To: The CEO of Achilty Retail (Achilty)
From: An Accountant
Date: Sep 20X5
Subject: Performance reporting and management issues at Achilty
This report evaluates the current performance report used by the board for strategic review. Next, certain proposed performance indicators are evaluated by calculation and for their fitness in measuring the achievement of the company’s objectives. Third, given the new information system proposed, the factors driving change in the role of the management accountant are considered. Finally, the opportunities and risks associated with the introduction of a data warehouse system are assessed.
(i) Current performance reporting
The current report has a number of strengths and weaknesses. These will be discussed according to whether the report:
– addresses the objectives of the business;
– contains appropriate information for decision-making; and
– is well-presented.
The mission of Achilty can be broken down into a main aim with supporting objectives. The primary aim is to deliver long-term returns to shareholders through a combination of sustainable growth in earnings per share and payment of cash dividends. This is to be achieved by:
– Improving product ranges;
– Increasing the number of customers and their individual spend;
– Focusing on customer service; and
– Improving profitability by efficient cost control in purchasing and inventory management.
The report does provide much information which is useful to assess the achievement of the company’s objectives. However, it is not complete or always clear on all objectives.
1. Information on the primary objective is presented as the growth figures for EPS and dividends. However, the sustainability of these is not clear from the report. A percentage measure of the return on capital for shareholders may give them a simpler and clearer view of the overall performance (see later discussion on return on capital employed and total shareholder return). However, without forecast figures it is difficult to give a view of whether these are ‘long term’ returns.
2. The first subsidiary objective on improving product ranges can be inferred from revenue growth and other measures relating to the customer perspective such as number of active customer accounts and their average spend. However, these measures are not precise as they are also affected by service levels.
3. The second subsidiary objective is clearly measured under the customer response heading. However, rather than seeking to only increase the number of accounts, it would be more useful to measure the active accounts otherwise resources may be poured into account holders who never purchase.
4. The third subsidiary objective is indirectly measured through revenue growth and the measures noted in point 2. It is specifically addressed in meeting of delivery deadlines. However, there is no indicator for the website experience, for example, relating to its ease of use. As this is the primary contact point with customers, it should receive more attention.
5. The final objective is partially measured through gross margin for purchasing. There are no inventory control indicators offered, such as relating to obsolescence or write-offs.
Other points in meeting best practice in reporting
1. The report is usefully broken into different perspectives similar to the balanced scorecard (financial, customer and internal process). No mention is made of innovation and learning which is unusual for a company dependent on technology but it is not a strategic objective and so this seems reasonable.
2. At present, the financial part of the report breaks the sales into four areas and in light of the creation of teams at Achilty, it should be assessed whether the board requires team performance or this broader view of the performance by product types. Considering profitability in these areas, operating margins should be calculated for each product type if they are considered important enough to warrant separate disclosure.
3. Efficient cost control is measured through operating margins and it may not be possible to allocate other operating costs to specific areas to give margins for each area. However, there appears to be no use made of the detailed operating costs nor are they mentioned in the objectives and so these might all be taken under one summary heading ‘other operating costs’. Also, if cost control is of major importance, then variances to budget may assist the board in monitoring and controlling them.
4. The mix of financial and non-financial indicators gives the board a good vantage point to judge customer satisfaction. However, the lack of any external benchmarks such as industry growth and margins might explain why other similar companies are outperforming Achilty.
The current commentary is succinct and in a sensible priority order given the order of Achilty’s objectives. However, it does not address all of the objectives and the comments are sometimes vague.
The first point does address the primary objective but the claim that performance is satisfactory when the test is that growth occurs and, currently, performance is static seems questionable.
The second point measures the attractiveness of the product range through the sales growth and this appears a reasonable financial measure.
The third point is indirectly related to customer satisfaction which is notoriously difficult to measure. However, combined with the growing sales, the comment about average spend and growing number of customers appear to indicate satisfaction. However, a better measure might consider the number of active accounts rather than all accounts and, in fact, this number has fallen in the year from about 594,000 to 588,000 but this is covered by the large rise in average spend per purchase. Average spend per customer in the period is a better measure of customer satisfaction than average spend per purchase.
The final point on delivery times could also be considered part of the customer satisfaction measurement. This means that the final objective relating to efficiency is not commented upon.
(ii) Other proposed performance indicators
Calculations:

Return on capital employed is a measure used by businesses to identify the return provided to the capital providers overall. At Achilty, the primary objective relates specifically to shareholder returns and so return on equity may be a better alternative. The result requires comparison with other similar companies in order to be understood but appears to represent a strong return compared to likely costs of capital. However, this may not be a particularly useful measure for a company such as Achilty which depends heavily on intangible assets.
Total shareholder return (TSR) would fit very well with the primary objective as a good summary for the principal stakeholders. However, it is not possible to calculate TSR as no share price has been supplied in order to gauge the capital gain/loss nor the dividend yield, which are needed for TSR.
Inventory days measures the amount of stock carried and so relate to the final subsidiary objective of efficient inventory control since a lower inventory requires lower working capital to support it. It is likely that this measure varies widely during the year as clothing is a seasonal business.
Receivables days estimates the length of time it takes to collect revenue from sales. As Achilty is a website business, it will have no cash sales and the time it takes to receive funds will be dictated by the customers’ credit card firms or banks. It is unlikely that Achilty can change this situation and so it may not be a relevant measure.
(iii) Changing role of the management accountant
Burns and Scapens studied how the role of the management accountant would change. They noted that the management accountant has become more of an internal consultant advising different managers rather than working as a specialist within the finance department. They described this new role as being a hybrid accountant, where the focus is primarily on business support and financial control. This is contrasted with the traditional view where accountants were independent from operational managers in order to allow them to objectively judge and report their accounting information to senior management.
The three drivers of this change identified by Burns and Scapens are technology, management structure and competition. However, it has also been commented that many accountants believe that the need for change in the management accountant’s role may only be a passing fashion although it has appeared to have persisted.
Taking the drivers for change in turn and beginning with technology, a significant change has occurred in the quality and quantity of information technology. In the past, the management accountant working in the finance department would be one of the few people in the organisation who had access across all the IT systems in the different functions of Achilty. The information which was generated would often be used to prepare financial reports for management. Now, however, systems, such as the new ERPS, allow users across the organisation to input data and run reports giving the type of analysis once only available within the finance function. As a result, the management accountant now acts as another user of the system. It will be critical to the success of the ERPS that the hybrid accountant successfully assists the managers in getting the right information from the large volume which will be available from the ERPS and data warehouse.
Second, changes in management structure can mean that the role of the management accountant needs to change. For example at Achilty, responsibility for decision-making has often moved from functional department heads to the cross-functional team leaders. These leaders will be making budgeting decisions and producing pricing and profit forecasts with the assistance of the hybrid accountant. The hybrid accountant will link the teams with strategic decision-making helping to ensure that there is effective, autonomous team management which is aligned with the strategic objectives of the whole business.
Finally, Burns and Scapens identify that the competitive environment also drives change in the role of the management accountant. The need to catch up with competitors is one of the main objectives of the IT changes. The more traditional accountant’s focus had often been short term but this is changing with the use of more long-term measures of performance. This is certainly the case at Achilty, where a principal aim is the long-term growth for the company. This will entail the accountant understanding the needs of the particular manager and then working with them to extract valuable reports from the ERPS. This may require the development of different performance measures beyond the traditional measure of profit. For example, it may be important to build customer loyalty initially before building profitability and so understanding the point at which a customer can be moved from initial loss-leader offers on to more profitable sales will be key to Achilty’s success. Eventually, it will be this knowledge which will become amongst the valuable commercial secrets for Achilty.
(iv) Data warehouse
The proposed new information system will collect data from customers’ website visits and store it for data mining purposes in a data warehouse. The capital required will be significant at $50m and there will also be considerable annual running costs. However, the benefits could be significant although measuring them will be difficult as they depend on influencing customer behaviour and so are not simply cutting costs.
Data mining involves seeking relationships, for example, geographical preferences for products; links between price offers and volumes sold; products which are often bought together; seasonality of product purchases.
Opportunities
These relationships can then be used to create opportunities to address the objectives of Achilty:
– Improving product ranges by knowing customer preferences. A problem in most retail businesses is the large size of the product portfolio since more products (and potentially more suppliers) require more effort to manage. The new system may allow a Pareto-style analysis where the least profitable non-essential products are identified and can be cut from the product range;
– Increasing the number of profitable customers and their individual spend by linking lower margin offers to high margin purchases and, also, identifying the most profitable customers;
– Focusing on customer service by identifying the design factors in the website which generate most sales; and
– Improving profitability by efficient cost control in purchasing and inventory management by forecasting more accurately and quickly demand changes so that excess inventory is not purchased or held. Also, there will be cost savings by more efficient advertising. The data on each individual customer can be searched to profile customers and identify their individual preferences. Marketing can then be targeted to groups of customers using products which they commonly buy.
Risks
As can be seen from the $50m cost, systems which can handle the volumes of data being produced are expensive. In fact, this level of expenditure would almost double the existing non-current asset base of Achilty. Although costs in this area are falling, the volumes of data available are rising and, also, Achilty’s competitors will be spending to achieve advantage in this area too. This project will require a large initial spend and then constant on-going spending to maintain a position in the competitive environment.
The storage of personal information (e.g. about customers, especially their payment details) is an active area of new laws and regulation. Breaking these rules can be punished in the legal sense and by loss of reputation. In particular, theft or loss of personal data can lead to civil legal action and bad publicity.
The data obtained from qualitative sources (such as social media) can be imprecise or inaccurate and lead to inaccurate conclusions. Some data collected may be incorrect. This is sometimes referred to as the veracity problem. Also, in large volumes of data, some data may become out-of-date quickly and so constant monitoring of the database will be required to avoid this.