goals but there are certain limitations to the same therefore, it should be well structured so that actual benefits of the same can be obtained.
By using the principles of balanced scorecard, Integrated Technology Services can center on the focal point which puts its business on a course of success. It is evident that balanced scorecard is a framework for executing strategic plan of the company which provides focus on principle which enable employees to be synchronized and move towards the ultimate goals of the enterprise. It is a management system which enables the organization to set, track and achieve key business objectives and strategies (Kinney and Raiborn, 2012). It is evident that expansion in outsourcing industry is quiet rapid therefore, businesses need to drive and initiate controlled framework. The aforesaid company requires effective balanced scorecard in order to track performance of the business in four different areas. These including financial, customer,
The above formulated balanced scorecard covers four major areas of this approach for which objectives have also been provided. An effective balanced scorecard should be in line with the business goals and vision of an entity therefore, objective relevant to each area is stated corresponding to it. Four major components of balanced scorecard of the company are explained here under:
The major objectives related to this are directly concerned with monetary aspect which involves profit maximization, acceleration of sales growth and revenue generation by entering into new contracts by Integrated Technology Services. Along with objectives, three effective measures to monitors company performance have also been identified including ROI, return on equity and changes in revenue (Peterson and Fabozzi, 2012). In order to reach this objective, company may change conditions such as change in the terms of contract by changing conditions like using gross margin for profit sharing instead of net margin. Here, initiatives to be taken have also been listed to compare target and actual figures.
The three measures of reviewing the performance for customer aspect are acquisition and retention percentage of customers so that figures can be compared (Lillis, 2008). The main objectives for this area are customer satisfaction and securing customer loyalty by ITS.
Like finance and customer, this is another important area of focus for which objectives have also been set. As ITS Ltd. is a consultancy company therefore, research, learning and innovation are essential for company. These can be tracked by various measures such as capacity utilization percentage, quality and errors in the service delivery in percentage (Shapiro, 2008).
This is also important section of given balanced scorecard of ITS Company in which organization intends to achieve objectives like high skill level, creating outstanding leaders and reducing employee turnover. For this area also three important measures have been provided including ratio skill, satisfaction survey and leadership readiness (Thomas, 2009).
Management accounting is a modern concept scope of which is broader than financial accounting in any organization. ITS Company has set a benchmark of achieving a net margin of 6% which is difficult to achieve due to ineffective financing and accounting. The targets set by the company should be based on forecasting which might not be effective. The analysis of case study reveals many loopholes in the company like:
• Small contracts are expensive then large contracts because inability to meet net margin leads to decrease in the size of average contracts.
• There is lack of standardization in terms of leading complex financial and administrative controls within the organization (Weygandt and et. al., 2009).
• Arrangements have not been monitored individually because computer system is not able to fully accommodate all types of variations.
• There is no clarity of charges as continuous monitoring is not done due to which company suffers as charges which should be incurred by clients are often borne by ITS Company.
• Ineffective utilization of financial resources has been witnessed because increasing complexity of matrix organization resulted wastage of organizational resources (Wet, 2006).
Thus, the above stated deficiencies of Integrated Technology Services resulted in the realization of need of an accountant in the team. The role of management accountant is explained under the following heads:
ITS Company generates its revenue from contractors if it is able to achieve get tender of the amount more than actual cost. Additionally, the company also needs to share the profit on percentage basis. Thus, in order to make a contract profitable effective budgeting is required which is presently done on computerized basis. But there are certain variations which cannot be detected by computers. However, it may also not be favorable for the company as in modern era, technology ensures speed and accuracy (Stolowy, and Lebas, 2006.).
Tax handling is important for the ITS Company in order to make efficient use of the revenue generated by the company. The firm should handle the taxes effectively so that it could utilize the profits in various activities in order to minimize the tax amount. If the mangers utilize the capital in various activities efficiently, the tax burden of the firm can be reduced (Weygandt and et. al., 2009).
The appropriate decision making is important for ITS Company for achieving net margin and objectives of the enterprise. If the manager is not able to take the appropriate decisions then the enterprise has to face many challenges such as poor budgeting, poor tax handling and inadequate allocation of budget in various activities. The managers should ensure that the decisions taken by him, is appropriate and justifiable in various situations (Hopwood, 2007).
Target costing can be defined as pricing method used by commercial organizations for better management of financial terms. It is also known as cost management tool used for the reduction in overall cost of product over its entire life cycle. This is done with the help of research, production, design and engineering (Peterson and Fabozzi, 2012). ITS UK can use this cost accounting tool to achieve their financial objectives in effective manner. In the provided information it can be noticed that company has markup value of 12% on their cost. Through this contract, company is planning for outsourcing arrangements for the information systems and records management functions at Company X. In addition to this, Company X will contribute 60% in underruns and remuneration for Discretionary Service project will be provided in accordance with the consumption of time and material. By using this method, ITS UK will be able to determine cost by considering price of the product. Through this strategy ITS UK can assess that targeted price is appropriate or not with reference to determined cost. In the given scenario Ceiling price for 2012 is 784000 Pounds. Thus, company cannot charge higher amount than this. By considering the figure of sales then can develop optimum cost structure for higher profits. Target costing method can be utilized by Company with the following steps-
1.Conduct research- Initially they have to review market place where they will sell their products. For this purpose, they will design their production process in accordance with the needs and requirements of customers (Hopwood, 2007).
2.Computation of maximum cost- In this step, company will provide design team with the mandated gross margin that is required to be earned by product. Design team will reduce mandated gross margin from the projected price of product. By this strategy, ITS UK will be able determine maximum target cost which is essential to be attained by product.
3.Engineer the product- The engineers of ITS UK will determine component price by considering quality, quantity and delivery. They will reduce the cost by eliminating waste in production activities.
4.Ongoing activities- This step will be conducted after finalization of design and its approval. In this designed plan will be implemented to achieve aims and objectives.
The given statement is true that 20% gross margin is not enough to achieve net margin of 6%. It is due to higher administration and distribution expenses. In the provided financial data of ITS UK, it can be noticed that company has to pay cost of overheads, training, and other direct cost and head office (Gartenstein, 2014). This will reduce the gross margin of the entity at significant level due to which company will not be able to attain desired profits. Company has to enhance their margin of gross profit to achieve their aims and objectives in effective manner.
Employee stock ownership plan is a effective to motivate employees by giving them share of the company so that they become the share holders of the firm. Through this plan employees can participate in the decisions taken by the firm. The interest of the firm and the employees are aligned by giving them ownership in the firm. The firm use this plan to appreciate the value of its shares in the market and to ensure that the shares of the enterprises perform well. In Integrated Technology Services, the employee stock ownership is used to appreciate the value of shares and to motivate the employees (Gartenstein, 2014). The employees get motivated by this plan as they become the share holders of the firm so now; they participate in the important decisions of the firm. In this way they feel their value in the enterprise and consider themselves as an important part of the organization. These types of feelings boost the morale of the employees and motivate them to perform well as the personal goals of individual are aligned with the organizational goals. The employees are able to contribute their full potential toward the achievement of organizational goals (Palmer, 2013). Following are the advantages of employee stock ownership which helps in improving the performance of the employees:
• These plans help the employees in improving their presence at the workplace.
• The employees are able to contribute in the decision making process of the organization.
• ESOP is useful for the employees in increasing the pay and gaining more benefits from the firm (Lillis, 2008).
• It also creates a feeling of job satisfaction and the job security among all the employees.
• It also builds a trust in the mind of employees towards the management and enterprise
• The employees contribute their full potential as the plan ensures the uniformity in individual and organizational goals.
In order to achieve learning outcomes a research has been conducted on the Integrated Technology Services. It is revealed from the above study that the ITS company have the opportunities to grow in the UK market. To grow in the UK market the firm should use the computerized accounting to make the operations of the business easy and effective. The Firm should also hire a manger in order to improve effectiveness of the accounting procedures. A good manager necessary in the ITS company as the only computers can not watch all the transactions, manager is required to find-out the defects in the accounting process. Further, it is also described that employees stock ownership scheme helps in improving the performance of the employees.