How are finance teams keeping up with digitalisation?

Alnoor Bhimani, Ph.D., professor of management accounting at the London School of Economics, thinks the finance and accounting profession has yet to fully understand the sweeping implications of today’s digitalised business models and operations. In this episode of the FM magazine podcast, he shares key findings from his new book, Accounting Disrupted, and how finance professionals can equip themselves to deliver the right financial and nonfinancial intelligence that organisations need.

What you will learn from this episode:

• Why linear thinking in business has become inadequate.
• Strategy is emerging from analysing and understanding operations. The two are no longer separate.
• How the digitalisation strategy of Development Bank of Singapore and PingAn Bank helped them improve customer experience.
• Finance professionals face expertise risk: a risk of not understanding the changes affecting businesses.

Play the episode below or read the edited transcript:

Transcript:

Alexis See Tho: So, Al, first things first. What made you write the book?

Alnoor Bhimani: I think that's a lovely question, to begin with, so thanks very much for inviting me, Alexis. A pleasure to speak to you and always a pleasure to speak about accounting as well.

I’ve been writing around the area of accounting and technology for over 30 years now, and I think that what we’re confronted with today in terms of digital technologies far exceeds what we've seen before.

I’ll expand on that a little bit. If we think of a relationship between accounting and technology that's existed certainly from the 18th century with, the rise of the first Industrial Revolution.

But I think the relationship between technologies today and accounting far, far exceeds anything that we've encountered before. It's essentially the biggest transformation in the history of business.

About 30 odd years ago we talked about emerging technologies that were tied to computers. Later on, we saw the emergence of the internet and that got accountants, to focus a little bit more on the sorts of changes that may arise from the rise of technology. But I think what we focused on was essentially what we used to do before only in ways that maybe are enhanced through the technology or in ways that we need to enhance those things because of the technology.

I think today we've entered a very, very different realm. The technology basically enables things that businesses could not have conceived before. So you know we talk about uncertainty, certainty, we're moving into a more uncertain world. But it is the beauty of that uncertainty that lays before us as accountants.

Digital technologies allow us to focus not just on economic transactions and capturing those, which we've always done as accountants. But we're now able to capture transactions that lead to economic changes ultimately. So the accountants role is increasingly becoming being more predictive based on data-generated insights rather than focusing on historical conceptions of how does information actually influence the way in which we read statements and engage in accounting analysis.

So data prediction is one of the virtues of digital technologies, and accountants will have to move in that direction.

To give you another example, I think increasingly we're seeing machines doing a lot of the tasks that accountants used to do. So, we have, for instance, the RPA systems across very many organisations and they take away a lot of the tasks and accountants were engaged in and perhaps in a very nice way, because these were repetitive tasks and they were tasks that had to be done, but could not be done effectively through the previous technology, and it's just the emergence of RPA that's allowed us to do new things.

But we're now moving much further into the ability of machines to engage in decisions that humans used to make based on accounting information. And that is a fascinating new world that we're entering.

Beyond that, we're even seeing the potential of technologies entering products. For instance, accounting systems used to be separate from the products that we counted. [In] the products and services today, you have technologies that are entering products themselves, so the product becomes part of the information system.

Those sorts of changes raise a lot of questions about the propriety of accounting and dealing with the needs of decision-makers, stakeholders and others interested in accounting information.

So those were the forces that drove me to say, "There's so much happening out there, but it hasn't been put into one book that you can access [and] which gives you a panoply of the forms and types and extent of changes that are taking place today.”

See Tho: What are three to five main themes of the book?

Bhimani: First, we've tended to focus on the idea of running a business or an organisation, taking great accounts of scale and scope issues: how do we increase throughput, how do we expand volume, what do we need to do in order to react to a market that is expanding.

By the same token, we talked quite a lot about the scope of production and services. So you might have had an organisation that provided one type of service or that produced one type of product and then you have the expansion of this product over a period of time, because the organisation becomes successful and customer tastes and requirements and desires change. But we're now moving to a different notion of what it takes to run an effective organisation today.

And that is very much based on learning. Now we've known that for many years. But what we've done in the past is to have said, "Let's engage in production or the delivery of services and then we'll get a better idea.” We basically learned how to deliver those better.

Today, what we've got is digitisation allows learning to arise from data itself. And that data generation leads to action, decisions, implementations, operations, that yield more data from which we learn faster.

And so you can sense that an organisation that is more reliant on data for its learning practices engenders more data from which it can learn faster and so on. So the idea of learning now is no longer closely connected with the idea of production and service delivery. It becomes a decision that the organisation makes, and a learning organisation is one that's basically going to crowd out the others that just don't engage in that form of learning.

The other thing that arises from the book is that the linear thinking that is embedded in most executive action is no longer of relevance. Digital technologies allow organisations to develop very different business models.

To a degree, we have the rise of platform models. So you end up having a greater pool of avenues to pursue in order to generate what it is that the business is after.

See Tho: Can you elaborate on what you mean by a linear business model?

Bhimani: Yeah, that is a good question. So, if you're a manufacturing organisation, then you think about your primary material and where they come from. You might think of the suppliers. You might think of the supply chains. You might then engage within the organisation in a step-by-step production of the good.

Then it enters the market and continues along basically a linear path of value being added. I think now we're really talking about interconnected nodes where the impact on accounting is massive. You can visualise a linear organisation which has revenues, and it has costs and they're closely associated.

In a more kind of diversified notion of business activities, you end up having the top line being quite dissociated from the expenses. What generates expenses is not necessarily what drives revenues at all. You may have a different pool of customers, and they differ from consumers; they're very different groups, for instance.

There are so many organisations that have expanded their domain of activities once they became digitised or ones that were actually born digital. Take Amazon, for instance, and it is a massive set of possibilities for generating revenues, many of which the average pedestrian consumer of Amazon services has no idea about.

But the fact is that data is what drives the various possibilities that emerged out of this progression into digital technologies. So ultimately linear thinking has become inadequate, and this is the second theme of the book.

The third quite important one is that the past 250-odd years of looking at business practices has taught us one thing very clearly. And this is that a strategy develops within an organisation to do things differently, the organisation then structures itself around that strategy, and accounting systems, then serve that new structure. There's a notion of almost ossification of structures based on strategies.

I think now we're moving into a very different realm where strategy is becoming intertwined with operations. This idea that strategies are about the long term and operations are about the immediate and real time.

In organisations that I've been in, you're finding that a strategy emerges out of understanding and analysing the operations as it takes place.

So there’s a confluence, in a sense, of strategy and operations, which we've been taught to demarcate separately, and I think that intertwining is quite fascinating. But it will impact accounting work.

If you think of PingAn Bank, so this is a great organisation, a banking institution, that started fairly recently to invest in what they refer to as smart finance. So basically getting the customers to do things at home on their own. The pandemic certainly has helped immensely, and so technophobes have become technophiles. You find that the consumer interest is much better served.

I mean they will talk about millions of transactions with customers that are now using their smart finance technologies, 3 million customers within a very short period of time.

They basically went on the trajectory of becoming online users of the bank services, and you find that there's customer delight beyond the bounds of what could have been imaginable.

To take the case of another bank, the Development Bank of Singapore (DBS). You talk to the people there, and they would say, "You know, we had pretty mediocre service that we were providing to our customers.”

They engaged in a drive to get digital to the core and within a very short period of time, and they have a 25- to 30-fold in reduction in customer complaints, wait times, and so on.

The idea that you get onto a path of digitalisation essentially drives you to a further path in that direction in all sorts of unknown ways.

And Development Bank of Singapore is a great case in point. They use blockchain technologies; they use IoT devices.

And so I think it's a technological non–U-turn that we've entered. The era of digitalisation is really one where you cannot come back from it.

What I would also say is, in that light, do not under underestimate the power of digital technologies. The end state can never be known, and this is why the work of accountants is so incredibly important.

In past technologies when investments were made, you could pretty much predict why you were making the investment and therefore the accounting information that was required. Today we have stepped away from that in a big way. We're saying you're investing in something where there are unknowns, including accounting's role in that context.

That means there are very many new things that accountants will have to do.

But the last thing I’d add quickly mention as a theme of the book is the idea that we've always talked about business risk and financial risk, and accountants are pretty familiar with that notion of the duality of risks in in organisations. But I think now we have a third risk which we need to be concerned about, and this is expertise risk.

Accounting and financial expertise is becoming a question mark in organisations that will not delve into a more digital type environment and the implications that it presents. Conversely understanding expertise risk drives organisations to be much better prepared than others and actually gain advantages in the market. This really increases the role of accountants, in the context of enabling organisations to push ahead with whatever their objectives might be.

See Tho: It sounds as if every aspect of an accountant’s role will change, which sounds awfully overwhelming. But I suspect that’s not what you found. Are there things that accountants are great at and these things will pretty much look the same in spite of changes in technology?

Bhimani: Sure, so the earlier point was really about accounting being really a few steps ahead in relation to other information providers in organisations, but that is going to dissipate unless we do certain things.

First of all, I don't think that financial representations of organisations are ever going to go away. There's always going to be a need for making those representations. And we're pretty much the one profession that is most adept at doing that.

So we understand the basis of providing a set of understandings about what an organisation has accomplished financially. Then we've in the past 30 to 40 years, if you look at different organisations in different countries, the accountants have been forefront in also including nonfinancial measures, ways in which an organisation can talk about how quickly it learns or the strategies that it's implemented or qualitative elements of how a customer reacts to certain things. I think accountants are a great at coupling financial and nonfinancial and other quantitative measures.

In addition to that, accountants have been very good at communicating in terms that relate to executive action, much more technical understanding that they've been trained to report or suggest.

So they're great communicators; they have acted as intermediaries between the technicalities of a business and what the manager needs to hear in order to take that business further. I think those are all foundations that need to be built on.

So, you know, in a sense, I don't think that the accountant should be should feel overwhelmed because the accountant comes in with certain qualities. But having said all that, there are things that need to be done. Otherwise, we will lose that kind of advantage as it were.

One of the things that I think again we certainly need to do is to understand what new technologies can do.

And it doesn't mean you need to take a course in coding or develop blockchain protocols. But it's understanding what can a blockchain possibly do, how could it impact auditing and assurance and other elements of smart contracting, for instance.

The internet of things-type devices, they changed the basis of information systems. Once an IoT device is available to expand the idea of a product entering different market, you get immediate access to a lot of information you never could, which the accountant can piggyback on their knowledge to further advance.

RPAs are certainly a reality, but that is going to get us into the realm, for instance, of machine learning. We're pretty good at it already in terms of being able to deal with structured data. But I think we're seeing instances where that then delves into deeper learning situations, where data becomes unstructured, and accountants have to be more adept at dealing with unstructured data sort of propositions.

There are other things that accountants need to do, which are much wider than just developing understandings and techniques.

One of these is to recognise that regulations, governance, data laws are going to be altered very rapidly in different sort of national, international context. And it is incumbent on the accountant to understand legal, ethical, and technical issues in terms of data. You cannot and should not shy away from that.

Beyond that, what I would say is that we're in a very fast-changing world there are societal and global changes taking place.

Within ten years, in developed nations, about a third of the population will have been born in the analogue era. If you look to developing nations, about 7.25 billion individuals will have been born digital. I think denying the notion of Easternisation is probably not a good thing for accountants to be doing. Technologies, certainly digital technologies, allow nations individuals, organisations to leapfrog others, and that is becoming absolutely inevitable.

The accountant has a big role to play in understanding those changes and then suggesting to decision-makers what that actually means.

And just in closing that argument, I just wanted to also add that we're seeing new generations emerging in the workforce. What's referred to often as Generation X, they were the ones who designed accounting and control systems in organisations.

But Generation Z, people that were born in the mid-90s, have a very different conception of what the business should be about. It may be more about open communications, about ethics, about even “wokeism”.

So, the workforce has different expectations of the business and the embedding to control systems are very traditional norms of being is inappropriate.

And in addition to that, we've got a much greater female workforce participation. And women, I think, will bring different sensitivities, different proclivities to organisations. And that must be within the understanding of accountants to say we have a different set of individuals interacting within the organisation, what does that mean for accounting and control systems, and these are key questions that need to be asked.

See Tho: As you were talking about that, I thought about the Gender Gap Report that the World Economic Forum published not too long ago. One of the things that was mentioned by one of the speakers at the launching of the report was, how companies — specifically, recruiters and HR departments — need to rethink the way they hire new recruits; not looking at the formal education they have but to look at the skillsets they have and how they can complement the organisation.

And the other thing was, in order to meet the current skill gaps we have — whether in finance or other areas of business — is to rethink how upskilling can be done within the company. What have you found speaking to companies and organisations on this?

Bhimani: In fact, most companies focus on these sorts of issues. We have a changing workforce. We have certain practices that don't tally with what worked in the past, with what should we be doing.

To give you an example in in one organisation there was there was this idea that senior managers have the most experience, and so they should be training the younger, the recruits and the juniors and establish targets and parameters of their operations.

We find that when organisations begin to implement digital technologies — and it's not just a matter of you know younger people understanding the technology better — actually, it very often is the other way around, and this is one of one of the interesting findings.

But what does tend to happen is that there are certain sentiments that more senior individuals bring in terms of what should be done. Normativeness is embedded in accounting control systems, and unfortunately, we're in a very different realm. The global state, including “wokeism”, I think has changed the parameters within which organisations have to operate.

And so, some of the things that we found is that all of a sudden, you find that an organisation that is open to let's say a junior person establishing the targets by which they want to live.

And making suggestions in terms of changing workflows, changing the way in which we analyse data and so on, you know the engagement of younger individuals in setting their own target has become a kind of key success factor for certain organisations.

So it's not a matter of telling senior managers to back off. It's basically saying, you know, maybe we can have an element of reverse mentoring where it's not in just one direction, but it is kind of a two-way thing. And you find that that sort of realisation, you know, it energises your organisation in in a multitude of ways, and part and parcel with that you know I found organisations, where I’ve been if you if you have homogeneity in the recruits you find that that organisation is less avant-garde and less innovative to one where you have a greater kind of dispersion, greater diversity embedded.

Plurality basically drives innovation, and that's something that accountants if they can understand that, bring that to the fore in terms of what is the analysis of all of they're doing for the organisation in moving forward.

See Tho: Wonderful. Last question, Al. What should be the biggest takeaway for an accountant, a finance professional from all the trends that you mentioned?

Bhimani: I don't know if there's one big takeaway, but if I really had to identify just one, and this is one that may surprise you a little bit given everything I’ve said, but it is one that is absolutely crucial.

And that is, don't overrate quantification. People talk about we need to be a data-driven organisation. All of that, I can agree with. But I found that organisations that really succeed, they don't lend data analysis a monopoly over executive insight.

I think, ultimately, there's always more tacit and more embedded in experience and understanding, that you can bring to bear when you engage in new forms of data and the analysis that they provide. I would just provide maybe a word of caution that the movement towards digitalisation enhances the extent to which we can quantify things, but quantification is not going to give us all the answers.

Executive insight, understanding sensitivities that we've been used to bringing to a business and organisational situation will always take precedence.

See Tho: Well, thank you, Al. It's been great speaking to you.

Bhimani: Thanks very much. Thank you, Alexis.