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 Welcome to Revolutionary Times

Accounting for an Info-Mated World

 

by

David Pearce Snyder

Consulting Futurist

 

April 5, 1999

 

 

          Back in 1992, the headline on the front page of Networks proclaimed "FUTURIST SNYDER SAYS CPAs POSITIONED PERFECTLY TO CAPITALIZE ON TOMORROW’S WORLD." While the explosive growth of major accounting firms and the rapid general increase in CPA revenues during the 1990s appear to have borne out my cheerful expectations, that scarcely tells the whole story. As more than one accountant has commented to me since then, "You might also have said we were perfectly positioned to be struck by a tidal wave."

          The point is well taken. I concluded my 1992 interview by enthusiastically asserting that, for those accounting firms that were willing to change their traditional self image and learn to use information technology throughout their operations, "the 1990s represents an untapped gold mine." In retrospect, my metaphor was not nearly dynamic enough to describe the multiple forces of change that are currently transforming not only accountancy, but all other professions, and the organizational structure of all private and public enterprise as well. It is now clear that we are passing through a genuine techno-economic revolution of historic proportions, and that a near-term future which will be dramatically different from our recent past is immediately at hand.

 

Some Lessons from History

          Economic historians tell us that it usually takes two generations – 70 to 80 years – for a technology to go from initial demonstration to general adoption throughout a nation’s principal economic, social and political institutions. What’s more, during the first 25 years of this 75-year process of techno-economic assimilation, a new technology is so costly, inefficient and unreliable that it finds few applications and has no measurable net effect on a nation’s economy! (For the computer, this non-productive period was from 1946 until 1970, when information technology first appeared in factories and offices.)

          During the second 25 years of a techno-economic transition, the new technology matures; it becomes cheaper, more powerful and more reliable. As the technology becomes more plausibly useful, it elicits increased marketplace demands, shifting producer capital from traditional, proven productivity-enhancing investments to investments in new technologies that are still largely unproven in real-world applications, most of which fail to improve multi-factor productivity. (A 1996 survey of 360 companies, by Standish Group, International, Inc., found that 42 percent of corporate information technology projects are abandoned before completion.) As a consequence, productivity improvement rates stagnate, and both profitability and general prosperity decline. (The counter-productive 25 years of the computer revolution lasted from 1970 to 1995.)

          By the time that a basic technology gets to be 50 years old, it has typically become cheap enough, reliable enough and efficient enough to consistently produce a positive return on investment across a broad array of marketplace applications. A major reason for the increased utility of a maturing technology by the end of its first 50 years is the simultaneous development of an infrastructure to sustain the wide-spread, systematic use of the new technology by both commercial and social enterprise. For the steam engine, this infrastructure was the network of rail lines that first linked the principal cities of Europe in 1845. Electro-mechanical technology required the creation of a nationwide infrastructure of power grids, generating plants and transmission lines that were not substantially completed until the 1930s, both in Europe and the U.S.

          The WebNet is, of course, the infrastructure – or "info-structure" – for the computer revolution, and it now permits information to flow into businesses and homes like other basic utilities: e.g., water, gas, electricity, etc. It is only at this point, economic historians tell us, when a new technology and its infrastructure have both become commonplace, affordable, and broadly useful, that it acquires the capacity to actually transform major social and economic institutions. And it is during the final 25 years of a new technology’s assimilation that seven-eighths of the productive potential of that technology is realized! For the computer in America, this period of productive innovation should last from 1995 through 2020.

          The immediate – and startling – implication of the historic model of techno-economic transition is that the dramatic changes experienced by both private and public enterprise during the past 15 to 20 years are only precursors – partial and preliminary realizations – of much more comprehensive, transformational innovations in the decade ahead. In particular, three powerful vectors of change (already well-established in the marketplace) pose revolutionary implications for the future of all commercial professional services, including finance, real estate, accounting and the law. These vectors of change are: (1) the "info-mation" of enterprise; (2) the "globalization" of enterprise; and (3) the "reconfiguration" of enterprise.

          Individually, any one of these three fundamental, long-term trends would, in the normal course of events, pose substantial challenges and opportunities for the average enterprise. In combination, these three inexorable developments are already provoking adaptations and innovations that foreshadow a rapid, historic transformation of accountancy.

 

The Info-Mation of Enterprise

          Since the 1950s, the computerized future has commonly been described as being "cash-less," "paper-less," even "worker-less." The principal perceived benefits of information technology involved eliminating the encumbrances and drudgeries of industrial enterprise rather than creating new value or conferring new benefits of its own. It has only been during the past four or five years – with the maturation of the computer and its WebNet info-structure and the resulting explosion of productive IT applications across many industries, trades and professions – that the marketplace and Mr. Greenspan have begun to fully appreciate the potential economic value to be added to every aspect of enterprise by "info-mation."

          Just as the purpose of "auto-mation" is to mechanically perform the simple, repetitive steps of physical production, the purpose of "info-mation" is to cybernetically perform the simple, repetitive steps of intellectual production: e.g., research, analysis, design, planning, decision-making, etc. And just as automated systems required the development of tens of thousands of individual, specialized industrial tools – e.g., materials handlers, screw machines, pallet racks, packaging systems, etc. – info-mation will require the development of tens of thousands of individual, specialized, information-handling tools, ranging from single purpose expert systems and statistical algorithms, to operational simulations and comprehensive knowledge-management programs.

          These information-handling tools will enable employees at all levels in all functions of enterprise to apply the rapidly-growing inventory of raw data and knowledge to specific workplace tasks in a timely and coherent manner. Examples range from the mathematical algorithm that helps American Express loan officers quickly assess member financial data in order to set sound credit limits to the computer simulations that specialty steel-makers use to prevent slag drift in a phosphorous furnace; from the "Confined Spaces Advisor" logic tree on the OSHA Website that enables employers to understand how to comply with complex Federal safety regulations to the hundreds of "adaptive agents" – virtual shoppers – that PricewaterhouseCoopers is creating for Macy’s to evaluate the sales impacts of alternative store layout, cash register placements, etc.

 

 

          The extensive involvement of accounting firms as consultants in the development and installation of such practical information-handling tools has been widely reported in the business press and trade journals. Even more widely reported – and considerably more controversial – has been the active involvement by the major CPA firms as consultants in information systems integration, and in the adoption of proprietary comprehensive information management systems – e.g., SAP, PeopleSoft, etc., by third parties. The potential for conflicts of interest arising when an accounting firm must attest to the financial soundness of an enterprise whose products the accounting firm’s consulting arm has been hired to install and support are a mounting source of concern to business ethicists and government regulators.

          In addition to helping clients install comprehensive integrative information systems and develop nuts-and-bolts IT applications, accounting firms have also been increasingly active in the evolving field of "knowledge management." Stuart Card, a research fellow at Xerox PARC, calculates that, "In the past four years, the number of documents you can get while sitting in your chair has increased by a factor of 10,000." This includes information dealing with your own organization’s past and present operations, plus information dealing with the organization’s operating environment, its markets, its resources, its competitors, the materials it uses, and the concerns of its regulators. It also includes an infinity of information that is of no relevance whatsoever to an organization’s decision makers.

          The challenge, of course, will be the timely acquisition of useful knowledge from the whirling galaxies of information that are filling up cyberspace. The search engines and webcasting services that are currently being used to extract purposeful information from the Internet have apparently proven useful for some individuals, but have been wholly inadequate for most institutional decision support purposes. In order to mobilize the performance-enhancing information from both the external environment and from within the institution itself, a rapidly-growing number of organizations – e.g., Dow Chemical, Cigna, G.E., NASA, Bechtel, etc. – are establishing "knowledge management" functions.

          For some organizations, "knowledge management" is a largely virtual affair; i.e., a special channel on the firm’s intranet that encourages employees to solicit each other’s experience in solving work-related problems. In other institutions, "knowledge management" is a new box on the organization chart, headed up by a Chief Knowledge Officer (CKO), and employing cybrarians, statisticians, technologists, "web-masters," and intellectual property assessors. Accounting firms have been involved in the design, installation, and operation of Knowledge Management activities for many major corporations.

          The explosion of information produced by the maturing of our info-com technology has created a booming marketplace demand for information services. As well-regarded providers of a broad-spectrum of professional information services, the major accounting firms have prospered. The "Big 5’s" consulting work has been growing at nearly 50 percent per year since the early 1990s. Consulting brought in two-thirds of Andersen Worldwide’s $5.5 billion, 1997 revenues, and over 40 percent of Ernst & Young’s $4.4 billion, 1997 receipts. Consulting generates more than one-third of the revenues for the remaining Big 5, divided roughly equally between IT projects (including Y2K work) and all other consulting.

          While major accounting firms have prospered through consulting, smaller firms appear to have been largely unable to capitalize on the opportunities posed by the burgeoning market for professional information services. The failure of smaller accounting firms to expand into consultancy poses a particular problem for those firms because the growth in revenue from traditional audit services has been – and will likely remain – flat. Info-mation is steadily reducing the billable hours generated by traditional bookkeeping and accounting, while consolidations, roll-ups and franchization are rapidly reducing the numbers of independent businesses in the U.S. These dynamics are especially troubling for the 200 or so mid-sized CPA firms who find that they cannot afford the sophisticated human resources and computing capacities offered by the "Big 5" (or 10), but are frequently underpriced in competition with smaller firms or sole practitioners.

 

 

The Globalization of Enterprise

          Economists have long observed that, as they mature, mass markets for high-value goods and services naturally evolve into oligopolies, in which fewer than 10 competitors dominate two-thirds or more of all business. This tendency, already evident in aircraft and automotives in the 1980s, is now manifesting itself in banking and finance, in health care, and in retail businesses from restaurants and drugstores to supermarkets and hardware chains. Meanwhile, by eliminating the tariff barriers separating national economies, free trade agreements like the EU, GATT, and NAFTA are now merging several dozen mature mass markets into a single massive market, in a process that will predictably reduce the numbers of pre-eminent players even further. (In the past 10 years, the numbers of mid-sized accounting firms was cut in half, and the Big 8 almost became the Big 4, even though employment and revenues in accounting doubled!)

          The spread of free trade is likely to continue and, as European and Asian countries complete their transition from the counter-productive to the productive stage of the Info-Mation Revolution, the global economy will begin to experience the broad increases in prosperity that the U.S. has experienced since 1994-95. And so long as the U.S. economy continues to improve its productivity at rates similar to those of the past five years, most Americans – and American businesses – will benefit hugely from international economic integration. In the area of commercial/professional services like accounting, however, globalization seems certain to foster further consolidation in both the client populations and the numbers of service providers.

          Accounting firms that do not have an international "presence" – partners or affiliates – will be at a serious competitive disadvantage in a marketplace in which a growing percentage of the major enterprises in all sectors of the economy will be part of a multi-national organization whose leadership will want to deal with one public relations firm, one law firm and one accounting firm for all of their operations worldwide. Indeed, among the local professional service practitioners in many developing nations, there is gloom in the face of impending general prosperity. Local lawyers, consulting engineers, and accounting firms in sub-Saharan Africa, Central America, the Mideast, and central Asia commonly believe that, as their nations are assimilated into the global economy, local professional service providers will be overwhelmed in the marketplace by the prosperous and sophisticated multi-national practitioners from the mature industrial countries.

          In fact, in both the developing and developed economies of the world, independent local producers of high value services in every field of commercial endeavor have legitimate cause to fear the rising tide of free trade. Scholarly research has amply demonstrated the advantages of dominant competitors in mass markets. In the commercial world, the "Big 5" have brand-name recognition equivalent to that of Coca Cola, Xerox or Ford. Mid-size accounting firms complain that, whenever one of their long-standing, closely-held clients elects to issue stock, the firms handling the IPO or private placement routinely require the client to engage a Big 5 CPA firm in order to increase the salability of the issue.

          Thus, three current trends in accountings operating environment – info-mation, globalization, and the resulting market massification – all confer substantial competitive advantages upon large, well-recognized, full-service providers over smaller independent accounting firms. A further major trend in accounting’s operating environment, however, is dramatically altering the organizational structure of American enterprise and posing a wide range of opportunities for small and mid-sized accounting firms which are willing to participate in the re-invention of accountancy for the post-industrial era.

 

 

The Re-Configuration of Enterprise

          For more than a century, vertical integration has been a hallmark of industrial enterprise. In the hay days of The Saturday Evening Post, the paper on which the magazine was printed was made from trees harvested from the Post’s own New England forests, pulped in the Post’s paper mills, and shipped via the Post’s own fleet of steamships to the Post’s Philadelphia printing plants. The lumberjacks who cut down the trees, the teenagers who sold the magazine on the nation’s street corners – and everybody in between – were all employed by The Saturday Evening Post. Vertical integration was originally conceived as the ultimate organizational strategy for assuring the continuity and quality of mass-market manufacturing in the industrial age.

          By the middle of the 20th Century, a limited form of vertical integration had become the commonly-assumed structure for all forms of private and public enterprise. Formal organizations were casually expected to hire, supervise, and compensate their own employees, to operate their own plant and equipment, to manage their own finances, and market their own products. Each of these activities involves its own complex set of issues – budgetary, political, and personal imperatives – some portion of which become a part of the larger organization’s "info-sphere," increasing the density and diversity of the institution’s message flow. (A 1997 study of Fortune 1,000 companies by the Gallup Organization and the Institute for the Future found that workers send and receive an average of 178 messages each day, via phone, fax, pager, e-male, snail mail, Federal Express, etc.)

          Not only have the numbers of messages in the workplace soared in recent years, but the density of content has increased as well. In every profession, trade and industry, there is simply more detailed information to master and more sub-sets of relevant factors to be considered with respect to every decision in every enterprise. At least 70 percent of Fortune 500 companies are reportedly engaged in some form or organization-wide information system integration in order to permit "comprehensive enterprise planning." Some firms – e.g., IBM, Microsoft – have referred to their integrated management information systems as "key to every successful decision we make . . ." and "foundations of our long-range planning." Other firms – Chrysler Financial, PG&E – have terminated their systems integration projects as too costly and unworkable. In the case of at least one firm – FoxMeyer Drug Co. – the cost of their system engineering project terminated the company.

          Meanwhile, at about the same time that the systems integration efforts really began to take off (early 1990s), some of the knowledge managers hired to make value-adding sense out of the info-blizzard enveloping corporate leaders began to realize that attempting to simultaneously optimize all of the multiple functions of a vertically-integrated enterprise would overwhelm executives with a maelstrom of conflicting criteria and incompatible options.

          The solution to this information overload, the knowledge managers argued, would be for the firm to identify and develop its core competencies – the specific set of skills, capacities, and contextual knowledge that allow the firm to produce an array of products and/or services that cannot be easily replicated by competitors. All non-core functions under such a competency-based strategy would be outsourced to suppliers who are more competent at those functions than the firm itself. The activities of these independent suppliers would be coordinated via the newly–installed info-structure – the Internet – and, in this manner, a vertically-integrated industrial enterprise could be transformed into a "virtually-integrated" info-mated enterprise.

          The vision of virtually-integrated, competency-based enterprise changed outsourcing from a financial expediency to a comprehensive strategy almost overnight. In 1990, total spending on outsourcing by U.S. corporations, non-profits, and federal, state, and local government amounted to less than $25 billion per annum. According to The Outsourcing Institute, that figure had climbed to $100 billion per annum by 1996, and is expected to reach $318 billion per annum by 2001.

          "Outsourcing" is typically associated with manufacturing and, indeed, in the VW and GM "worldbeater" assembly plants in Brazil, up to 80 percent of the workforce on the factory floor are employees of subcontractors. But increasingly, businesses are outsourcing their administrative support services and organizational logistics work so the firms’ leaders can focus their attention on those factors that are crucial to the long-term success of the enterprise. The British Petroleum Co., for example, has contracted out management of its financial operations, including some accounting, to Andersen Consulting, which services BP’s far-flung organization over the Internet.

          As our information technology has matured, the adaptive behavior of big American businesses has been dramatic. If the organizational restructuring of the past 10 years continues 10 more years, nearly two-thirds of the personnel associated with the production of the average high-value good or service will be outsourced. Typically, these outsourced functions will include facilities management, information systems and financial services. In order to be able to offer their clients "one-stop" integrated financial services – including tax legal advice – the Big 5 accounting firms are reportedly "recruiting lawyers at a manic clip." In pursuit of the same market, brokerage houses and investment firms – including Merrill Lynch and American Express – are "affiliating with or buying hundreds of individual accounting practices," and raising fresh concerns regarding objectivity and conflicts of interest.

 

Prospects and Potentialities for Accounting

          In a marketplace where the principal new realities – info-mation, globalization, and massification – primarily benefit the existing dominant competitors, reconfiguration offers small and mid-sized accounting practices two options that did not exist a decade ago. As hundreds of firms have already done, an accounting practice may – either by "affiliation" or outright merger – become an accounting services unit of a comprehensive financial services conglomerate. Alternatively, accounting firms can begin to provide small and medium-sized businesses and government agencies with outsourced comptrollership services.

          While the big financial service firms are eager to help an enterprise manage its money, they have little interest in the broader aspects of comptrollership – e.g., procurement, contracting, billing and bookkeeping, transportation and travel, management reporting, records and supplies, etc. Yet organizations will be seeking to outsource all of these logistical details of their operations, just as they will be seeking to outsource their data processing systems, their facilities, and much of their human resources.

          Already, a number of previously separate human resource-related businesses – e.g., outplacement firms, employment agencies, trade and technical schools, executive search firms, temporary agencies, etc. – are dropping their specializations and promoting themselves as full-service human resource companies. It would seem entirely reasonable – and appropriate – for accounting firms to take the lead in forging comptrollership into a business service profession with considerable potential to add value and generate revenue.

          Study after study shows that, on the average, America’s administrative procedures are terrible. Re-engineering guru, Michael Hammer, estimates that simply by putting its purchasing systems on the Internet, the average organization should be able to cut the costs of its procurement process by over 95 percent! Moreover, even well-managed enterprises have trouble keeping track of inventory. In March 1999, the FCC announced that the "Baby Bells" could not account for $5 billion worth of equipment. By broadening their charter to encompass the functions of comptrollership, accountants would be able to bring the rigor of their profession to several poorly-disciplined areas of American management.

          Finally, by expanding the traditional narrower focus of financial accounting to incorporate the broader transactional and record-keeping roles of comptrollership, accounting firms will set the stage for the further expansion of the profession to incorporate three new forms of accounting that will become essential components of post-industrial enterprise: (1) human resource accounting, (2) intellectual capital accounting, and (3) environmental accounting. As the basic principles and practices of financial accounting are packaged into user-friendly, conversational expert systems, and fuzzy logic algorithms are applied to increasingly-comprehensive, source-automated data, a growing percentage of accounting’s creative energies will be sought to help businesses quantify the less-easily measured costs and yields of enterprise.

 

 

 

©1999 David Pearce Snyder

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