Management accounting for lateral organisations (part 1)

Management accounting for lateral organisations: How does the lateral orientation of modern organisations impact on the formation (technical practices and processes), role (the purpose and perception) and use (the way the information is used) of management accounting?

Abstract

The world is changing. With increasing technology, organisations and individuals are becoming more interconnected and networked than ever before. With calls for ‘management innovations’, and reflective movements in many aspects of personal and organisational life - towards a networked and holistic view of the world, this review seeks to explore the role of management accounting within a lateral dimension.

Adopting a broad contingency theory perspective, the review  suggests there is a need to explore the formation, use and role of management accounting empirically within ‘lateral’ organisations who seek to extract ‘magic’ or extraordinary performance through radical organisational structures and management styles. The structure of the review highlights the differing requirements of lateral organisations and how this conflicts with the traditionally hierarchical orientation of management accounting. Despite this conflict, the analysis suggests a number of accounting concepts which incorporate lateral dimensions, including aspects of; operations management, strategic management, the BSC and ABCM, and inter-organisational networks. Through the analysis and synthesis of these concepts, the review constructs a framework synthesising complementary aspects of management accounting for lateral organisations based on three sections; (i) balancing strategies and promoting integration; (ii) operational and structural decisions; and (iii) intra-organisational networks. A number of research areas are highlighted from the literature review and proposed in the interview schedule in Appendix A based on the three categories presented above. Through the structure, the analysis suggests that whilst the move to lateral organisations places a strain on management accounting, its hybrid ability allows it to adapt to this new environment.

1.    Introduction

1.1  An overview

Organisations continue to face an increasingly competitive environment. With the financial crisis, increased globalisation, rapid technological improvements, fickle customers, improved access to knowledge, and with the application of concepts such as TQM, the BSC, JIT, ABCM etc. becoming more common-place, the current organisational environment is more daunting than ever; for both existing and prospective organisations. This, however, poses new and exciting challenges which may provide new, or new ways of using and applying traditional, solutions.

With this increasingly competitive environment, organisations face increasing numbers of decisions on how to compete; and with increasingly drastic consequences should those decisions turn out to have been poor. Further, these decisions span the organisation’s structure and value-chain, from overall strategy at the top level, to specific production or management concerns at localised employee level.  There is increasing drive for employees, middle, and senior management to be aligned with organisational goals and strategy, intrinsically motivated and driven, efficient, innovative, and networked within the organisation. Increasingly, organisations are realising the value of their employees, and striving to extract the ‘magic’ (Sugarman, 2010) of extraordinary performance that comes from an aligned, intrinsically motivated, networked, innovative, multi-disciplinary and multi-functional workforce.

(Sanders, 2008) suggests, in his review of Hamel, G. and Breen, B. (2007). The Future of Management, Harvard Business Press, MA:USA, that “the traditional model of management spawned by 20th century industrialization is strategically misaligned with the demands of a 21st century global knowledge-based economy.” Hamel and Breen suggest that a systematic shift, a ‘management innovation’, is required, and that those organisations performing extraordinarily are adopting and employing radically different structures and management styles, which directly contest the prevailing logic of management. Management accounting (MA), particularly in its ‘traditional’ form; advanced costing techniques, budgets and variance analysis, performance measurement through financial incentives etc., could well be described as typifying what Hamel and Breen suggest as the ‘traditional model of management’ and being ‘strategically misaligned with modern demands’. This is not a new or isolated concern, and there have been repeated calls that MA may be an unsuitable tool for managing organisations (Johnson and Kaplan, 1991, Johnson, 2006, Mouritsen and Hansen, 2006, Shank, 2006, Anderson, 2007, Hansen and Mouritsen, 2007 etc.). This review hopes to suggest an empirical investigation into the practices and processes of MA within organisations embracing this ‘management innovation’ is required, and seeks to present some MA principles which have compatible dimensions towards this innovation.

Many of the benefits cited by Hamel and Breen are illustrated in ‘lateral’ organisations; they in fact explicitly mention “flat structures” as a characteristic of these organisations. These organisations have a number of characteristics, but a central aspect of this radical management culture and style is tied fundamentally to the lateral structure and conceptualisation of the organisation. Whilst a lateral structure alone does not necessarily provide all of the benefits proposed, it is one of the key aspects of aligning the organisation towards its goals. A lateral structure is cited as the basis for many of the benefits of these radical organisations, and promotes benefits from a number of  incorporated fields, including; human resources, organisational studies, management, production, marketing etc. (Chenhall, 2008). The next section defines in more detail a definition of a lateral organisation, its characteristics, and provides some examples. But before we explore the characteristics of these lateral organisations, it is worth noting the conflict between traditional MA and lateral organisations.

1.2 A comment on the conflict between lateral organisations and MA

Despite MA being developed as a tool to assist management (Johnson and Kaplan, 1991), there is a long tradition of resentment and resistance towards MA from various areas (Johnson and Kaplan, 1991, Armstrong and Jones, 1992, Bromwich and Bhimani, 1994, c.f. Pierce and O'Dea, 2003, Johnson, 2006, Shank, 2006, Anderson, 2007, Burns and Baldvinsdottir, 2007, Byrne and Pierce, 2007 etc.). MA has responded to these concerns by developing new techniques (the BSC/ABC etc.), by being more involved, integrated and strategic (a move to ‘consultant’ roles), and by exploring lateral dimensions (strategic accounting, inter-organisational networks etc.). Despite these innovations, a plethora of research literature exists which suggests that the hierarchical orientation of MA may be fundamentally incompatible with lateral organisations (Shank, 2006, Anderson, 2007, Hansen and Mouritsen, 2007, Chenhall, 2008 etc.). (Johnson, 2006) even comments that MA has no place at all within lateral, lean organisations since;

…the widespread use of accounting control systems to drive operations in businesses rests on an erroneous belief that financial or other quantitative targets can be used to explain, motivate, and control financial results in a business. Managing operations according to that belief has, I think, fatal consequences for any business.

(Johnson, 2006, p. 7)

Despite these concerns, there is still evidence of MA being used within lateral organisations. Hutchinson and Liao (2009) describe how MA is still used within lean Japanese manufacturing organisations (who are oft cited as exemplars of management innovations and radical thinking, particularly within the lateral domain). Thus there is a paradox.

The main purposes of this review are to seek to explore this paradox; to highlight that indeed there is a requirement for different formation, roles and uses of MA within lateral organisations, but to suggest that MA could be adapted and adopted into these organisations. Having built a case for the reasons as to why the MA system might be different under lateral organisations, the review then explores some of the accounting concepts which demonstrate lateral dimensions, comments on how these might be used within a lateral organisation and suggests a framework through which we can explore the formation and use of MA within lateral organisations empirically. Calls for further research in this area are presented, alongside some questions arising from the synthesis of the literature reviewed, and a need for empirical research in this area is presented alongside a draft interview schedule (Appendix A).

1.3  Definition of lateral organisations

There are many proponents of horizontal organisations, but a ‘horizontal organisation’, likewise a ‘vertical organisation’, is arguably a misnomer. Whilst organisations may be more or less horizontal or vertical, it is unlikely they will truly be either horizontal or vertical (ICAA, 1997, McCormack, 1997, Spector, 1999). The term ‘vertical organisation’ is broadly accepted as referring to a traditional tall hierarchy, with top-down control, prescriptive standards, and management layers increasing as size increases (Anonymous, 1999). A truly horizontal organisation is unachievable and potentially useless for most organisations (ICAA, 1997, Anand and Daft, 2007); thus the term ‘lateral’[1] is used to describe organisations which lean heavily towards a flatter structure but still employ some levels of (squat) hierarchies to structure and order the organisation (Galbraith, 2006, Chenhall, 2008). Further, the term is used here to suggest a true tendency to the ‘management innovation’ suggested above as required for the contemporary environment[2], and incorporating a number of the concepts outlined below.

One of the suggested reasons for the cited benefits of lateral organisations is that they are multi-faceted and draw on ‘best practice’ from a number of fields (Chenhall, 2008). Chenhall (2008, p. 517) suggests that Ostroff (1999), Schonenberger (1996), and Galbraith (2005) “distil the key elements of the HO” and summarises that a horizontal organisation;

…identifies specific value propositions with a customer-orientated focus and then develops process efficiency and continuous improvements, flattened structures with a team-based focus, human resource policies concerned with empowerment and a supportive and committed culture to help institutionalise change. The key distinguishing feature is to move away from traditional vertical, functional structures to lateral structures, processes and information to support the HO.

(Chenhall, 2008, p. 517)

Many of the same concepts are reflected in Hamel and Breen (2007) which Sanders (2008, p. 121) summarises. He suggests several characteristics of organisations illustrating ‘21st century management innovations’; (i) a strong purpose which will ‘excite the member’s passion and commitment’, (ii) the encouragement of trust through ‘open books’ and a ‘no secrets management philosophy’, which in turn promotes responsibility, autonomy and accountability, (iii) a strong community spirit based on teams, peer review and performance measurement, which prevents functional separation and tension, (iv) demonstration of an ‘overt aversion to bureaucracy’, instead preferring ‘flat structures’ built on a ‘network of interconnected teams’ promoting communication and interpersonal relations, and (v) a focus on innovation, promoting low-cost experimentation at all levels throughout the organisation.

Lateral organisations[3] are cited as having many benefits including promoting empowerment, autonomy, innovation, trust, intrinsic motivation, community spirit, information sharing, problem solving, business acumen, flexibility, adaptability, positive working environment, sustainability, efficiency, continuous improvement, a supportive culture etc. (McGregor, 1960, Deci and Ryan, 1980, Ouchi, 1980, Schonenberger, 1996, Anonymous, 1999, Ostroff, 1999, Galbraith, 2005, Mouritsen et al., 2005, Chenhall, 2008, Sanders, 2008 etc.).

The concept of a lateral conceptualisation of the people, departments, units and locations within the organisation, alongside an external conceptualisation of the organisation within the industry with respect to both supplier and customers, as holistic (Mouritsen et al., 2005), and in addition to a lateral structure, helps to create a strong purpose and drive for the organisation as the parts become interconnected and interact through this lateral conceptualisation – promoting the management innovation called for by Hamel and Breen (2007). These factors, of course, are interconnected and embedded, and are ‘mutually reinforcing’ (Chenhall, 2008). As McGregor (1960) pointed out, the management style is self-fulfilling – manage as if you expect employees need a carrot on the end of a stick, and they will probably fail to be engaged, motivated, interested, and thus perform poorly. Unfortunately the vice versa circumstance appears to be the exception, not the norm.

Lean manufacturing, world class manufacturing, operations management, total quality management, the Toyota Production System etc. are aspects of manufacturing which incorporate this lateral structure and conceptualisation, but the concept extends beyond manufacturing and into both product and service industries also; the BSC, delayered management hierarchies, employee-owned organisations, cooperatives and inter-organisational relationships also consider, and focus on, the value created from a lateral conceptualisation.

Examples of lateral organisations include; W L Gore and Associates, Tullis Russell Papermakers, Clansman Dynamics, John Lewis Partnership, Mountain Equipment Cooperative, Google, IBM, General Motors, and a large number of the some four hundred worker cooperatives in the UK alone[4].

This paper defines lateral organisations by drawing on multiple concepts within the literature which encapsulate compatible organisational characteristics. Defining what a lateral organisation is, and is not, is difficult as the characteristics are mostly on a spectrum, and not isolated or individual elements. It could well be described as falling into the category of ‘you know it when you see it’. However, a laterally structured and conceptualised organisation would be expected to demonstrate a tendency towards most of the following three characteristics in seeking to obtain ‘magic’ or extraordinary performance[5];

-        A lateral organisational structure; a delayered management structure (with a squat hierarchy); a network of interconnected, independent, autonomous and empowered multi-functional and multi-tasking departments, units, and individuals – largely built on a network of teams in which peer review and assessment are central; where high levels of face-to-face communication; a strong community spirit; highly integrated and participative processes, teams and systems; overlapping accountabilities between these processes, teams and systems; a focus on team responsibility and reward; strong lateral flows of information and little top-down control; highly flexible and adaptable; are promoted which emphasise the promotion of trust and accountability.

-        Lateral ownership; a strong community spirit; little definition or titles of roles - multi-functioning, rotation of responsibilities and multi-tasking are promoted; intrinsic motivation is encouraged; trust and accountability are also promoted.

-        A lateral Management style; a holistic and interconnected approach to management; an encouraging and supportive culture; a network conceptualisation and understanding of the organisation, industry, product, processes etc.; an open, honest and participative style involving front-line employees in change and strategy decision making; a team focus on processes, responsibility, and reward with performance measured on operational and process, not functional, measures; high levels of communication, cooperation and collaboration; little top-down control; a strong and simple strategy – with a customer focus, continuous improvement, and efficiency being understood and worked towards; a flexible, supportive and adaptable environment; experimentation and innovation; trust, accountability and commitment are all encouraged an promoted.

This review uses the term ‘lateral organisation’ to suggest an organisation which truly seeks to promote the above concepts and does so through a lateral organisational structure with squat levels of hierarchies. Notice it is more than merely having a flattened structure, and combines aspects of management style and culture, organisational structure, and organisational ownership.

                  In summary, HO…management initiatives…provide an integrated approach to management that operates within a structural form…that will deliver value to its customers…(through) a cross-functional, integrated approach….(which) operates ‘horizontally’ using structures where teams, not individuals, are responsible for delivering customer value and in ways that ensure continuous performance improvement within a culture of employee empowerment, responsibility and well being.

(Chenhall, 2008, p. 525)

1.4 Overview of structure

The remainder of this review is set out under five subsequent sections; (2.) Different MA systems under different theories, (3.) Lateral organisations and their impact on MA systems, (4.) Accounting concepts incorporating lateral dimensions, (5.) How accounting might be used within lateral organisations and some research questions, and (6.) Concluding remarks. The structure aims to clarify the purposes of the review, as set out in section 1.1, by highlighting the rationale behind the proposition to empirically investigate MA within lateral organisations. Sections 2 and 3 highlight how contingency theory and the characteristics of lateral organisations’ suggest that the lateral structure of the organisation will impact on the MA system. They also highlight how accounting is perceived as conflicting with this lateral orientation, as well as proposing that accounting information is still required; despite some calls that it is not. Contrasting this last point, sections 4 and 5 propose some suggestions of accounting concepts which incorporate lateral dimensions, and how these might be used in a lateral organisation; providing a framework for what one might expect to find in an empirical study.

The review hopes to highlight that factors such as the contingent variable of organisational structure, and the differing requirements and culture of lateral organisations, propose that there is a need to empirically explore the formation, role and use of MA systems in lateral organisations. The paper concludes by synthesising the above literature, and building on the research questions through the analysis to call for some empirical investigation into the formation, role and use of MA within lateral organisations – finally suggesting a draft interview schedule (Appendix A).

2      Different MA systems under different theories

Different theories have been applied to explain why MA systems take on various forms. The differing theories propose different focuses, formations and uses for the MA systems under different organisational settings and structures. The traditional neo-classic view of agency theory suggests that there are factors which push the MA system to an equilibrium, and under this school of thought the processes of change is not of interest; merely what the equilibrium solution should be. Markets and hierarchies theory extends this somewhat, but is still largely prescriptive about what form the MA system should take. Contingency theory, the most recent of the theories, suggests that there is in fact no universal best system; and that performance is promoted through ‘matching’ the contextual factors impacting on the organisation with the MA system. The following sections provide a basic overview of each of these three theories with respect to MA systems, and highlight that MA systems take on many different forms.

2.1 Agency theory

Agency theory focuses on the principal-agent problem; that agents (with delegated responsibility and power) may not act in the best interests of the principal (the owner of the assets for which the agent is acting) (Jensen and Meckling, 1976, Tiessen and Waterhouse, 1983, Ezzamel and Hart, 1987 etc.). The problem is concerned with aligning the agent’s interests with the best interests of the principal. Agency theory suggests the organisation is;

…perceived as a nexus of contracts regulating exchange relationships among interested parties who are the suppliers of different factors of production and the users of the firm's output (Jensen and Meckling, 1976). The purpose of such contractual relationships is to bring the conflicting interests of different parties into equilibrium.

(Ezzamel and Hart, 1987 p. 262)

Agency theory considers ‘incomplete contracting’ (Baiman and Rajan, 2002) which leads to a focus on two considerations; (i) information asymmetry and (ii) opportunistic behaviour, for which the MA system must act to prevent. (Ezzamel and Hart, 1987 p. 264) suggests that control, under an agency theory perspective, is exercised under three conditions; decision hierarchies, mutual monitoring systems, and boards of directors. These measures of control are, respectively; formal and based on hierarchies to ‘diffuse’ decision making across a number of agents; informal and based on the economic principle of rational, utility functioning agents who seek to maximise wealth in the next ‘rental of their labour’ through positive, and positively perceived, current performance; and a formal and independent board with enough power to enforce unbiased hire, fire and reward decisions.

From a MA perspective, agency theory, being based in economic and finance theory (Jensen and Meckling, 1976), suggests that; “an observed managerial accounting technique represents an equilibrium solution to the contracting process between a principal and one or more agents (Baiman 1982).” (Brown et al., 2009 133 p. 319 emphasis added)

Thus, an agency theory perspective of the organisation leads to a MA system; based on top-down monitoring and control; where control is provided by extensive standards of budgetary variance analysis; where decisions are made at higher levels; where there is little autonomy or empowerment for employees; and the MA system is rigid, routinized, mostly formal and ‘highly structured’ (Tiessen and Waterhouse p. 256). This ‘style’ of MA has many similarities to the ‘mechanistic’ controls described by (Chenhall, 2003 p. 131), and which influence the management ‘culture’. However, as (Ezzamel and Hart, 1987 p. 267) highlight, whilst agency theory may be beneficial in circumstances where “technology is routine and the environment is predictable”, there are many situations, for example where information and decisions are required to be highly localised, where a complementary perspective is required; namely, markets and hierarchies theory.[6]

2.2 Markets and hierarchies theory

A second widely used theory in MA research is the markets and hierarchies theory which builds on elements of agency theory[7] and addresses the closing point of the previous section. Within markets and hierarchies theory, losses of control arise where information impactedness and bounded rationality occur. Information impactedness suggests that it is difficult to ascertain all relevant information about a decision in a cost efficient manner because of uncertainty, the threat of opportunism, and bounded rationality itself. Bounded rationality is concerned with the fact that the rationality of decision makers is limited by the information they have available, and the cognitive limitations of their minds[8]. Thus, (Tiessen and Waterhouse, 1983) suggests that hierarchies replace markets when the costs of contracting through contracts becomes too high. They comment on an internal labour market being a situation in which information impactedness occurs, and in which the hierarchical form of control, through rules and procedures, becomes a more efficient control mechanism.

(Ezzamel and Hart, 1987 p. 265) also comment that control loss originates under different circumstances for markets and hierarchies theory (greater organisation size, and greater geographic, product, and market diversity) compared to agency theory (greater costs of information as information becomes more specific as organisational complexity increases).

Thus, a markets and hierarchies theory perspective of the organisation “advocates allocating strategic decisions to top-level managers and operating decision to divisional managers” (Ezzamel and Hart, 1987 p.265) and proposes that there should be different control mechanisms for markets as opposed to hierarchies within organisations. Accounting is involved in both orientations through “such techniques as internal audit, reward structures and resource allocation schemes” (Ibid., p. 265) and again adopts a rather ‘traditional’ form.

2.3 Contingency theory

Contingency theory has been more recently, and widely applied to MA research. It was developed in organisational studies research and combines agency theory and markets and hierarchies theory, and extends them to consider the impact of contextual, or contingent, factors[9].

The focus of contingency theory is to promote optimum organisational performance by ‘matching’ the contextual and contingent characteristics organisations face with their MA systems (Lawrence and Lorsch, 1967);

                  Hence, for example, an increase in size, especially in terms of numbers employed, should be accompanied by an increase in specialization; or, to mention another example, an increase in environmental uncertainty should be ’matched’ by decentralization, especially when the organization is to achieve a ’high’ performance.

(Tayeb, 1987 p.241)

(Otley, 1980) suggested, in his seminal review, that contingent variables which influenced the MA system included; technology (Woodward, 1965), organisational structure (Child, 1972), and environmental factors. He also suggested that contingency theory should not just be an excuse for different contingencies creating different systems – that there should be some collective predictive power of the theory, and concluded by extending the theory to include; other factors, intervening factors, contingency factors, and the organisational control package (Otley, 1980 p. 421). (Tiessen and Waterhouse, 1983) developed the theory further by incorporating both agency theory and markets and hierarchies theory, and concluded that contingent variables interact and are interconnected, and are ultimately constituted by; environment, technology, structure and size.

Contingency theory has been subject to much testing and revisions within MA research (Tayeb, 1987; Dent, 1990; Fisher, 1995; Galunic & Eisenhardt, 1994; Langfield- Smith, 1997; Gerdin, 2004, 2005 etc.). Two noteworthy concepts, with respect to this paper, are (i) the same MA system can be used in different ways (Ansari and Euske, 1987, Tayeb, 1987, Ittner and Larcker, 2001), and (ii) different MA systems can be used in the same ways - the concept of equifinality (Gerdin, 2005). These concepts highlight why we might, prima facie, find ‘generic’ MA systems (Lillis, 2002, Hansen and Mouritsen, 2007), and also suggest the intricacies and interconnected nature of these factors; making exploration of MA systems an interesting, challenging, and changing field.

Contingency theory helps explain the interaction and relationship between accounting systems and their contextual environment (Reid and Smith, 2000, Cadez and Guilding, 2008), and why MA systems are different within different environments. However, (Chenhall, 2003, andTillema, 2005) heavily critique contingency theory in MA research and comment that the cross-sectional, quantitative research methodology employed in much contingency research fails to capture the interconnected relationship, and even the correct weightings or relative importance, of the contingent variables. (Tillema, 2005) describes how a broad contingency perspective can still be useful in analysing differences in MA systems; she summarises how six levels of analysis; beyond-organisational level, organisational level, subunit level, individual level, operating-task level, and accounting-task level, provide a better focus for examining the impact of contingent variables upon the breadth of scope of the MA system. Her analysis explores in more detail the interconnectedness and social creation of the contingent variables and how they have different impacts at different levels, something that is emulated in this study by the differentiation of different levels of MA within an organisation[10].

(Chenhall, 2003 p. 161) proposes that research (such as Tillema, 2005) exploring the contemporary contingencies which impact on MA systems, the interconnected relationships between contingencies, the concept of equifinality (Gerdin, 2005), and research integrating the sociological aspects of MA systems, is fundamental. In line with these calls, (Abdel-Kader and Luther, 2008) explore ten contemporary contingent variables, which they sub-categorise into; external characteristics, organisational characteristics, and manufacturing or processing characteristics. They find some support for certain contingent variables, and little support for others. Their results suggest that the level of sophistication[11] of the MA system is strongly explained by environmental uncertainty, customer power, decentralisation, size, AMT, TQM and JIT factors, but little explanatory power is provided by competitive strategy, processing system complexity and product perishability factors. Further, they comment on the interconnected nature of the contingent variables and propose that MA sophistication is linked to; a highly uncertain environment, powerful customers, decentralisation, a relatively large size, and the employment of AMT/TQM and JIT – which clearly links to a lateral conceptualisation.

Recent contingency studies (Chenhall, 2003, Gerdin, 2005, Abdel-Kader and Luther, 2008) also comment explicitly on the contingencies of lateral conceptualisation through team-based work, lateral thinking in manufacturing, and lateral thinking in holistic approaches to management (TQM/the BSC etc.). respectively. They discuss how other contingent variables might interact with a lateral focus, and discuss this lateral conceptualisation as a contingent variable itself; however, they all comment that this is an area which requires further research.

As highlighted in the critiques of contingency theory (Otley, 1980, Tiessen and Waterhouse, 1983) there is an inherent problem in quantifying what terms mean and what they do, and do not, encompass – for example, what differentiates a risky and volatile external environment from a stable and risk-free environment? The black and whites are relatively clear, but most organisations actually operate somewhere in the grey; and thus there are conflicts and contradictions within aspects of contingency theory, and this further complicates development of the theory {Malmi and Granlund, 2009].

(Chenhall, 2003 102 p. 143-147) provides a list of propositions for the MA system under different contingent variables, and a number of conflicts are observable {Malmi and Granlund, 2009]; particularly between technology sophistication, concepts such as TQM, and decentralisation promoting both traditional and informal, flexible MA systems.

However, with reference to the general principles of lateral conceptualisation of the organisation, recent studies propose that the MA system should have the following characteristics for lateral or ‘organic’ organisations; a combination with interpersonal interactions, less traditional forms, less developed process controls, broad scope information concerned with integration, informal, non-financial measures, participation etc. (Chenhall, 2003 p. 138-155, Gerdin, 2005 p. 102-106, Abdel-Kader and Luther, 2008).

(Chenhall, 2003 p. 148) and (Gerdin, 2005 p. 105-106) both comment on the need to explore the lateral aspects of organisations as a contingent variable, especially the interconnected and embedded nature of the systems with regards to other functional areas. Whilst the use of MA within laterally conceptualised organisations is still strongly contested (Johnson, 1992, 2005; Kaplan, 1983; c.f. Chenhall, 2008 etc.). and many organisations have not adopted lateral MA innovations (Shank, 2005), there are calls to explore this relationship in more detail (Mouritsen and Hansen, 2006), and evidence that this is not the case in practice (Hutchinson and Liao, 2009) given the impact of contextual factors (Tilemma, 2005 p. 102).

2.4 Summary

This study adopts a broad contingency perspective with respect to exploring the impact on the MA system of the lateral conceptualisation of the organisation. Given the focus on MA system formation and use under modern, lateral conceptualisation, the interconnectedness of these issues and the concept of equifinality, contingency theory is deemed the most applicable. Given these concerns, and the repeated calls in the literature to explore the impact of lateral conceptualisation as a contingent variable (Chenhall, 2003, Gerdin, 2005, Mouritsen and Hansen, 2006, Hansen and Mouritsen, 2007, Abdel-Kader and Luther, 2008), this paper seeks to explore how MA might be impacted by the contextual factor of lateral conceptualisation of the organisation, and the associated shifts in culture, management structure, style and strategy as a result of this. The review hopes to illustrate that there is a requirement for empirical analysis of MA under lateral organisations on the basis of the differing requirements, culture, and structure of lateral organisations.

Whilst contingency theorists have suggested that organisational structure has important impacts on MA systems, most empirical analysis has focused on traditional and hierarchical organisations and there has been little research into laterally orientated organisations (despite continued calls in the literature; (Chenhall, 2003, Gerdin, 2005, Mouritsen and Hansen, 2006, Hansen and Mouritsen, 2007, Abdel-Kader and Luther, 2008). Furthermore, the following section will highlight a number of differences between lateral and hierarchical organisations with respect to MA, and highlight some issues in the use of MA within lateral organisations. The following section seeks to bridge some of these conflicts and tensions and will draw upon literature from operations management and lean manufacturing/accounting, strategic cost/MA, the BSC/ABCM, and inter-organisational relationships and networks specifically, in the hope of demonstrating that many accounting concepts do have lateral dimensions, and could interact coherently with a lateral organisation. After comparing this literature, the paper seeks to draw out some potential ways in which MA might be formed and used under even within the most extreme forms of lateral conceptualisation; which (Johnson, 2006) suggests is impossible.

3. Lateral organisations and their impact on MA systems

3.1 Lateral organisations

As highlighted above, in section 1.2, lateral organisations are those who lean towards horizontal tendencies, and strive to achieve extraordinary performance through a number of ‘best practice’ principles. The key principles are a mutually reinforcing set of characteristics based on a strategy and structure of processes, people, and skills which promote; a customer focus; integration; multi-skilled, multi-functional teams; employee participation and involvement; and a supportive culture promoting continuous improvement through empowerment, autonomy and responsibility.

McCormack (1997, p. 24) comments that “[t]he advantages of horizontality are obvious…people are more accountable, they perform better and the company prospers.” There are many advocates of lateral and horizontal organisations (Schonenberger, 1996, Ostroff, 1999, Galbraith, 2005, 2006, Johnson, 2006 etc.) who cite many benefits of a horizontal structure (as highlighted in section 1.2). The proposed benefits are reflected in the increasing numbers of cooperatives, partnerships, strategic alliances and other forms of lateral working within the contemporary business environment.

The purpose of this paper is not to advocate that a lateral structure is the best way to organise every organisation (Anand and Daft, 2007). It merely hopes to; (i) highlight some reasons for the growing popularity of lateral organisations[12], (ii) to suggest the different requirements of MA within these lateral organisations, (iii) to comment on the on-going relevance of MA to these contemporary organisations, despite a traditional conflict between hierarchically orientated accounting information, and lateral organisational structure (Johnson, 2006, Mouritsen and Hansen, 2006, Chenhall, 2008 etc.), and (iv) to suggest the need for an empirical investigation into these issues in more detail.

3.2 Different requirements for MAS

Given the different characteristics and focus of lateral organisations (integration, team focus, cross-functional and multi-tasking, real-time information, empowerment, autonomy, responsibility, operational and process measures rather than functional, participation and collective decision making etc.), it is perhaps unsurprising to see a conflict with traditional MA practices and processes, which are typically perceived as slow, unhelpful for operational decision making, complicating and mystifying matters, creating tensions and conflicts between departments etc. (Schonenberger, 1996, c.f Pierce and O’Dea, 2003, Johnson, 2006, Mouritsen and Hansen, 2006, Shank, 2006, c.f. Burns and Baldvinsdottir, 2007 etc.).

Concerns within lateral organisations that relate to MA include; (i) the requirement for continuing financial control (ICAA, 1997, Chenhall and Langfield-Smith, 1998, Hutchinson and Liao, 2009) to promote empowerment and the formation of teams (Bennett, 2002), and to measure organisational competitiveness and success (Chenhall, 2008), (ii) performance measurement focused on operational and internal aspects (rather than intra-process, functional or external aspects) based on teams (not individuals) and inclusive of non-financial information (Spector, 1999, Ittner and Larcker, 2001, Chenhall, 2008, Griffith and Neely, 2008, Esben Rahbek Gjerdrum and Sudzina, 2012) sustained by top-level support (Tung et al., 2011), (iii) promotion of the alignment and cooperation of teams and products to a customer focus and promoting a culture of information sharing and trust (Galbraith, 2005, Chenhall, 2008, Baird et al., 2011), (iv) a balanced strategy incorporating financial and non-financial measures to promote organisational success (Chenhall and Langfield-Smith, 1998), and (v) the institutionalisation and hybrid ability of MA (Miller et al., 2008, Modell, 2012) and how MA can be used to facilitate organisational change (Spector, 1999, Burns and Scapens, 2000).

There are many ways in which MA information can be useful in lateral organisations, particularly if MA is used under a supportive and inclusive culture (Tomkins, 2001, Bennett, 2002, Kraus and Lind, 2007, Hutchinson and Liao, 2009) throughout multiple levels of the organisation, including; balanced strategies and measures, integration of teams and products, performance measurement, incentivisation, promoting alignment and cooperation, and assisting in institutionalised change. Often, the roles of MA within these areas are replaced by other fields in lateral organisations (such as HR – Ostroff, 1999), but the following sections hope to demonstrate that there are a number of MA practices and processes which incorporate lateral dimensions, and that these could be used for the above ends under the correct circumstances. The closing sections hope to highlight that there are aspects of MA which incorporate lateral dimensions, and that an empirical study into this area would contribute to the field of MA research.