Page 3: How are decisions made?
Management accountants use their skills alongside hard information to support decision making. Through intelligent analysis of information, they can generate alternative solutions and match these to the larger strategy. Each alternative can then be evaluated for its contribution towards objectives, taking into account:
- the timescale: money received in the future being worth less than money received today
- the risk: factoring in the probability of under or over-performance (also called negative or positive variance).
Once a decision is made and implemented it needs careful monitoring to ensure it keeps on track and any problems are detected early.
The Electricity Supply Board (ESB) in Ireland faced the challenge of reducing its costs from £250m to £200m over five years. A team including management accountants was formed to break down costs and identify waste. The team discovered that ESB was carrying the costs of electrical faults caused by external building and construction companies. Meanwhile the ESB technicians were over-burdened with paperwork. The team simplified and centralised this within a designated administration team. This meant the technical staff had more time to give a faster, flexible response to faults and to diagnose their causes. Major savings followed as faults plummeted by 75% and cost-efficiency at the company’s call centre significantly improved.
Some operational decisions can be made mainly from experience and based on an assessment of circumstances. More complex decisions need a systematic and structured approach. This is where decision making models help.