Re-imagining accounting, and no it's not boring - part 2
- Summary:
- Tags could be the answer to the codeblock problem. But how? We attempt to find answers.
Since the number of management hierarchies dwarfs the actual statutory rollup, the overhead to manage them – without actually producing any usable information from them – is tremendous.What the world needs is an accounting system that does management accounting as well as it does statutory accounting. The problem has been, whilst we have “real” applications for the various domain areas in accounting – accounts payable, treasury, accounts receivable, fixed assets, etc. – all we have for management accounting are “tools”. And there is a huge difference between “you can”, and “it does”.
Here is another example drawn from Phil Wainewright's discussion on cloud myths that talks to the outcomes
In the subscription economy, you invest in sales & marketing to acquire customers, and you recognize revenue from those customers over their lifetime, which often can be 3, 5, 10 years or more. However, accounting rules today do not let you spread or depreciate sales and marketing costs over time.
Many vendors have made valiant efforts to overcome the problem: sub-ledgers, sub-accounting and flexfields to name but a few. They all suffer from the same problem: they lead to a long tail of proliferating account codes, many of which may only be used a few times locked inside an inflexible framework. In one case, I heard of 214,000 individual codes. I still remember the provider rep who confidently proclaimed that their 72 character code block could be used globally to cover every eventuality.
While I have no wish to diminish these and many other efforts, none of them address the root problem which is why Phil's quote above is relevant. That in turn has led to a burgeoning data analytics industry but which in practice, almost always defaults back to the spreadsheet, an incredibly inefficient and error prone analysis tool. It's that 'it can' versus 'it does' thinking.
What's the answer?
Tags to the rescue?
Tags provide the potential for a remarkably simple and intuitive answer, yet can be fraught with complexity.
The concept of a tag is something I first came across about 10 years ago. It acts like a secondary form of categorization and has been popularized by the blogging community. Got an accounting story about XYZ? Add to the accounting hierarchical category while tagging XYZ. Got an accounting story about ABC? Tag: ABC. You get the picture.
In the accounting situation, tags would appear to represent an ideal way forward. Why? While the governance framework can be predicted with reasonable certainty, the business requirements for data that end up in the accounting system almost certainly cannot be predicted with any expectation of certainty. The world has become volatile and business needs are now dynamic in nature. RFPs try overcome this with questions like: How many and what types of standard report do you include? Whatever the answer might be, you can be sure they won't meet operational needs.
Let's consider two real world examples where the codeblock will not cope but where tags could provide an answer:
Cost of sales
The cost of sending sales and other resources out to pursue business opportunities is very high – and generally completely untracked. An application for cost of sales would contain two types of tags – one for the opportunity, and one for the product type(s).
In addition, the system should use semantics to interrogate sales personnel calendars to tie meetings and other normal business events. Compared against the contracts and tags files, the cost of sales labor for each account can be calculated much more simply than currently.
Product sales analysis
Product revenue is heavily skewed by discounting and multi-product sales allocations. The total values then expressed therefore do not actually reflect value delivered. Again, two types of tags would be used. The first would be straight tagging by product group. The second tag would be by “customer problem being solved.”
The product tags would allow the total units to be calculated across all customers, as well as analyzed by multi-product breakdown. The “customer problem” tags would help refine marketing messaging as well as provide clarity as to what the product value proposition is compared to what customers are looking to buy.
But how?
Note the use of the term 'application.' It is not clear to me whether tags on their own do the trick. I suspect not because, like the codeblock before them, they run the risk of uncontrolled proliferation while having to sit inside an already constrained system of codes. Workday has baked the concept of 'worktags' into its accounting solution but from what I know, they've not yet taken hold in any significant way among the accounting types or business users.
Impact Radius offers a turnkey tag management solution that embraces third party tags but this looks like it is aimed squarely at marketing departments and agencies with specific tracking needs outside the financial systems.
Companies I've spoken to about this get worried that their tried and tested governance systems of record would need a complete overhaul. That's not necessarily the case if the object is to put control into the hands of business users. It could be achieved by representing the applications as supporting to the general ledger. As such, they would be applications that become 'accounting for management' rather then the narrower 'management accounting' system.
Taming the tag
One way to overcome the tag proliferation problem might come from thinking about tags as in semi-permanent and disposable form. A semi-permanent tagging system would have a good deal of control around it since it would be designed for business models that are not changing very rapidly. Disposable tags on the other hand would be those needed for project purposes - the email campaign, or marketing event are good examples.
If you, like me believe the concept of tags is the way to go then there is one more fly in this particular pot of ointment worth considering. Change.
Tag usage requires a mindset change among accounting types. We all hate change but the upside is too compelling to avoid.
My sense is that a big part of the problem goes away by shifting the responsibility for some level of tag creation and maintenance into the hands of business users, but with appropriate oversight. After all, it is in their interests to have information upon which they can take the right decisions. And with value comes responsibility of a kind that has been difficult to assert in the past.
Disclosure: Workday is a partner at time of writing
Image credit: Scott Oakley via Flickr