Strategic Implications Of Resource Accounting

By Professor Michael Mainelli and Wyatt Ramsdale
Published by Executive Agency Overview, Issue 5, pages 17-19 (Also reprinted in The Defence Yearbook 1997, Public Sector Information Ltd, pages 98-101).

Introduction

Does the score matter in football? Would you play poker without chips? Do you study hard without examinations? For most people, the answers to the above - or the answers that they would say other people would give - are self-evident. Measurement is an integral part of human activity. Why then are there questions over resource accounting?

Background to Resource or Accruals Accounting

"Taxpayers will be better able to see what they are receiving for their money and judge what value for money they are getting" - Kenneth Clarke, Chancellor of the Exchequer.

From the above quotation, resource accounting sounds like another invention for better government. Government organisations earnestly prepare for their annual reviews. A glossy document is a not uncommon result of the review. Over the next few years, all these glossy documents will be based on resource accounting. If changes to glossy documents were the sole result of resource accounting, then it would be a sham.

To some degree resource accounting is a new invention in government worldwide, from New Zealand to the UK. Resource accounting is nothing new in the private sector, where it is called accruals accounting. Accruals accounting is typically contrasted with cash accounting (vote accounting in government) and characterised by matching all of the costs of an organisation (or product or project . . .) against the income over comparable time periods. The transition from cash/vote accounting to accruals/resource accounting can appear so fundamental that it shakes the organisation to the core, or accruals/resource accounting can be viewed as just another new accounting technicality for the annual report. Combined with management commitment to better decision-making, accruals/resource accounting reaps large benefits..

What are the effects of Resource Accounting?

The key to resource accounting is comparability over time. Without resource accounting an organisation can examine what resources it has available at a particular moment, but not what effect its planned expenditure or planned income might have on its position. A simplistic example may help to illustrate the very basic concepts. A hamburger stand beside a sports ground costs £1,200 and lasts one year. There is an event each month which nets the stand £200. In vote/cash accounting terms, the stand loses £1,000 in the first month and makes profits of £200 in each subsequent month of the year. In accruals/resource accounting terms, the stand gains £100 each month. Significantly different decisions could be made on both sets of information - get out of business in the first month or borrow and expand rapidly because your vote/cash profits are double your accruals/resource neighbours' profits.

Accruals/resource accounting is fundamental to rational decisions over large investments of capital. Cash/vote accounting may be adequate for many small enterprises which make infrequent/small capital investments or have primarily hard cash transactions, and sometimes for quite sizeable organisations who have limited overheads or infrastructure. On larger investments accruals/resource accounting permits the evaluation of expenditure on large capital items over their lifetime. For DERA, (Defence Evaluation and Research Agency) one of the most visible contrasts is the state of its buildings. DERA's older buildings were often built by its predecessors with an eye to what could be spent in a single year, often regardless of the ongoing maintenance costs. This approach resulted in an unsightly number of poorly-built or poorly-maintained structures which were not built for long-term requirements. Today, we are able to invest prudently in large-scale buildings which are designed to meet longer term needs and the evidence surrounds us.

Accruals/resource accounting is not just about large capital projects. The effects of the approach are also felt in purchase payment periods, credit control, sales analysis, employment terms, asset valuation/amortisation/disposal, machine deployment, utilisation, cost sharing and internal transfer costs. Accruals reflect the time intervals between the cash flows and the actions taking place. Resource accounting focuses attention on the balance sheet (cash accounting does not really have a balance sheet), the assets represented there and measuring the outputs delivered with those assets, e.g. return on capital employed.

DERA Experience

"The Defence Research Agency has examined its activities and processes and introduced best private sector practice, particularly in financial and commercial management." - Government White Paper - The Civil Service: Continuity and Change.

DERA (and its predecessor, DRA) has achieved much since it was established as an agency. In 1993 resource accounting was an early step towards more commercial management. Resource accounting was not the only step, but it is a foundation for the information which underpins the measurement and evaluation of our management's performance.

The size of the overhead infrastructure is almost totally a burden on the productive work of the organisation and its reduction is wholly a benefit to customers. Our plan was to reduce the infrastructure cost in 1991/1992 of £260 million by $100 million over five years, a plan regarded by many at the time as ambitious and high risk. In the event, our managers have succeeded so far in reducing it by £135 million in just three years. This success led to customers being offered much better value for money year by year. In 1991 customer expenditure of £1,000 would buy, on average, 22 hours of research. In 1995 the amount of time bought by the customers' money has expanded 60%, to 36 hours.

How Does Resource Accounting Achieve These Marvels?

The financial benefits described above are achieved day-by-day in the decisions made by over 12,000 people throughout DERA. The marvel is in the routine information that all these people use. The benefits were largely achieved by:

  • empowering managers to take cost conscious decisions in line with organisational goals;
  • providing managers with relevant, reliable information which helped them to plan and evaluate their responsibilities.
  • For instance, in DERA, managers are provided with:
  • time utilisation reports three days after the week worked;
  • full cost reports at all levels in the management structure after seven days from the period end;
  • on line enquiry to project cost and income;
  • cross charges for the support services they use and thus the power to reduce support costs;
  • the tools to investigate in detail individual payroll costs, time charges, purchases, etc.
  • The same managers are empowered to:
  • recruit more resources where more work needs to be done, or vice-versa;
  • select the type of resources to use on any task;
  • manage the recruitment, retention and reward of staff;
  • seek additional sources of cost recovery and income.

Thus, if enough line managers, who produce tangible output for external customers, determine that they do not want an overhead, an automatic mechanism ("invisible hand") eliminates it. In DERA this market driven approach has resulted both in cost reductions and in changes of priority in the deployment of resources.

What Could the Strategic Implications of Resource Accounting Be?

DERA has a good perspective on resource accounting not only as one of the first organisations to move entirely to resource accounting but also because DERA has also contributed to best practice in other organisations, where DERA advises and can take on their accounting functions for a fee. The key benefit of resource accounting is better decision-making at the coal-face of the organisation.

The typical strategic cycle is planning, implementing, evaluating - and then planning again. Resource accounting enables better decision-making during planning, because the evaluations are more relevant. The true value is the decisions made each day, at every level in the organisation, e.g. make or buy, new machine or more people, a few quality items or many cheap ones. Managers need resource and cost information which enables measurement in £'s of the results of their actions. £'s are the closest unit to a common denominator for resource and income measurement. Resource accounting empowers managers throughout the organisation, where the business is delivered.

Another strategic implication is that output becomes more important than input. At the same time, large capital inputs must sweat harder. In a large government organisation, service delivery is a complex value chain. Many people are involved from beginning to end. Many resources contribute to delivering the service, e.g. computers, buildings, etc. Decisions are made using transfer costs or cross-charging to determine levels of service, quality of service and the components of service. In cash accounting, the person who buys resources is responsible for proving that the item has been authorised and used. In resource accounting, the person who owns an item has to demonstrate the value of its use over the period he or she owns it. Under cash accounting, DERA's jet aircraft were authorised and useful. Under resource accounting DERA's managers are trying to demonstrate the value, i.e. improve the output while minimising the use or ownership. In the long run, a series of decisions by managers results in fewer jets working harder.

Scoring

"Resource accounting techniques have given me the tools to deliver research to my customers much more efficiently. I now have the financial power and business knowledge to use it effectively." - A DERA Profit Centre Manager.

The score does matter in football. Cash accounting is like measuring the goals scored by your team in the first half versus goals scored by the opposition in the second half, and believing that this produces a meaningful result. The time periods just do not match. Resource accounting gives a complete match.

DERA is scoring goals for its customers and staff. Other government teams can achieve the same high scores with similar strategies. Resource accounting is an integral part of the planning, implementation and evaluation of any modern strategy.

Reference

John Chisholm, "Why Are We Doing All This?", Journal of Strategic Change, Vol. 4, 208.1-17 (1995).

[A version of this article originally appeared as "Strategic Implications of Resource Accounting", Executive Agency Overview, Issue 5, (May 1996) pages 17-19. Also reprinted in The Defence Yearbook 1997, Public Sector Information Ltd. pages 98-101.]