Why you should change your view of accounting

Digitization or digital transformation - the pervasive process in which new technology basically paves the way for society. So big it's almost impossible to grab. Business services and business models change, our communication changes, our way of working changes and changing our daily lives.

Digitization involves electronic transactions created by the combination of human and IT systems, which together are so powerful that they will completely bump into business and society in general. These transactions handle the industrial economy systems, based on GAAP, as a cost burden is not worth measuring in relation to the values ‚Äč‚Äčthese transactions create in terms of products / services / more efficient processes. Instead, these transaction costs are blurred as an ever increasing effort on corporate products or directly burden the results. A negative cost view that is an effective barrier to the commercial offensive utilization of the huge potential of the ongoing IT revolution.

Let's go down on economic fundamentals and start with a comparison between the screw & nut and the IT-transaction.

As far as the IT-transaction is concerned, the cost of this in Information Technology's childhood was microscopic and its value creation marginal. In addition, it was difficult to measure a consumption in the same way as consuming screws & nuts. In practice, this would in many cases require some form of manual time study where the greatest use of IT occurs, ie in the offices.

Today, the situation is rather the reverse. The cost of the screws & nuts in the final product calculation is in many cases microscopic relative to the cost of soft refinement and the resource consumption that IT-transactions represent.

Product calculation - product structure

In all operations, the product or service consumes resources and generates revenue. In order to raise profits while maintaining competitiveness, it is both about streamlining resource consumption, reducing costs connected to them and generating additional values that customers are prepared to pay for.

Productivity fog2png

As regards the consumption of the screws & nuts, these measurement methods are well developed (see above). With regard to the soft refinement, the models for these measurement methods were already published in the Book The Hidden Treasure Chest (Bergstrand, 1993). A publication that was made 25 years too early because issues with growing overheads were still manageable at this time. Today, the situation is totally different and businesses are struggling around in an exploding mess of overhead costs, resulting in an overwhelming productivity fog.

A mental collapse

Companies have fallen into a situation where you chase mosquitoes (screws & nuts), but swallow camels (the growing overheads). The fundamentally incorrect perception that it is not possible to measure the costs of soft refinement (ie IT) in its relation to increase of value in a product or service has resulted in two things:
  • A more or less blind investment in IT, that result in considerable operational suboptimations
  • A negative cost perspective which leads to reduced IT investments, rather than utilizing IT into an offensive business development

Is it then possible to measure and control the soft refinement directly related to related products or services and, finally, sideline the overhead costs? The answer is YES!

The economic models for handling not only soft refinement, but soft and hard combined, as published in The Hidden Treasure Chest, will be explored in a coming post.

Bert-Olov Bergstrand
Senior Advisor