Master Thesis
The relation between management accounting information and decision
making: Do changes in management accounting information influence decision
making or vice versa?
Abstract
This paper explores the relation between decision making and management accounting information by using the concept of sensemaking. Normative accounting theories and cost-benefit accounting theories are indicating that managers themselves will request (changes in) management accounting information. The constrained efficiency framework already indicated that managers can never know all information available to request. The script perspective gives us a contradicting view, which says that decision making is a scripted behavior which is set into motion by cues extracted from management accounting information. Sensemaking, a broader concept, is used to explore this relation. Four propositions, formalized out of the sensemaking literature, were used for this. Three propositions deal with plausibility of management accounting information and how management accounting information changes and is changed by sensemaking of managers. The fourth proposition is about updating of decision premises when dealing with recurring actions and situations. There have been found overwhelming support for the first three propositions in two healthcare organizations from the Netherlands. Thereby, some supplements to our propositions have been formalized. The fourth proposition is scanning in the right direction, but there are some snags with it. Overall plausibility is of crucial importance for research about management accounting information and the concept of sensemaking should be considered when researching in the direction of decision making or managerial behavior.
Introduction
There is much literature about management accounting information, decision making and management accounting information related to decision making. In this literature most management accounting researchers follow a decision-making perspective. This perspective implies that the management accounting systems aid managers with decisions and control activities by collecting, analyzing and reporting information (Littleton, 1938; Devine, 1950; Hepworth, 1953). Thus, in this perspective managers use management accounting information to make decisions (Swieringa and Weick, 1987; Feltham and Demski, 1970; Gordon and Miller, 1976; Simon, 1955). So the decision making perspective assumes that a manager knows which information is needed to make a good decision and that the manager addresses the management accounting system for this information. Researchers have also developed other perspectives to describe the concept of decision making, as some researchers question the explanatory power of the decision-making perspective (Laroche, 1995; March, 1987). One of those alternatives is the script perspective, that studies the link between cognition and behavior (Gioia and Manz, 1985) and tries to explain human behavior in organizations (Gioia and Poole, 1984; Choo, 1989). This perspective studies decision making as scripted behavior and thereby the contribution lies in understanding the decision making process (Gioia and Poole, 1984; Choo, 1989). So the script perspective implies that decision making, as scripted behavior, can be cued by management accounting information, but it also implies that managers do not know which information should be asked for. One other perspective that researchers have developed is the action perspective (Starbuck, 1983; Weick et. al., 2005; Brunsson, 1989; Laroche, 1995). Whereas the script perspective is used to describe the process of decision making, the action theorists claim that there is no such process as decision making. In this perspective ‘cognitive structures shape cognitive processes, which in turn shape organizational action’ (Laroche, 1995, p. 66), cognitive activities as sensemaking, rationalization and justification then follow (organizational) action (Weick, 1988; Weick, 1993; Weick et. al., 2005; Starbuck, 1983). This implies that managers ask information from the management accounting system, but not to make decisions; rather they will use it for sensemaking or rationalization.
specifically the sensemaking perspective, received relatively little attention in the field of management accounting. So therefore the literature still does not coherently explain how decision making relates to management accounting information.
As such, the purpose of this paper is to uncover the relation between decision making and management accounting information. This study explores the action perspective with the use of the sensemaking concept. For the concept of sensemaking explains how decisions are made and how information is used compared to other theories in the field of management accounting. Most theories only address how decisions are made or how management accounting information is used, whereas sensemaking thus addresses both. Some researchers already pointed out how management accounting information is used for sensemaking and that this is strongly related to decision making (Tillman and Goddard, 2008; Boland, 1984). Furthermore, it is already noted before the 21st century that it is important to develop a complete understanding of how management accounting information is used (Birnberg and Shields, 1984) and to understand decision making in organizations (Laroche, 1995). So even while leaving all practical implications aside, this is an interesting research area.
A case study approach is used to understand the dynamics within a single setting (Eisenhardt, 1989). For this interviews were conducted in Isala and Deventer Ziekenhuis, two hospitals in the Netherlands. Management accounting information changed often during the last few years in these organizations, which helps to understand the dynamics of the relationship. Furthermore, the healthcare sector in the Netherlands is changing to being more market oriented, which might have a big impact on the characteristics of the decisions.
The next section is the theoretical section in which the different perspectives will be explored and related. Also the relation of management accounting information to our understanding of decision making will be made here. The third section will be the methodical section, where also the Dutch Isala and Deventer Ziekenhuis will be introduced. The fourth sections contains the analysis of the data and conformation of the theory. In the fifth section is the discussion that also reflects on the study. The paper ends with concluding what this research has found.
From the decision making perspective to the action perspective
for easier decisions, so they can concentrate on more important decisions (Laroche, 1995; Gioia and Poole, 1984; Choo, 1996). The managers want to make controlled and informed choices and therefore address the accounting system for information (Swieringa and Weick, 1987; Feltham and Demski, 1970; Gordon and Miller, 1976; Simon, 1955). Because this perspective implies rationality, managers are aware of their information needs; which implies that the provided management accounting information would only change when the managers ask for it.
However, over the years this decision making perspective has been seriously criticized and challenged, mostly because many researchers see this perspective as an extension of the rational model. Argumentation against the decision making perspective differs. First, research on managerial activity tense that decision making is not a central element in managerial tasks (Mintzberg, 1973; Kotter, 1982; Hannaway, 1989; Whitley, 1987). This research also argues that those problems handled by managers are highly interdependent and thus outcomes cannot be seen in isolation. Second, there is research that challenges the underlying assumptions of the decision making perspective about the nature of the social world (Burrell and Morgan, 1979; Boland, 1984). The decision making perspective sees the social world as being objective and having an external character. By such assumptions the decision maker can be provided with a model of the situation, consistent of observations and analyses, whereby an action with a desired outcome can be chosen. This is challenged by a view of the social world as being subjective and having an intersubjective character. With these assumptions knowledge of the social world can only be obtained through interaction with others and not by observation. The social world can thus be seen as a socially constructed reality, which implies that a manager can never be provided with a perfect model of the situation.
So, although the decision making perspective is broadly used, a lot of researchers question its explanatory power. Some think that the decision making activity of managers is overstated and some disagree on the fundamental assumptions. So this leaves room for other perspectives to explain decision making. The action perspective challenges the decision making perspective on both types of criticism. First, the action perspective challenges the view on managerial activity. Organizations are seen as action generators, not as decision making entities, and those decisions made also rarely initiating action (Starbuck, 1983). Managers are more seen as reacting to different demands, whereby any decisions are often decoupled from real actions (Brunsson, 1982). Second, the action perspective has other assumptions about the nature of the social world. In this perspective action is most important and action creates a person’s perception of reality (Boland, 1984; Hopper and Powell, 1985). Thus the action perspective follows assumptions of social reality as being subjective and intersubjective. This action perspective has a different view on the managerial activity and therefore on decision making. In the action perspective cognitive activities as sensemaking, rationalization and justification only take place after the action is performed (Weick, 1988; Weick, 1993; Weick et. al., 2005; Starbuck, 1983; Laroche, 1995). So, according to this perspective management accounting information used for these purposes would be gathered after, not before, the decision is made. Following this line of reasoning, a change in (the characteristics of) the decision would never change the provision of management accounting information before the decision has been taken. After the decision has taken place, the manager might request for a change in information. Also, when the provision of management accounting information changes and this is pushed to the managers, for instance by interaction, the managers might change the characteristics of the decision.
Shields, 1984). Therefore in this paper we aim to get a better understanding of this relationship. In order to come to that, we
Explore the relationship between decision making and management accounting information.
For our study we explore theories that explains both how decisions are made and how management accounting information is used, so we could elaborate on such a theory to develop a framework or propositions by which we will explore in the field. For this sake we’ll discuss some relevant developed theories and concepts from the field of management accounting to see their implications for our study. Theories in the field of management accounting
The normative accounting theories are one of the oldest in the field of management accounting. This stream of research focuses on providing the right information for decision makers (MacNeal, 1939; Paton and Littleton, 1940; Littleton, 1953; Chambers, 1966; Ijiri, 1975). The underlying reasoning is that when the right information is provided, the decision makers have everything they need to decide the right course of action. So according to this theory, organizations should put much emphasize on providing the right information, as decisions are dependent on the quality of management accounting information. Management accounting information should be relevant (MacNeal, 1939; Paton and Littleton, 1940), objective (Littleton, 1953), focus on the future (Chambers, 1966) and record all transactions (Ijiri, 1975). This stream of research is very important for the field of management accounting as it identified what management accounting information should look like. The relevance for this study is the fact that this theory assumes the manager will ask for the needed information when there is a need to make a decision. In this way management accounting information will only change when a manager needs other information for his (changed) way of making decisions.
Another important theory is the cost-benefit theory (Vessey, 1994), which tells us that the decision making is influenced by context variables. This is first recognized by Blochter, Moffie and Zmud (1986) who claim that the problem was that report formats did not always match decision task characteristics. This is challenging the normative accounting theory, because these context variables make it impossible that there is one right way of providing management accounting information. The cost-benefit stream of research is examining these context variables, but has a strong focus on information presentation (Desanctis and Jarvenpaa, 1989; Bonner, 1990; Amer, 1991; Wright, 1995). Vessey contributed to this stream of research by introducing the model of cognitive fit, which summarized earlier research and recognizes a mismatch between the problem representation and the decision making tasks (Vessey, 1991; Vessey and Galletta , 1991; Vessey, 1994). This stream of research gives us new insights about optimizing the (presentation of) management accounting information and about what context variables are important when providing management accounting information. Therefore this research contributes by the explanation of how management accounting information is used. However, this stream of research is criticized for only looking at the tasks characteristics and ignoring user characteristics (Cardinaels, 2008). This stream of research also assumes that the manager will ask for the needed information when he/she needs to make a decision. Therefore again, only a change in request can change the management accounting information.
the new institutional economics point of view. But they are influenced by institutional forces and constrained by cognitive limitations, which came more from the side of new institutional sociology. This constrained-efficiency framework is partly challenging the normative accounting theory, by threating humans somewhat more realistic. Therefore it contributes to our knowledge about decision makers. As this theory assumes rationality it thereby claims that the manager will request the needed information when it is required for a decision. The influences of new institutional sociology (bounded rationality) however assumes that the manager does not know all different kinds of management accounting information that can be requested. This leaves room the management accountants that have an expertise in the field to show how management accounting information can be changed.
The script perspective takes a very different approach on the relation between decisions and information, and it descends from the behavioral science. Scripts are first introduced to the field of management accounting by Colville (1981) and the importance of the development of scripts is highlighted by Birnberg and Shields (1984). The research of scripts is useful to understand how information is used by decision makers and how it influences their actions (Birnberg and Shields, 1984). Choo (1989) explains the impact of scripts for management accounting practices and tells us that we can see decisions as scripted behavior. The script perspective is challenging all previous theories by claiming that managers are often not actively searching for information, but that their actions are driven when information is pushed to them. This makes that decision making is not an action of choice, but rather a by script guided behavior that can be set in motion by presenting management accounting information. The script perspective gives us a very solid explanation of the working of human behavior and thus of how decision are made (Choo, 1996). The script perspective is relevant to this study because it says that the provision of management accounting information is just something that the manager is befalling. In this perspective the management accounting information is provided first and then there might be a need to make a decision. The decision making script is invoked by information, so a change in management accounting information is might change the characteristics of a managers’ decision making.
These theories are very important for our research as it shows us the confusion that the different theories create. The normative and the cost-benefit theory tell us that the manager requests any change in management accounting information when he/she is changing the characteristics of decision making. The constrained-efficiency framework tells us that a manager cannot oversee all possible changes in management accounting information, therefore opposing the former two theories. Last, is the script perspective that contradicts the normative and cost-benefit theories by telling us that a change in (scripted) decision making can only be set into motion by a change in (the provision of) management accounting information (the cue). This confusion cannot be solved when we build on one of these theories. Therefore, we will explore the concept of sensemaking; which is not about decision making itself, but is complementary (or even substituting) to decision making.
sensemaking. But sensemaking is a concept that covers some more than only interpreting the world. Sensemaking is also about the action that follows when the decision maker made sense and it contains some interesting properties (Weick et. al., 2005; Weick, 1995). These properties seem to cover both the decision making (identity, enact, social and ongoing) itself and the information used (retrospective, extracted cues and plausibility). Furthermore, this is a different angle to explore the relation between decision making and management accounting information.
The concept of sensemaking
Sensemaking simply ‘means the making of sense’ (Weick, 1995, p. 4) and Karl E. Weick introduced the concept to the organizational literature with his first book in 1969. Weick was getting interested in sensemaking by a study of Garfinkel (1967), where jurors first came up with the outcome of a decision and then gathered the facts that justified the outcome. According to Boland (1984) sensemaking builds, among others, on the work of James (1890), Mead (1938) and Schutz (1967). After Weick his first book he elaborated the concept more with the publishing of the second edition of the first book in 1979. Since the publishing of the second edition, sensemaking was getting more attention in the academic world and was developed to a greater extend. From then on, Weick tried to hold all his sensemaking students on the right path and to integrate all studies by fulfilling an elder statesmen role (Gioia and Mehra, 1996; Orton, 2000). His book of 1995 is a perfect example for this.
So, sensemaking is the making of sense or the constructing of meaning, but sensemaking can be better explained as a set of ideas and images that can explain reality, than as a body of knowledge (Weick, 1995; Weick, 1979, Brown, 2000; Tillman and Goddard, 2008; Boland, 1984; Weick et. al., 2005). We are making sense of all kind of things, but most often we make sense of situations and actions. We make sense because it helps us to understand reality, so we can rationalize our part in it and so we can rationalize what we are doing (Weick, 1993). This can be seen as the questions “what’s going on here?”, however the follow up question “what do I do next?” is of equal importance in sensemaking. So, sensemaking is not an outcome, but it ’is about the interplay of action and interpretation’ (Weick et. al., 2005: p409; Weick, 1995; Laroche, 1995). We should therefore not confuse sensemaking with interpretation, as sensemaking is about action and creating that leaves traces that are interpreted and sometimes reinterpreted (Weick, 1995). The formula “how can I know what I think until I see what I say” is the recipe for sensemaking (Weick, 1979; p175).
result of our own action. We make sense of those stimuli in combination with the actions performed. Fourth, sensemaking is both an individual and social activity. We are making sense of social activities and by social activities (Weick, 1995; Weick et. al., 2005). We make sense of the communication and interaction with others and we try to make sense of how other people make sense. Fifth, the process of sensemaking is ongoing as ‘people are always in the middle of things, which become things only when those same people focus on the past’ (Weick, 1995, p43). Sixth, we are not making sense of everything, we make sense by extracting cues (Weick, 1995; Weick et. al., 2005; Daft and Weick, 1984). We can see cues as simple and familiar structures from which people set up an image of what might be going on. The context can influence the extraction of cues and even small and/or subtle characteristics can have a significant effect on sensemaking (Weick, 1995). Extracted cues are very important because they set action into motion. Sensemaking of wrongly extracted cues can evoke such intense action that the sense made at first does not matter that much anymore, as new sense gets constructed (Weick, 1995). Seventh, when we are making sense we need to know enough for a good perception, but accuracy is not required for this (Weick, 1995). This goes hand in hand with the sixth property, as it shows us that we will elaborate on only one single extracted cue, wherefore accuracy is not necessary.
Decision making and sensemaking are different concepts to explain different phenomena. Decision making is the process that leads to a final choice (Laroche, 1995), whereas sensemaking has more to deal with the development of plausible explanations of reality (Weick, 1995; Weick et. al., 2005). However, decision making can be a part of the concept of sensemaking, as Weick (1979: p175) states: ‘decision making in the organizing model means selecting some interpretation of the world and some set of extrapolations from that interpretation and then using these summaries as constrains on subsequent action’. Following this line of reasoning would imply decision makers would first create a plausible image of reality, thus making sense, whereas the decision maker would then ‘decide’ on basis of this image, which actions would follow. That would mean ‘that a decision is an act of interpretation rather than an act of choice’ (Weick, 1995: p185). This is contradicting to the decision making perspective, which tells us that we follow some clear steps before we come to a final decision. But this image probably created because ‘the enactment process produces outcomes that are interpreted by the selection process as if a decision has been made’ (Weick, 1979: p195). In sensemaking the enactment process is the performed action and selection process is the part of sensemaking that is interpreting what is going on. So, people ‘take an outcome and interpret it to be the result of a series of decisions that often were not seen as decisions at the time they were made’ (Weick, 1995: p184). This is where the concept of sensemaking challenges the decision making perspective, as it says we are not rationally or consciously making decisions even if we later think we did. As a matter of fact, one of the seven properties tells us that sensemaking is retrospective, so we can only know what we ‘decided’ after the action has been performed (Weick, 1995; Weick et. al., 2005; Boland, 1984; Weick, 1993; Weick, 2010). That would imply that ‘favoring those who think before they act is mischievous because you have to do or say something first so that you can then discover what you thought, decided or did’ (Weick, 1979: p 194). Although this seems to be common practice in most organizations. Even the total information provision is aligned to this way of thinking, and managers are seen as decision makers (Laroche, 1995; Bruchell et. al., 1980).
for the purpose of sensemaking, as it goes further than direct observations and it forms idea’s and understandings (Weick, 1995). So, when management accounting information does not give a plausible explanation of reality, it does not fit with the plausible reasoning of manager, which they pursue to understand. It is not necessary that this reasoning is also correct, but it is important that the reasoning should fit the facts (Weick, 1995). This means that plausible reasoning could even be based on incorrect management accounting information. So, important for management accounting information is that it should contribute to a good story constructed by the managers, as ‘a good story [is] (…) plausibly enough to allow people to make retrospective sense of whatever happens’ (Weick, 1995: p61). When our organization is making huge profits and someone shows us a set of performance measures that indicate that our firm is performing poorly, this would make no sense; as these figures do not tell a plausible story. This leads to the following proposition:
Proposition 1: Management accounting information is used for sensemaking if it gives a plausible explanation of reality.
When management accounting information does not provide or no longer provide a plausible explanation of reality, the sensemaker (the manager) will be most likely to undertake action (Weick, 1995). This situation can occur, as our world is dynamic. When performance measures are indicating that a firm is doing well when the firm is making a huge profit, most managers would commit to these performance measures. In other words, the performance measures seem to give a plausible explanation of reality. However, when this firm is losing money a few years later while these performance measures are indicating that the firm is doing even better, commitment would collapse. Managers then want to understand the situation again (Weick, 1995) and as the management accounting information does not provide a plausible explanation anymore, it does not help them with their understanding of the situation. Managers would undertake different actions to cope with their plausible reasoning. Logically, this can be in the form of a request to change the management accounting information provided. This gives us the following proposition:
Proposition 2: Managers will ask for a change in management accounting information if it does not (any longer) provide a plausible explanation of past actions or events.
realize that the hard working in the past should be kept up to keep the profits high in the future. This leads us the following proposition:
Proposition 3: A change in management accounting information changes the sense made of past actions or events if it provides a (more) plausible explanation of those actions or events.
Management accounting information can be very useful even as we only use it to make sense of past ‘decisions’, as the created image of reality is the basis for future related ‘decisions’ (Tillman and Goddard, 2008; Weick, 1979). Therefore, the usability of management accounting information differs between more routinely made ‘decisions’ and infrequently made ‘decisions’.
As we can use management accounting information to make sense of ‘decisions’ that have passed, our image of reality gets stronger when these kind of ‘decisions’ are more frequently occurring (Weick, 1979). To illustrate this we think of two ‘decisions’ that are taken in different points in time; first we have to ‘decide’ which supplier may supply wood for our factory, second after some time we have to ‘decide’ which supplier may supply the metal used in our factory. These will be called respectively ‘decision A1’ and ‘decision A2’. Both contain ‘A’ as they are somewhat related. As we have to make such ‘decisions’ for every period and for more suppliers, we can consider these as routinely made decisions. Imagine that the cheapest supplier is now supplying our factories as result of ‘decisions A1’ and thus we can start to make sense of it. First we see from our management accounting information that our profits increase, but second we notice that the quality of the wood is bad and is causing problems. This can create an image of reality that choosing a cheap supplier results in higher profits but lower quality of the products or the service. This image creates ‘decision’ premises that can affect related ‘decision A2’. As sensemaking is ongoing we also make sense of ‘decision A2’, but this goes combined with our established image of reality resulted from ‘decision A1’. New premises are set and update for future related decisions.
Management accounting information has a significant lower usability when we are dealing with infrequent ‘decisions’, as it does not get the chance to repeatedly update the image of reality. To illustrate this, we again think of two ‘decisions’ that are taken in different points in time; now our first ‘decision’ is about acquiring a new company and our second ‘decision’ is about a new ERP system. These will be called respectively ‘decision B’ and ‘decision C’. These do contain different consonants, as these are clearly less related than our ‘decisions’ about suppliers. As an average organization does not make such decisions every year we consider these as infrequent decisions. The point is that after we made sense of ‘decision B’, this again gives us an image of reality about such kind of ‘decisions’. Although this results in ‘decision’ premises for such kind of decisions, we might never take such a decision again. Also these premises do not play a role for ‘decision C’, as it is too different from ‘decision B’.
So, managers are likely put more value on management accounting information when they are dealing with recurring ‘decisions’, as it will help them to continually reshape their image of reality. this leads to our last proposition:
Proposition 4: Management accounting information is more useful for managers that are dealing with recurring actions and situations.
Methodoloy
information. As we use the concept of sensemaking, we already know that retrospective distortion is a threat to our information and should be reduced to the uttermost; managers will rationalize and justify their behavior. Weaknesses as; the labor intensity, the overwhelming amount of data and few guidelines for protection against self-delusion had to be overcome (Miles, 1979). The first two weaknesses were more practical of nature and just had to be covered up by more dedication to the project. For protection against self-delusion interactions were held with contact persons that were introduced to the concept of sensemaking, but were not or loosely tied to this research. The impact of this protection remains unclear. Two cases are used so that any cross-case patterns would come to light (Eisenhardt, 1989; Yin, 1984) and as another protection against self-delusion; as we can place idiosyncratic aspects of one case into perspective (Miles, 1979). The study is performed at a single unit of analysis, which is the individual. This means that we were interested in the individual’s usage of management accounting information and how they made sense (of the social representation) of decisions.
A total of 13 interviews of one hour each were conducted, which were divided among the two hospitals; Isala and Deventer Ziekenhuis. All these interviews were intended to be held with those who are seen as decision makers within hospitals; namely managers of profit centers. However, the contact person of one hospital came up with the good idea to also conduct some interviews with providers of management accounting information, to address their view as well. So, in the end there were 10 profit center managers interviewed and 3 providers of information. For all interviews an interview guide1 was used which can be found in appendix 1. Although this interview guide was static, some learning points were taking into account as more interviews were held (eg. Is that emphasis should be laid on the image that management accounting information draws). All interviews held were spoken in Dutch and, with the exception of one, were recorded. This ended up in 708 minutes of recorded information.
The analysis focused on the theoretical interpretations of the interviews. This included the structuring and coding of the interviews held. The whole recording of an interview was cut into multiple small audio fragments and these fragments were coded. This was done with the use of Microsoft Excel software, where different audio fragments were classified according to our four propositions. This ended up in 659 excel lines. Next to these propositions fragments were also classified for including: sensemaking, retrospective, plausible, irrational, including an example and for just being useless. After all interviews were coded, a selection for each proposition or one of the other categories could be made. For the analysis the audio fragments were filtered on proposition, replayed, chosen on best fit and translated.
The cases
Both cases are hospitals that are operating in the province of Overijssel in the Netherlands. Both organizations are regular regional hospitals2 but Isala is somewhat larger than Deventer Ziekenhuis. Management accounting information was subjected to multiple changes over the past few years in both organizations. Examples are the introduction of performance indicators, cost price benchmarks and time driven activity based costing. These changes in management accounting information makes both cases very suitable for this research, as two propositions deal with such changes. Moreover, the healthcare sector in the Netherlands is changing toward being more market oriented. This might have a huge impact on the decision characteristics. In the past the doctors took decisions, which were almost fully healthcare oriented, now more managerial tools and information from other sectors is used which make decisions more market oriented. Furthermore, investment decisions are now taken (assessed) by a committee (and taken by board), while in the past the doctors took them.
1
The interview guide is written in Dutch, as this was the languages of the interviews held 2
Isala
Isala is one of the biggest regular hospitals in the Netherlands with a total balance sheet of 390 million and counted around 3.750 FTE in 2011. Because of the size almost all surgeries and treatments are performed in this hospital. Isala counted 994 beds in 2011, which is another indicator of its size. It also has a specialized department for child healthcare with a Ronald MacDonald house, which is highly regarded in the Netherlands.
Isala still is an independent hospital, although they are on the verge of a merger with a smaller regional hospital. This is certainly not uncommon in the Netherlands, as more hospitals already merged the recent years. Isala has a two-headed executive board, one has a healthcare background and the other has a politics and business background. All the specialisms in the organization are regarded as profit centers and thereby Isala counts around 35 operational profit centers3. These profit centers have a manager and a chairman, whereas the chairman is always a healthcare specialist. The backgrounds of the managers differ, but an increasing number has a business background. Managers may take all kind of decisions on their own, but decisions require involvement of the chairman when they are comprehensive.
Deventer Ziekenhuis
Deventer Ziekenhuis is a smaller regular hospital with a total balance sheet of 223 million and counted around 1.674 FTE in 2011. Not all surgeries and treatments are performed, but Deventer Ziekenhuis still is counted to the group of top clinical hospitals in the Netherlands4. Deventer Ziekenhuis counted 405 beds in 2011. Furthermore, Deventer Ziekenhuis was crowned to richest hospital of the Netherlands in 2011.
Deventer Ziekenhuis is also an independent hospital, although this hospital is also on the verge of a merger or cooperation with closely located hospitals. Deventer Ziekenhuis also has a two-headed executive board, just as Isala, in which one has a healthcare background and the other has a business background. Deventer Ziekenhuis is somewhat differently structured than Isala, in the way that they divided the specialisms into five specialism groups: surgical, contemplative, emergency-intensive, medical support and nursing. These five groups also have a manager and a chairman, in where the chairman is a healthcare specialist. The background of the five managers is also healthcare related. Just like Isala, managers may take all kind of decisions, but comprehensive decisions require involvement of the chairman.
Analysis
This study of management accounting information and sensemaking almost exclusively used individual verbal accounts, which resulted from the semi-structured interviews. These verbal accounts allowed us to recognize sensemaking and place it into a broader context. However, interviewees were also trying to make sense of the interview, which sometimes meant that they were rationalizing what had passed. This was apparent by the way people thought for a moment before they spoke. But by asking detailed questions and by asking for examples, this could often be bypassed. Observations during the interviews and provided documents were complementary to the verbal accounts.
3
Supporting departments are also regarded as profit or costs centers, but these are not included in this number.
4
The analyses were aimed to identify if there was any support for our propositions. As three out of four propositions conclude plausibility, there is some overlap between the verbal accounts.
Sensemaking and plausibility of management accounting information
Sensemaking is the constructing of meaning. Something managers will do continuously. Managers form a set of ideas and images that explains reality to them about that which they manage. Management accounting information helps with this explanation of reality, but the image of reality is created by a lot more than only figures. When a profit center manager was asked how she usually creates an image of how busy her departments where, she told the following:
Yes, well now that you question more about it, it’s 9 of the 10 times just the feeling that you got with a department. That sounds very basic I think, but when you, as manager, regularly walk over your departments and you regularly speak your operational supervisors and regularly speak to doctors, then you just get a picture how busy they are. And this feeling, if you get it confirmed by figures, often you take a decision on basis of that. And if your feeling is not confirmed with figures, then that is often an occasion to dive deeper into it. Like: Jeez, I got this feeling that they are awfully busy, but that is not shown by the figures, where does this go crooked?
This manager is extracting different kind of cues and uses this to make sense about how busy a department has been. These extracted cues are from interactions, observations and figures, which together shape and reshape the image of reality of this manager. She told us that the figures are used to (dis)confirm the feeling, which might be because the figures often have a greater time lag than the interactions and observations. A controller told us that managers use multiple sources to set their image of reality:
Yes but also, ehm, if financials show that your personal costs are exceeding, do I also see that from the HR data? He, that there are also more people walking around or ehm, ehm, is absenteeism increased by which you also use more, ehm.., so they try to lay all kinds of relations between different matters, ehm, by which they use multiple information sources. However, what different sources they use, yes, well, there will be a difference between the managers.
According to this controller, managers use different kind of sources from which they extract cues and they also look at differences between the extracted cues. Managers use all kind of extracted cues for their plausible reasoning and therefore plausible reasoning should fit all these extracted cues. But our first proposition is: management accounting information is used for sensemaking if it gives a plausible explanation of reality. Implying this proposition would mean that managers do not just buy everything that we throw at them. Figures should be plausible; it should be a plausible explanation of reality, but it should also be consistent with the other cues that the manager extracts, else it will not fit with the managers’ plausible reasoning. A profit center manager was indicating the following when he told a long story about the image of reality of management accounting information:
Because when we wanted a lot more oncological patients, those lay long, and therefore those can also.., well like that. It is a guideline, but if you say, do you use your gut-feeling some more for it and do use some other things with it, well yes that’s right, and with quality parameters, quality data, well yes than you should look at more than only that little figure.
The manager was indicating that costs figures were used for sensemaking; calling it static euros is telling us he has not much doubt about these figures and thus are plausible to him. But the manager is not just using the decubitus percentage for sensemaking about quality. Yet, the manager was aware of the feebleness of his gut-feeling story. When asked further if he always took a figure for granted with respect to displaying the right image of reality, he answered the following:
No, as uhm, with Cognos if it’s about the static euros yes, right, because then you can pin down and you can even know what is booked on line level. So even till the booking of a phone, so then you know that it is not really a discussion. But with those quality parameters, if we’re talking about pain perception, postoperative pain perception, well yes, if I then see something that is a way too high, which barely happens, but if there is something, then I first go to this department and I’m asking some questions about it, before I think like well it stands there, but I don’t just take it for granted no. The manager can even see the details of the costs, which might explain why these figures are plausible in the eyes of the manager. What is even more interesting to us, is that the manager uses interaction with more operational employees to check the story behind the quality parameters. So, when information is not plausible, the manager is further checking it. This manager is enacting on this extracted cue and does not directly use the information for sensemaking about quality. His image of reality about quality does not change by the figure. Another example of management accounting information that is not being plausible to a manager as it does not fit his plausible reasoning is the following case; a profit center manager discusses a remarkable exceeding on FTE’s:
Oh but that could not be so because they had no production, they were 10% behind with production. The thing that I’m looking at if you are exceeding and you got no production is, why is your TFT, and your PLB and your vacation days and whatever not declining. It is still increasing. That can’t be true. Hahaha.
According to the sensemaking of the manager the production is still lacking behind. This in combination with extracted cues about time-for-time (TFT), personal life phase budget (PLB) and vacation days, which are still increasing, makes that the remarkable FTE does not fit the manager’s plausible reasoning. So in this case the information is not plausible because the story it tells does not fit with the other extracted cues. What then happened next was that the error was sought. Instead of further evaluating or checking, some non-plausible management accounting information is just ignored. As this profit center manager told us:
From this example we see that the manager sometimes just ignores management accounting information when it is not a plausible explanation of reality in the eyes of the manager. This manager is not striving to 4% absenteeism; he does not want those people on the work floor himself. So far we have seen on the one hand that managers use the management accounting information, but are sensemaking what is wrong when it does not fit their plausible reasoning based on multiple extracted cues. On the other hand, managers may also completely ignore a kind of management accounting information when they think the information mechanism is not a plausible explanation of reality. Another example in which a profit center manager ignores a kind of management accounting information because it is not plausible in his eyes is the following:
One of the performance measures is productivity. When does this not help me? For instance in this situation, productivity goes down, right, the number of admissions goes down. You see that the personnel is not downscaling, that remains the same or even slightly increases. So if I’m now just, ehm, look at the productivity my director tells me: “hey you’re not doing well”. Just as an example. I tell him: “Yeah bullshit, explain to me, we should introduce Apenio, we should introduce PDMS, Harmony we should introduce, ehm, ehm, we should practice new work processes in the new building, we should practice resuscitation protocols, ehm, I’m relieved that it is somewhat quieter, so I can use my people for that”. Right, and so that is, eh, eh, management accounting information, the hard figures, but reality is really different. Well then information does not help me.
This quote is another example in which the kind of management accounting information itself is not plausible in the eyes of the manager, as the profit center manager told us the information is not helpful to him. Although he has not explicitly told us that the information is no longer used, this management accounting information is unlikely to be used for sensemaking as the manager will not incorporate it in his plausible reasoning.
It seems that our first proposition leads us to the following: On the one hand, if managers think that a kind of management accounting information is not a plausible explanation of reality they will ignore it and thus not use for sensemaking. On the other hand, if managers tend to use a kind of management accounting information, but it does not fit their plausible reasoning, which incorporates also other extracted cues, then it is not plausible at that time. In the latter case it is not used for sensemaking about the specific action or event, but the manager is sensemaking why the extracted cue is contrary with other extracted cues and therefore the manager will evaluate it. As already showed, plausible reasoning also incorporated extracted cues derived from observations and interaction. However, besides observations, interactions and management accounting information, cues are also extracted from other information. When a profit center manager discussed how he was setting an image of reality he told us:
Well actually, then I’m asking the operational manager to look in the department systems for how many surgeries we did.
After asking for examples he told us the following:
that fluctuates now and then. And next to that we look what, ehm, yes, how many MRI’s are in this number, what is very laborious, is that there are many labor hours. Or CT, or PET-CT, that is in particular nuclear medicine and how many BUGGY researches are in the number, you have to imagine that that only takes a few minutes for each research. So if you do 1.000 more of those, naah no, 1.000 is not really a number where you get nervous from. But if you do 1.000 MRI’s more, he, whereby you use half an hour to an hour laboratory time for sure for each MRI, well then you got a feeling of how busy it is. The same is for echo, it’s also completely handwork and then you get some feeling of how busy it is.
We see that cues extracted from information of the department systems helps the manager with sensemaking about how busy his departments have been the past months/weeks/days. Those extracted cues form an image of reality about the level of production (in money), but also about FTE’s deployed, etc. As we have seen, management accounting information should confirm this image of reality to at least some extent, to be plausible. When management accounting information is disconfirming the managers’ sense made, he is going to make sense how this can be so. This means that management accounting information is evaluated and analyzed till it fits the managers’ plausible reasoning. Another profit center manager was telling that production in Q1 of 2013 was lacking behind, but the strange thing was that there were no revenue figures of any kind available since the start of 20135. So there was no management accounting information available that this manager could use for sensemaking to build his image of reality. When the profit center manager was confronted with this he said about his image of reality:
Ehm, guesswork? No, particularly ehm, [my controller], she ehm, she can play quite handy with figures and she gets old parameters on to the table. The FB-parameters, but also, well I don’t know if that are all FB-parameters. It is about the number of first outpatient visit, the number of admissions etc. Well, all that kind of old compared to the past, than you can get at least an idea of how I’m doing with respect to the past year. (…) We know that we lag behind on some departments. We also have the idea that we exceed expectations on some departments. But how we do it eventually on total, yes emotionally not very bad.
Of course we want to know where this sense made from, how this image of reality has been constructed. So when the manager was asked how he knew that some departments were lagging behind he answered:
Ehm, from the fact that the production on the OC is lacking behind. You see vacancy.
As this answer is not satisfactory enough, the manager was asked if he actually observed it at the operation chambers (OC) to make sense of lacking surgeries. He answered the following:
Well, probably also, but I don’t walk that often on the OC. So ehm, no, there are just issued hours to specialisms and those are filled or not and the issued hours are eventually determining the expediency of your OC, your utilization of your OC. And ehm, in the past it was of ehm, you had to look to who
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you would disappoint, who you could not give what was requested and now there are falling gaps. So you know as well that you lack behind. With an arrears of, well let’s say, almost 10% for the first months.
Asking the manager to conform if the OC had his own information systems:
On the OC we got our own management information yes. So from the OC I heard it. From the central sterilization department, of the, the, the facilitator of the number of packages and that kind of business I heard the same sound, they are also lacking behind.
Asking the manager to confirm if the central sterilization department also had their own information: They also have their own figures. Those are in inherent to each other. But meanwhile, if you look to the bed occupation of the past three months, then ehm, the past four months, then we say that is good that we do not have that many OC patients as we could never place them, as we had such a full clinic. Well if that is not by the surgical patient, that comes from the contemplative specialisms, and the contemplative specialisms are on average many emergency patients, and surgical patients, and elective patients. So with respect to emergency patients I got the idea that we did it very well, but this gives you no assurance for the future and for elective we are looking where are patients are staying. So that is the image that you, not on the basis of, or well, also hard figures, but also on the basis of vague signals and that kind of business get.
These quotes gives us an idea of how the manager uses all kind of cues extracted from operational information to make sense of what happened the past weeks and months and thus establishes an image of reality. The manager uses production information from the OC and the central sterilization department to extract cues that indicate that production is lacking. Extracted cues from the clinic indicate that the house was full. So with plausible reasoning the manager sense made is that contemplative and emergency specialisms are doing well and that elective specialisms are lacking behind. Apparently he does not need management accounting information for sensemaking. It is most likely that this manager also uses the extracted cues from operational information when the management accounting information is available; as the operational information is more frequently available. So when management accounting information gets available it should confirm sense already made on the basis of interactions, observations and other (operational) information.
Sensemaking and non-plausible management accounting information
Our second proposition is about the action managers would perform when management accounting information was not plausible anymore. Specifically, the proposition contains: managers will ask for a change in management accounting information if it does not (any longer) provide a plausible explanation of past actions or events. We expect that managers will ask for a change in the management accounting information when it was not or no longer plausible. When managers use a kind of management accounting information month after month without hesitation, it would imply that they use it for sensemaking, according to our propositions. A profit center manager told me what very recently happened when he discussed the FTE figures of the past month with his controller.
go to my operational supervisors and telling them, listen we exceed Iflex by 7 FTE, explain to me. Why do I not hear this!? My operational supervisors then tell: but it is not right, look at our figures. It’s not right.
This manager always used this management accounting information for sensemaking, as it always was plausible to him. This time the information gives him an image of reality that too many employees were used from their internal employment agency Iflex. Although he is not fully consistent with these figures, he thinks they are plausible and he is asking his operational supervisors for justification. The manager looked irritated as he asked ‘why do I not hear this!?’,. Referring to the fact that his operational supervisors had not told him about it yet and he had to find out by looking at the FTE figures himself. This indicates that the information was still plausible to him and he used the information for sensemaking. However, the story continues. The manager handed over a report of one sheet of paper, which showed the FTE’s used on Iflex of the past 12 months. He had asked for this report after the discussion with his operational supervisors. He excitedly told what he discovered:
7 FTE exceeding, Iflex, yes? So I got this report and I’m thinking, heeeeey pediatrics research 0,0,0,0 and then [points at a line on the paper]. Cannot be, impossible, is really impossible. So than this [while pointing at another function], this is impossible, this [pointing again at another function], is really impossible. Yes, well, here is the difference then aye? So that’s it, that is it.
When the manager received this report he saw clearer which functions were exceeding and how this was related to the previous 12 months. This in combination with the cues extracted from the interaction with his operational supervisors made that the figures were not plausible anymore at this point. At this point our second proposition tells us that the manager will call for a change in management accounting information. However, what is happening first is plausible reasoning and sensemaking about where it goes wrong and why it goes wrong, as we have seen in our previous part of the analysis. In this example the number was corrected as it was an error and the information mechanism itself was not faulty. Therefore, this resulted in a change of management accounting information, but only a correction of the output and not a change of the information mechanism itself. Another example in where the figures were corrected, as they were not plausible came from a manager operations:
Ehm, yes, yesterday I had a discussion with ehm, the manager of the cardiology. And then it went about the waiting times, ehh, for a specific patient group and there stood that a patient had to wait 52 weeks before, ehm, before he could be helped. So yes, how can that be. But that can never be right eh. The operational supervisor of the policlinic was asked and told us: you can always be helped within two weeks. Well, if you go further on that, than it appears that it also is very much about the definition, of, ehm, waiting times what makes that the outcome is 52 weeks. There are patients that wait for 52 weeks, but that are in particular patients that say themselves: I don’t want to be treated yet. But well, if someone decides themselves to not being threated yet than I would not put someone on a waiting lists, ehm, let it count for a waiting list. Only those people who say: I want to be threated now and how long does it take then before I got treated. Those are the people that you should be included for your waiting list. Well, ehm, then you have a figure from which the manager says that it can’t be right and if you talk on about it you say: yes is not a realistic figure. That has to do with how we defined that figure and then you maybe should look to the definition.
requested a change in the definition of the measure. This highlights, as mentioned in the previous quote, that when management accounting information is not plausible (anymore) a change in the information itself can be requested. But it can also be that managers request a change in a management accounting mechanism itself, instead of a change in the figures and/or definitions. When a profit center manager was asked for examples of such requested changes he answered:
Ehm, the story of the production of the OC is an item what now has become structural normal information, the utilization of the OC. That also on specialism level so you know where the over-utilization and under-over-utilization is. Regardless of the fact that I don’t want anything to do with those specialisms, but it is handy information. Ehm, I also have been busy with my controller at the time, with that, with that monthly rapport to get sharp what is important for me.
This illustration indicates that additional or substituting management accounting information is provided when managers request it. These are not changes in the figures or definitions but in the information mechanism itself. When another profit center manager was asked for examples of requests by managers to change the kind of information he came, beside other examples, up with the following:
Where we last year started with a little, after the enormous production dip and with that up and downscaling, we are staffing some more on, ehm, productivity. And that is really a new figure and it is especially on the productivity of the poli and productivity of the clinic, that we just look to your deployment, FTE, on the number of warm bed hours. So the number of bed hours that, ehm, is occupied.
Naturally, we wanted to know whether this production dip led to the request of change in management accounting information. When the manager was asked about this he replied with the following:
Well that will be a combination of a number of things. Ehm, but one of the most important is that we were actually always accustomed to an increasing production trend. We have never really had the burden of a dip. In fact, there was a time here that the people hung with their legs out of the windows, it was that full!. But apparently the whole market is into motion and some political decisions led to the fact that healthcare was experienced and asked by the patient on another way. Think of policy excess, referral behavior, all that kind of things. In and outflow to primary line but also to nursing homes and that kind of things is really differently organized the past year, so we see all of a sudden also at us many fluctuations in our revenue pattern. And yes that ehm. So I think that the dip, it waked us up and then we get in the mode of: ow we must measure productivity. We should control on it, we should much more.. So that is changed indeed.
No, they look for another information source on the moment that they have the feeling that the figures they have now just are not right. And then they use other information sources to point out why it is not right and why, yes, ehm, it does not give a good image of the business.
Some managers will collect their own data and figures to extract cues for sensemaking when management accounting information is not or no longer plausible. This would be complementary to the use of operational data for sensemaking, as we have seen in the previous analysis subsection. When a profit center manager was asked what he would do when management accounting information did no longer give a plausible explanation of reality he said the following:
Ehm, then, I turn myself to my limited resources. We have those completely in order. And that is my dashboard of my departments and there we control on.
This profit center manager was asked for an example of it:
Yes then we go here [walking to his pc]. Come with me. This is the directory of the radiology. This is my whole system where I look into weekly to the production and productivity. And this is linked with my controller. My controller has the same access rights as me got to look in this map. Look at this, 2012 a month, utilization chambers, productivity laboratory, the year and the month are in it, all figures.
The manager has his own information system, which was filled by his operational supervisors. So instead of requesting other information, managers may also create their own provision of information to feed their plausible reasoning. This again shows how cues extracted from operational information helps managers to more frequently reshape their image of reality. These cues are used for sensemaking. Another profit center manager, who thinks that the performance measurement about pain scores is no longer plausible tells us:
I now got some other agreements on that with my operational supervisors. I want them to not only report the pain score, but also the registration score. Only, that is something which I not see in our official performance measures. Also because my doctors indicate that, you know. They also tell: I don’t go into a discussion with a manager about absolute pain scores, that does not say anything. Again, managers will collect their own information needed to extract cues from, when other information does not fit their plausible reasoning. Previous examples showed this could be operational data, but this example shows us that a supplement to the management accounting information could also be used to extract cues. It is also possible that managers first request a change in management accounting information, but start to collect or create it when their requests are denied.
Sensemaking changed by (changing) management accounting information
Our third proposition is: a change in management accounting information changes the sense made of past actions or events if it provides a (more) plausible explanation of those actions or events. When a concern controller was asked how he thought that managers would use new information he told us:
how they, ehm, imagine the business. On the moment that the new information fits into that, they will use it.
This illustration fits our proposition as sentences like ‘a better view on the business’ and ‘showing similarities with how managers imagine the business’ are consistent with plausibility as we have seen in the analysis of our first proposition. Therefore, this controller supports our view that new information has to be (more) plausible to be used for sensemaking. Changed sense made was discussed with managers by talking about the having of an “eureka” moment or “I have never looked at it like that”. One profit center manager came up with this example about the unexplainable loss of 50 to 100 admissions yearly:
Well, eh, example, I got an example. Ehm, ehm, ehm, it is an old example, but ehm, ehm, information that we get about where patients come from right. Which region, which city and ehm that kind of stuff. And ehm which religion that they have, or which country they’re from. (..) Ehm ehm, on the moment that the asylum center closed here, we had 50 to 100 admissions on the specialized departments less. So what turned out, that 50 to 100 patients of that asylum center just where taken up here in this hospital on the, let’s say it, specialized departments. So you shut down this asylum seeker center, that does the municipality, our organization does not think about it, that it can also have consequences. That is what you find out later. You only find out on the moment that you look at those figures, like hey wait a sec, are there now 100 Africans less taken up, ah damn! The asylum seeker center.
The demographical information of patients was changing the understanding of an earlier situation this manager had experienced. This change in provided (management accounting) information offered was plausible enough to make sense of the drop in admissions. Even though the closing of the asylum seeker center did not seem to have any consequences at first, new meaning was constructed with this information. The manager now knows that Africans from this asylum seeker center where accounting for at least 50 to 100 admissions each year. This changed the sense made by that manager, as he only now realized how important that asylum seeker center was. Put differently, his image of reality about where admissions came from changed and the closing of the asylum seeker center was getting a new meaning. Another example of changing sensemaking came at light when a profit center manager told us what new insights he got from the provisions of productivity information:
No ehm, last year we had introduced that productivity figure, that, well ehm, it went pretty good though for, ehm, almost all departments, expect of B5. There appeared all of a sudden, a, a, a, pretty low productivity outcome. Well, then we evaluate that, where it came from. Well, one of those things I just told you: a lot more small admissions, with shorter length of stay. By this we earn awfully good, because a shorter length of stay is awfully good, also for the patient because it can go back home earlier. But what you do not take into account is that you have more turnover costs. Getting to that insight was pretty nice.
Of course we wanted to know what he meant by this turnover costs insight and he told us:
