Problems wit h ABC

As stated earlier, ABC has enjoyed a high profile and a successful reception as a new practical approach to costing. As more ABC experience has been gained, a greater level of critical comment has become apparent. Bromwich and Bhimani (1991) highlight that, as yet, the financial benefits of ABC have not yet been established. Criticism has centred on two closely related aspects of ABC. The first criticism is centred around technical limitations which relate to the procedures involved in application of ABC. The second criticism concerns problems associated with use of the outputs of an ABC system.

Cobb, Innes and Mitchell (1992) carried out a review of companies which were assessing ABC, implementing ABC, had rejected ABC and had not yet seriously considered ABC. The review was based on a postal questionnaire survey, telephone interviews and field visits. The central aim of this project was to establish what the problems with ABC were perceived to be from a practical perspective.

The five most common problems perceived by those who had been assessing it for at least one year were; the amount of work involved, other higher priorities, lack of staff time, scarce computer resources and selection of cost drivers. The first four problems relate to the practical problems of change rather than the technical difficulties of ABC. After the first year of implementation, the three most common problems were the amount of work involved in keeping the ABC system up-to -date, data collection difficulties and the fact that activities cross both departmental boundaries and individual areas of responsibility.

Overall, this review of the UK experience of ABC shows that the technical problems associated with ABC are a relatively insignificant barrier to its adoption. Although the motivation to change does exist, most of the problems both perceived and experienced with ABC are the result of an absence of resources which facilitate change.

There are however certain disadvantages and problems associated with ABC. In many cases, it is not practical to relate all overheads to specific activities. Bromwich and Bhimani (1994) state that certain costs:

"will not be amenable to ABC analysis and will, for a variety of reasons, specific to an enterprise, remain unattributable to the production of given goods and services." (p 83)

ABC as an accounting technique cannot overcome this problem fully. The approach implicitly assumes a sense of harmony and co-operative behaviour among operating units and between operating units and service functions: ABC does not acknowledge the possibility of conflict over the allocation process. ABC takes no account of opportunity cost; an analysis which showed some existing products as profitable would take no account of a possibly better alternative strategy perhaps based on new products.

Furthermore, the ABC approach is not a panacea which will solve all management's cost information needs per se. Its value is situationally dependent. ABC produces historic cost information which only has an indirect relevance to managerial decisions. Its role in decision-making requires careful specification. Furthermore, it does not overcome all of the procedural problems of conventional costing. Generating the basic data is a sensitive issue among employees, particularly so where staff reductions are perceived as likely13. The information itself does not overcome all of the technical allocation problems of cost accounting and being a cost base approach it does not directly provide information on the future cash flow implications of decisions.

13For example, the Clearing Department in my research which will be discussed later.

Conclusion

This chapter has provided a review of the literature on ABC. As stated earlier, my stance has been intentionally uncritical and has simply provided an overview of the literature. This chapter on ABC completes the discussion of the central elements of the research; the changes in the banking environment, the importance of organisational change and the perspective which is taken in this research and the role of ABC as a means of affecting the change in this research. Part II applies Laughlin's (1991) model of change to the Clearing banks as a whole and models the changes that have taken place largely since the 1970s through to the mid-1990s.

Part II Introduction

Chapter 4 traces the way that organisational change has taken place in the Clearing Banks and models the banking organisation in terms of its interpretive schemes, design archetypes and sub-systems (Laughlin 1991). The intention is to illustrate that, as a result of the changes imposed on the Clearing Banks by the changing external environment, these primary elements of the Banking organisation were out of balance and in the late

1980s and 1990s, because of wide-sweeping structural changes, the Banking

organisation seems to be finding a new balance. Chapter 5 then details the nature of the method and methodology adopted in the research.

Chapter 4

The UK Clearing Banks 1960 - mid 1990 Introduction

The focus of this chapter is on the changing model of the UK Clearing Banks from 1970 - 1990. There is, however, a brief discussion of the 1960s which provides important background information. The changes that have taken place in the Clearing Banks are described using Laughlin's (1991) model of organisational change, (which was detailed in chapter 2). The emphasis here is on the changes that have taken place in the interpretive schemes, the design archetype and the sub-systems of the organisation showing how these elements became out o f balance1*. Three perspectives are adopted; the first perspective provides an overview of the 1970s (see figure 10). Figure 11 illustrates the second perspective, a model of the organisation15 from 1979-1989 which is the 1980s model of UK Clearing Banks. Figure 12 illustrates a model of the banking organisation from 1989-early 1990s which is the 1990s model of UK Clearing Banks. By tracing the model of the banking organisation over three decades we can see that essentially the different elements (i.e. the interpretive schemes, design archetypes and sub-systems) of the Banking organisation have been out of balance since the late 1970s when change first began to take place. The research shows that it is only in the mid -1990s that the Clearing banks are moving back towards a state where balance/ coherence is being achieved16. This is largely because the organisational structures and management

processes have been altered to reflect the changed nature of the underlying set of values and beliefs of the Clearing banks.

14This is shown on diagrams 10, 11, 12 as imbalance/ inchoherence as opposed to the balance/ coherence of the ideal type model in chapter 2.

Shaw (1990) identifies three distinct bank organisation types: supportive,

entrepreneurial and collaborative; each type differs in degree of integration and

diversification. The UK Clearers historically fitted the supportive model of organisations. There was a high degree of integration and little diversification. The units of the bank were geared to support its various lending operations. Senior management exercised tremendous control through hierarchical structures rather than personal involvement. From the 1980s onwards, in an attempt to respond more efficiently and effectively to the needs of an increasingly sophisticated and discerning clientele, the Clearing Banks became entrepreneurial organisations.

The entrepreneurial approach meant adopting a profit centre approach. Management responsibility has been pushed down into the core of the organisation where decisions have maximum impact on the market. Managers have been given closer control over the resources which generate profits and are closely monitored and targeted on profit performance. Within this framework the success of the organisation depends on the degree of success of each of its parts and on individual performance and the management culture moves from top-down to bottom-up. Business unit managers have to adapt to a more profit motivated approach and more objective performance measures. Business unit managers shoulder much of the responsibility which was previously held by a small group of senior managers. The move from supportive to entrepreneurial provides a useful starting point from which to discuss the level of change that has occurred since the late 1970s.