Accounting in Networks

Håkan Håkansson, Kalle Kraus, Johnny Lind

• Publisher: Routledge
• Year: 2010
• ISBN:
  9781136989698
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Accounting in Networks is the first book that in a comprehensive way covers the emerging issue of accounting and control in horizontal relations across legally independent organizations. During the last 20 years, organisations have shown an increased interest in collaborations that cross company boundaries. New organisational forms, such as alliances, partnerships, joint ventures, outsourcing and networks have received increased attention. This development has pushed management accounting researchers into examining the lateral effects of accounting. This book examines these lateral effects on accounting, and creates a comprehensive summary of what has been achieved so far and what interesting developments will occur in the coming ten years.

The book covers a variety of inter-organizational settings – dyads, networks, joint ventures, public sector – and the roles of accounting therein. It also deals with specific inter-organizational accounting techniques – customer accounting, target costing and open book accounting – which companies use to manage in a world of inter-organizational relationships and networks. The book also covers different theoretical perspectives – transactional cost economics, the industrial-network approach, actor-network theory, institutional theory – on accounting in networks. Each chapter focus on a specific angle of accounting in networks, assess theoretical and empirical evidence, summarize the current position/debate and discuss promising avenues for future research.

1
Accounting in Networks as a New Research Field

Håkan Håkansson, Kalle Kraus, and Johnny Lind

1 A NEW ISSUE FOR ACCOUNTING SCHOLARS

In the mid-1990s, several accounting scholars emphasised the importance of extending the domain of accounting across the traditional boundary taken—that of the firm. Two important contributions were those of Hopwood (1996) and Otley et al. (1995). Hopwood (1996) stressed that, historically, accounting has been concerned with the management of vertical relationships within firms and that its key functions have been to constitute the boundary of the firm and reinforce the organisational hierarchy. Further, he stated that even the accounting innovations that were developed in the 1980s and early 1990s share this concern with the hierarchy. This historical picture of the vertical focus of accounting is in contrast with the contemporary and often conflicting changes in the organisational arrangements between companies, such as outsourcing, which emphasises the horizontal relations between legally independent firms rather than the vertical activities within firms.

Otley et al. (1995) examined the development of management control up to the mid-1990s and gave an overview of this, from which the authors concluded that it was still dominated by a closed and functionalistic view of management control. In this way, the development described by Otley and his coauthors corresponds well with the picture painted by Hopwood (1996). At this time, management control was largely comprised of ‘financial numbers’; it was developed within large, hierarchically structured organisations and the firm and its subunits were the natural focus of the research. Hence, management control had a clear vertical orientation and took place within the boundary of the firm. Just as Hopwood would come to note in the following year, Otley and his co-workers discussed how the existing ‘orientation’ of management control did not correspond with an environment of contemporary organisations facing challenges such as business process re-engineering and the outsourcing of noncore activities, i.e., a world in which the importance of horizontal relations across legal boundaries was increasing.

Both of the preceding contributions point out that the development of production processes that are integrated across firm boundaries, thereby becoming embedded in several companies, put new demands on the management processes that also need to transcend the legal organisational boundaries. A particular problem encountered in this situation is that of the interdependence of the organisational tasks within the companies involved and how to manage tasks of this type. Integration, collaboration, and joint actions are some central aspects that need to be considered if one is to understand a firm’s success in this environment. However, accounting, with its focus on hierarchical coordination within a single company, is in conflict with changes in the business landscape of this kind, which increase the importance of horizontal coordination between independent companies. Hopwood (1996) and Otley et al. (1995) concluded that, in the mid-1990s, little knowledge existed about accounting and its role within networks of embedded companies. Hence, in their view, accounting in networks was an important and promising field for further investigation.

Shields and Scapens and Bromwich drew similar conclusions in their literature reviews, which considered published articles by North Americans (Shields 1997) and the first decade of publications in Management Accounting Research (Scapens and Bromwich 2001). One of the key suggestions for future research put forward by Shields was horizontal accounting, whereas Scapens and Bromwich called for management accounting in new organizational forms that would be able to go beyond existing organisational boundaries.

Many scholars have responded to these calls for research on accounting in inter-organisational settings and, since the mid-1990s, a growing body of literature has appeared. One relatively early and influential contribution is that of Tomkins (2001). In his analytical paper on interdependences, trust, and information in dyadic relationships and networks, he analysed the interaction between trust and information in personal relationships. He used his findings to distinguish the information needed to support trust from that needed for the mastery of events. In the same paper, he also touched upon the consequences on the design and use of accounting of viewing a relationship as an element in a network of embedded relationships. One clear illustration of this paper’s influence is that the majority of chapters in this book refer to it.

Accounting in inter-organisational relationships has been viewed as an emerging field within accounting research, and it promises to become one of the most interesting areas for future research. This has been manifested in numerous publications in leading accounting journals, such as Accounting, Organizations and Society, Journal of Accounting Research, Management Accounting Research, and The Accounting Review, as well as in recent reviews on the topic (Håkansson and Lind 2007; Kraus and Lind 2007; Caglio and Ditillo 2008). However, this emerging issue has yet to be adequately dealt with in mainstream textbooks, and there is no comprehensive publication covering the whole field. The intention, therefore, of this book is to fill this gap by providing a comprehensive account of accounting in inter-organisational relationships and networks.

In a literature review of the field, Håkansson and Lind (2007) concluded that most of the articles that had been published at that time gave extensive empirical descriptions, while the theoretical base was still limited. However, during the last five years, some papers have applied theoretical frameworks derived from different theoretical approaches. The theoretical articles have been dominated by transaction cost economics and agency theory, but there are also an increasing number of publications using other theoretical approaches. In our view, the subject area has now reached the state—both with regard to empirical observations and theoretical considerations—when it is appropriate to assemble all these different threads into a comprehensive summary of what has been achieved so far, and to examine what the interesting developments for the coming ten years are likely to be.

This introductory chapter is organised as follows. In the next section, some indicators and development processes are identified that can illustrate and explain the increased importance of inter-organisational relationships. Thereafter, the obstacles contemporary accounting presents when firms want to increase their engagement in long-term horizontal relationships are discussed. Section 4 comments on the various conceptualisations of accounting in networks and provides a short summary of the different chapters of the book.

2 INTER-ORGANISATIONAL RELATIONSHIPS AND NETWORKS

The increase in the importance of horizontal processes in the business landscape during the past few decades is manifested by a large number of different forms of inter-organisational relationships that take place under names like joint ventures, strategic alliances, technology licensing, research consortia, strategic partnerships, business relationships, supply chain relationships, and outsourcing relationships.

The very diversity of names is itself an indicator of the increased importance of horizontal relationships in the contemporary business landscape. Two other more substantial ones were identified by Håkansson and Lind, 2007. The first of these is a large number of empirical studies that show that the business relationships between companies are more organised than they were previously. These studies have covered diverse industries and all major geographical regions of the economic world and include both broad survey studies and a large number of detailed case studies of single dyadic relationships and even of relationships embedded in networks. The second type of indicator is the popularity and increased use of management tools such as just-in-time (JIT) management, time-based management (TBM), and total quality management (TQM). The justification for the implementation of these general management tools is based on the existence of closer relationships with customer and suppliers. Several other management tools have also been developed, such as customer relationship management (CRM), supply chain management (SCM), and the appointment of key account managers (KAM), which are dedicated to the handling of specific customer or supplier relationships. These two indicators together suggest the existence and importance of inter-organisational relationships in today’s business landscape.

It is also possible to identify two types of development process that support the appearance and increased importance of inter-organisational relationships in network structures (Håkansson and Lind 2007; Kraus and Lind 2007). One such process is the nurturing of more extensive and long-term business relationships between companies that buy and sell products or services to each other. These types of relationships have probably existed for a long time. However, they have been accentuated in recent decades as companies have successively become more specialised, and have been forced to prioritise their counterparts and collaborate more intensively with some of them. The extensiveness of the relationships is shown by the high level of involvement of a large number of individuals from different functional specialities within each of the collaborating firms. The firms that prioritise one another adapt their products, production processes, and administrative and logistical activities. Furthermore, they seek combined involvement early in the product development processes and, thereby, embark on joint product development projects.

The second type of development process is related to the outsourcing of units, functions, and activities from companies. Outsourcing is of increased importance within large firms because of the need to reduce costs, to increase specialisation, and to improve the development capabilities through closer collaboration with a chosen supplier. The outsourcing takes various forms, such as the breaking up of large hierarchically controlled companies into independent units, as well as the more commonly understood interpretation, that of outsourcing operations that were previously viewed as core operations. Hence, one difference in the outsourcing activities during the last decade is that firms outsource both production and product development processes to a greater extent than before.

3 ACCOUNTING AND ITS REINFORCEMENT OF THE HIERARCHY

In the first section, we described how Hopwood (1996) and Otley et al. (1995) stated that, historically, accounting has been focused on the vertical relations within the firm and, as such, has supported the hierarchical coordination. Some authors even claim that the development of accounting methods was a prerequisite for the formation of large multinational companies (Chandler and Daems 1979; Johnson 1983). Hence, accounting methods such as responsibility accounting, transfer prices, and budgeting have been developed in symbiosis with the growth of companies solving internal hierarchical problems.

However, at the beginning of the 1990s, some researchers argued that this close connection to the vertical dimension has negative effects on handling the horizontal dimension with counterparts. They claimed that the design and use of the contemporary accounting that was focused on the hierarchically structured organisations was an obstacle for the establishment of long-term cooperative horizontal relationships (Shank and Govindarajan 1993; Gietzmann 1996). Shank and Govindarajan (1993) emphasised the importance of the change in focus when firms apply cost analysis, from a value-added perspective to a value chain perspective. According to them, the shortcomings of contemporary cost analysis were that it started too late for the firm’s suppliers and ended too soon for the customers, as it started and finished at the firm’s boundary. In their view, one consequence of the strong focus on the firm was that the decision makers within the firm did not consider the effects that the decisions made would have on the firm’s customers and suppliers. Thus, the contemporary accounting methods within the firm supported the individual firm’s attempts to improve its bargaining position with respect to its customers and suppliers, but did not take into account the fact that this was in conflict with the possibility of exploiting the relationships with suppliers and customers. An attempt to address the latter was identified as being of key potential for the implementation of cost reductions. Thus, the aim was to consider the competitiveness of the overall value chain in which a firm was situated (Shank and Govindarajan 1993).

Gietzmann (1996) analysed the classical make-or-buy decision and concluded that traditional management accounting does not motivate suppliers to invest specific resources in a relationship. The classical make-or-buy decision is presented in traditional management accounting texts as a competition between a company’s internal operations and an arm’s-length supplier. In such classical literature, however, it is argued that the most efficient form of governance is identified by competitive short-term bidding over price between a large numbers of suppliers. The lowest purchasing price, which is the outcome of this bidding process, is then compared with the company’s internal production costs to identify the cheapest form of governance. Short-term price bidding is an efficient solution for standardised components that the suppliers can supply off the shelf. However, it gives little incentive to the supplier to invest in cooperative design and development work with the buyer. According to Gietzmann (1996, p. 624), it was necessary that “the focus on accounting moves from how to apply competitive bidding to minimize supplier bargaining strength, to issues such as which subcontractors should be promoted to become design approved subcontractors.”

The preceding examples illustrate a central point in this book, namely, that the use of accounting methods is always based on some very specific assumptions about how individual companies are—and even how they should be—related to counterparts such as customers and suppliers and other third parties. From this, one can deduce that the theoretical dimension is closely connected to the empirical application of accounting methods and, as a consequence, a certain accounting method ought to be able to support or hinder the development of a specific type of business relationship.

4 ACCOUNTING IN NETWORKS, INTER-ORGANISATIONAL ACCOUNTING, AND MANAGEMENT CONTROL OF INTER-ORGANISATIONAL RELATIONSHIPS

The previous section shows that contemporary accounting, with its reinforcement of the hierarchy and its preference for short-term competitive bidding in external relations, is not just ignorant of, but even an obstacle to, the development of extensive long-term cooperative horizontal relationships. The critique of the contemporary accounting and the urge for research on accounting in horizontal relations have resulted in an increasing number of published papers on the issue.

However, accounting in horizontal relations has been taken up in discussions coming under a large variety of headings. Some examples are inter-organisational accounting, accounting in networks, inter-organisational cost management, open-book accounting, network accounting, supply chain accounting, target costing, horizontal information systems, management control of hierarchical networks, value chain accounting, management control of joint ventures, horizontal accounting, interfirm accounting, and management control of inter-organisational re...

Table of contents

• Routledge Studies in Accounting
• Contents
• Figures
• Tables
• Abbreviations
• Acknowledgments
• 1 Accounting in Networks as a New Research Field
• 2 Accounting and Inter-Organisational Issues
• Part I Accounting in Different Settings
• Part II Accounting Techniques
• Part III Theoretical Perspectives on Accounting in Networks
• Contributors
• Author Index
• Subject Index