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European Accounting Review, 2018 Vol. 27, No. 4, 747–770, https://doi.org/10.1080/09638180.2017.1375417

The Impact of Managers’ Participation in Costing System Design on Their Perceived Contributions to Process Improvement

SOPHIE HOOZÉE ∗ and QUANG-HUY NGO∗∗

∗Department of Accounting, Corporate Finance and Taxation, Ghent University, Ghent, Belgium; ∗∗Department of Accounting, Can Tho Technical Economic College, Can Tho, Vietnam

(Received: January 2016; accepted: August 2017)

Abstract The aim of this paper is to investigate the impact of managers’ participation in costing sys- tem design on their perceived contributions to process improvement. Drawing on the literature on business process management, participative decision-making and self-determination theory, we propose that partici- pation in costing system design fosters managers’ perceived contributions to process improvement through their autonomous motivation for cost management and their perceived usefulness of cost information. Ques- tionnaire data obtained from 170 Belgian managers were used to test the proposed model. The results suggest that participation in costing system design increases managers’ autonomous motivation for cost management and enhances their perceived usefulness of cost information. Managers’ perceived usefulness of cost information is, in turn, positively associated with their perceived contributions to process improve- ment. The effect of managers’ autonomous motivation for cost management on their perceived contributions to process improvement is, however, not significant. Taken together, our findings imply that contribu- tions to process improvement mainly emerge through informational mechanisms rather than motivational mechanisms triggered by the participation process.

1. Introduction

Firms often use costing systems to increase their financial performance by improving their business processes (e.g. Banker, Bardhan, & Chen, 2008). In particular, costing systems may reveal sources of inefficiency and ineffectiveness of business processes by providing detailed information about the consumption of resources by each of the firm’s activities (e.g. Innes & Mitchell, 1990; Turney, 1991). Prior research has demonstrated that participation in costing sys- tem design may help to identify such process improvements (e.g. Hoozée & Bruggeman, 2010). It is, however, unclear how participation can actually result in these beneficial outcomes.

The purpose of this study is to disentangle the mechanisms through which managers’ participa- tion in costing system design may foster their perceived contributions to process improvement. Understanding these mechanisms is important as they can provide insight into how firms can leverage the benefits offered by participation into process improvement. Although the relation

Correspondence Address: Sophie Hoozée, Department of Accounting, Corporate Finance and Taxation, Ghent Univer- sity, Sint-Pietersplein 7, 9000 Ghent, Belgium. Email: [email protected]

Paper accepted by Sally Widener.

© 2017 European Accounting Association

748 S. Hoozée and Q.-H. Ngo

between participation and desired outcomes may be influenced by many intervening variables, in line with the literature on participative decision-making (e.g. Latham, Winters, & Locke, 1994), we focus on motivational and informational factors. More specifically, building on self- determination theory and research on business process management, we predict the impact of participation in costing system design on perceived contributions to process improvement in terms of its role as an enabler of autonomous motivation for cost management and perceived usefulness of cost information.

Using survey data from 170 Belgian managers, we find that although managers’ autonomous motivation for cost management increases as a result of their participation in the costing system design process, this higher autonomous motivation does not stimulate their perceived contri- butions to process improvement. Regarding the informational path, we do find that perceived usefulness of cost information positively mediates the impact of managers’ participation in costing system design on their perceived contributions to process improvement.

Compared with prior research, this study provides three unique contributions. First, by unrav- eling the mechanisms that enable participation to result in process improvements, this study complements prior work on the potential of cost information to improve business processes (e.g. Hoozée & Bruggeman, 2010; Innes & Mitchell, 1990), as well as studies that have investi- gated the determinants of business process re-engineering success (e.g. Terziovski, Fitzpatrick, & O’Neill, 2003). Second, our study contributes to the literature on participative decision-making by highlighting the importance of informational mechanisms over motivational mechanisms in explaining why participation could lead to process improvements. This is in line with Latham et al. (1994), who argued that studies on participation, instead of focusing on motivational mechanisms, should be redirected to investigate informational mechanisms because the effi- cacy of participation as an organizational process lies not only in its potential to promote motivation or commitment, but also in its ability to facilitate information exchange and knowl- edge transfer. Third, by showing that a participative system design strategy could actually be used to enhance motivation, we clarify equivocal results of previous research on the link between budgetary participation and motivation (cf. Mia, 1989). In particular, according to Brownell and McInnes (1986), the inconsistent results in budgeting studies investigating the participation-motivation relationship may be due to differences in the approaches used to mea- sure motivation. We addressed their concern by using well-developed scales from studies on self-determination theory to measure autonomous motivation. As such, we also contribute to the growing body of accounting evidence on the effects of autonomous motivation, for example, regarding subordinates’ work effort induced by subjective performance evaluation (Kunz, 2015), managers’ creation of budget slack (De Baerdemaeker & Bruggeman, 2015) and the impact of different uses of performance metrics on employee job performance (Groen, Wouters, & Wilderom, 2017).

The remainder of this paper is structured as follows. The next section presents the theoretical background and hypotheses development. Section 3 describes the research method. Section 4 shows the results of this study. The last section concludes, discusses the limitations and offers suggestions for future research.

2. Literature Review and Hypotheses Development

Drawing on the literature on business process management, we first introduce the definition of a business process and the role of costing systems in process improvement. Second, using the literature on participative decision-making and self-determination theory, we identify the charac- teristics of participation in costing system design and explain the motivational and informational

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mechanisms through which managers’ participation may stimulate their perceived contributions to process improvement.

2.1. The Use of Costing Systems for Process Improvements

Davenport and Short (1990, p. 12) defined the concept of business processes as ‘a set of logically related tasks performed to achieve a defined business outcome’. Hammer and Champy (1993, p. 35) later emphasized the client-centred aspects of a business process: ‘a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer’. In the context of the present study, we conceive of a business process as an umbrella term that combines various operational work processes, such as product/service delivery, sales order processing, budget preparation, new product/service development, etc.

In both manufacturing and service environments, business processes may be redesigned by breaking them down in activities or work processes in order to reveal sources of inefficiency and ineffectiveness (Davenport & Short, 1990). As such, business process redesign focuses on creating and delivering value by rethinking, restructuring and streamlining work processes (Talwar, 1993).

To detect inefficient and ineffective parts of work processes, information systems are required (e.g. Davenport & Short, 1990). In this respect, costing systems, as a particular example of infor- mation systems, serve four important purposes in that costing systems that (1) provide a high level of cost information detail, (2) have a high ability to classify costs according to their behav- ior, (3) frequently disseminate cost information throughout the organization and (4) calculate various types of variances, can be expected to produce more useful and relevant cost informa- tion for managerial decision-making (Pizzini, 2006). As such, costing systems are equipped to help users identify process improvements. For instance, a costing system such as activity-based costing may reveal opportunities for process improvement by providing detailed insights into the consumption of resources by each activity of a firm (e.g. Holton, 2007; Innes & Mitchell, 1990; Turney, 1991).

To foster users’ acceptance of an information system and to make sure that it meets users’ information requirements, Tarafdar, Tu, and Ragu-Nathan (2010) suggest a participative strategy. In a similar vein, the beneficial outcomes of user participation have been investigated in the con- text of costing systems (e.g. Bhimani & Pigott, 1992; Hoozée & Bruggeman, 2010; McGowan & Klammer, 1997).

2.2. Participation in Costing System Design

Research on participative decision-making assumes that the relationship between participa- tion and its desired outcomes is driven by two mechanisms: motivational and informational (cognitive) mechanisms (Locke & Schweiger, 1979). First, from a motivational point of view, participation enables greater ‘trust, greater control of the work, more ego involvement in the job, increased identification with the organization, more group support (if it is group participa- tion) and, most important, the setting of higher goals and/or increased goal acceptance’ (Locke, Schweiger, & Latham, 1986, p. 69). Performance can then be improved through lower resis- tance to change and higher acceptance of difficult targets (Locke & Schweiger, 1979). Second, from an informational perspective, participation is viewed as a conduit for upward information and knowledge exchange, which allows better communication and understanding of job require- ments as well as decision-making processes. Hence, informational factors are important for the enhancement of information flows between participants (Locke & Schweiger, 1979).

750 S. Hoozée and Q.-H. Ngo

Figure 1. Research model.

In line with this reasoning, we propose that the relationship between managers’ participation in costing system design and their perceived contributions to process improvement is driven by both motivational and informational effects (see Figure 1).

2.2.1. Motivational Effects Traditionally, motivation has been referred to as a concept varying in size rather than quality (Gagné & Deci, 2005). Motivation theorists, however, emphasize the importance of distinguish- ing between several types of motivation, because each type of motivation can lead to different outcomes (Ryan & Deci, 2000; Vansteenkiste, Lens, & Deci, 2006).

To provide insight into different motivation types, Deci and Ryan (1985) proposed self- determination theory, which distinguishes between autonomous and controlled motivation. Whereas autonomous motivation is characterized by underlying feelings of freedom and voli- tion, controlled motivation is characterized by an overarching feeling of pressure (Vansteenkiste, Sierens, Soenens, Luyckx, & Lens, 2009). Importantly, psychology research has repeatedly demonstrated that autonomous motivation is associated with positive outcomes, whereas con- trolled motivation is associated with negative outcomes (e.g. Ryan & Deci, 2000; Vansteenkiste et al., 2006). In addition, the beneficial outcomes of autonomous motivation are also supported by recent management accounting research on participation (De Baerdemaeker & Bruggeman, 2015; Groen et al., 2017; Wong-On-Wing, Guo, & Lui, 2010).1

To understand the difference between autonomous and controlled motivation, the distinction between intrinsic and extrinsic motivation is important. While intrinsic motivation refers to doing an activity for its own sake because it is interesting and enjoyable, extrinsic motivation refers to doing something in order to attain some separable outcome (Ryan & Deci, 2000). According to self-determination theory, extrinsic motivation may vary in the degree to which it is controlled or autonomous based on the degree of internalization (e.g. Gagné & Deci, 2005; Ryan & Deci, 2000). Internalization is defined as ‘people taking in values, attitudes, or regulatory structures, such that the external regulation of a behavior is transformed into an internal regulation and thus no longer requires the presence of an external contingency’ (Gagné & Deci, 2005, p. 334).

Controlled motivation consists of the two least autonomous forms of extrinsic motivation: external regulation and introjected regulation (e.g. Williams, Grow, Freedman, Ryan, & Deci, 1996). External regulation (being interpersonally controlled) is not internalized at all because

1Because in this study we focus on the beneficial outcomes of participation in costing system design, we only hypothesize its effect on autonomous motivation for cost management. We do not develop a hypothesis for controlled motivation, but will control for it in our empirical model instead (see Section 3.3 and Figure 2).

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the person’s behaviors are initiated and maintained by external contingencies such as rewards or punishments (Gagné & Deci, 2005; Ryan & Deci, 2000). This is the classic type of extrin- sic motivation and a prototype of controlled motivation (Gagné & Deci, 2005). Next, introjected regulation (being intrapersonally controlled) implies that people perform activities ‘to avoid guilt or anxiety, or attain ego enhancement such as pride’ (Ryan & Deci, 2000, p. 72). This type of motivation is also a form of controlled motivation because people feel pressured to do some- thing due to internal contingencies that link feelings of self-esteem and social acceptance to the enactment of specific behaviors (Assor, Roth, & Deci, 2004).

Autonomous motivation combines identified regulation and intrinsic motivation (e.g. Gagné et al., 2015).2 Although still extrinsic in nature, identified regulation is considered as autonomous motivation because it is volitional in that it results from identifying with the value of an activ- ity, such that regulation of the activity is accepted or owned as personally important (Ryan & Deci, 2000; Vansteenkiste et al., 2006). Identification differs from intrinsic motivation in that the activity is not done out of inherent satisfaction, but for the instrumental value it represents (Gagné et al., 2015). The last and most autonomous form of motivation is intrinsic motivation, which, as already mentioned, motivates people to be involved in an activity for its own sake. It is characterized by feelings of ‘enthusiasm, spontaneity, excitement, intense concentration, and joy’ (Roth, Assor, Kanat-Maymon, & Kaplan, 2007, p. 762).

Self-determination theory assumes that three basic psychological needs drive the motivational mechanisms that energize people’s behavior (Deci & Ryan, 2000). The satisfaction of these needs is an essential nutriment for individuals’ autonomous motivation (Vansteenkiste, Niemiec, & Soenens, 2010). The three needs are the needs for autonomy, relatedness and competence. The first one, the need for autonomy, represents individuals’ inherent desire to experience a sense of volition and psychological freedom (deCharms, 1968). Second, the need for relatedness, is an individual’s inherent propensity to feel connected to others, to be a member of a group, to love and care and be loved and cared for (Baumeister & Leary, 1995). Third, the need for competence, is defined as the desire to feel effective in one’s interactions with the social and physical environment (Deci, 1975).

Prior studies indicate that participation in decision-making processes may enable the satisfac- tion of the three basic psychological needs, which, in turn, fosters autonomous motivation. First, participation in decision-making can provide managers with a sense of willpower and choice (Deci, Connell, & Ryan, 1989), which satisfies their need for autonomy. Second, participation in decision-making enables employees to receive positive feedback (Deci, Koestner, & Ryan, 1999), which stimulates an atmosphere of caring for and being recognized by others and thereby triggers the sense of relatedness. Third, participation may enhance self-efficacy, which has been shown to be related to the feeling of competence (Van den Broeck, Vansteenkiste, De Witte, Soenens, & Lens, 2010).

In the context of budget participation, De Baerdemaeker and Bruggeman (2015) found that participation can engender autonomous budget motivation. In a similar vein, we argue that par- ticipation in costing system design may foster autonomous motivation for cost management. Through participation, managers are more likely to choose how to define the important compo- nents of the costing system (e.g. cost allocation bases, cost pools, frequency of reporting) used in their departments. Hence, the more managers are involved in the design of a costing system, the greater their perceived sense of autonomy. Participation in costing system design creates

2In line with recent psychology research (Gagné et al., 2015), we do not include integrated regulation, which is the most autonomous form of extrinsic motivation, as it has typically been very difficult to psychometrically distinguish integration from identification (Vallerand et al., 1992).

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opportunities for cost-related discussions among managers from different functions in an orga- nization. Positive interactions with colleagues in discussions about the factors influencing costs could trigger managers’ sense of relatedness because they feed the sense of group belongingness. Furthermore, when managers are invited to participate in a costing system design process, their feeling of competence increases thanks to the enhanced recognition and appreciation that they perceive. Hence, we expect that the satisfaction of the three basic psychological needs through participation in costing system design will encourage managers to identify with the value of cost management, such that they experience autonomous motivation for cost management. Accord- ingly, our first hypothesis proposes a positive association between managers’ participation in costing system design and their autonomous motivation for cost management.

H1: Managers’ participation in costing system design is positively associated with their autonomous motivation for cost management.

Although economists argue that external factors such as monetary incentives can reinforce employees’ effort and performance (e.g. Bonner & Sprinkle, 2002), psychologists have inves- tigated the negative impact of such controlled motivation on employees’ behavior (e.g. Deci, 1971). In particular, research has shown that contingent, tangible rewards and other extrinsic factors such as competition and evaluation can be detrimental to outcomes such as creativ- ity and cognitive flexibility in problem-solving (e.g. Amabile, Goldfarb, & Brackfleld, 1990). Autonomous motivation, in contrast, has consistently been demonstrated to facilitate positive work outcomes, such as performance, persistence, creativity and initiative (e.g. Gagné & Deci, 2005; Wong-On-Wing et al., 2010).

It should be noted that ability also relates to performance. However, given a certain level of ability, increased autonomous motivation should result in increased performance because (in contrast to controlled motivation) it positively relates to individuals’ optimal functioning (e.g. Gagné et al., 2015). In addition, despite the longstanding belief that ability and motivation inter- act to affect performance, a recent meta-analysis has demonstrated that their effects are additive and that both are similarly important to job performance (Van Iddekinge, Aguinis, Mackey, & DeOrtentiis, forthcoming).

Hence, we argue that managers having autonomous motivation for cost management under- stand the importance of cost management, which will stimulate them to put more effort in it. As a result, they are more inclined to suggest improvement actions. Hence, our second hypothesis predicts that when managers are more autonomously motivated for cost management, they are more likely to contribute to process improvement.

H2: Managers’ autonomous motivation for cost management is positively associated with their perceived contribu- tions to process improvement.

2.2.2. Informational Effects Although participation may foster managers’ motivation, there are also informational benefits resulting from participation. Informational benefits refer to the dissemination of task-relevant knowledge,3 which participation could facilitate. Information sharing has been shown to play a central role in the process of participation (Locke & Schweiger, 1979). When people participate in a process, the outcome is of higher quality thanks to information exchange and knowledge transfer (Latham et al., 1994). Because subordinates often hold more information about their jobs, they know more about how to perform their tasks effectively than their superiors do.

3It should be noted that the literature on participative decision-making typically also includes knowledge discovery in addition to knowledge dissemination (e.g. Latham et al., 1994). As we are studying improvement processes and not innovation, we focus on the latter only.

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Including users in the design process helps to ensure the success of the new system in terms of information quality because users are considered as experts in their work due to a better under- standing of their working environment (Beyer & Holtzblatt, 1995). Participation in the design of an information system thus allows users to customize the output information according to their working habits and, as such, fosters satisfaction as well as higher intensity of use (e.g. Tait & Vessey, 1988). Through participation, systems can also be designed at the appropriate level of detail (e.g. Tarafdar et al., 2010). Hence, because users’ information and knowledge as well as their desired system features are included through participation, it may foster system quality and acceptance (Ives & Olson, 1984).

As a result of common costs of joint processes, costing system design also requires input from managers from other functions. By including them in the participation process, more and better information is obtained (Moreland, Argote, & Krishnan, 1996). In particular, since each individ- ual has partial and biased information about current processes, group discussions may perform a corrective function that enables members of the group to collectively gain more access to pri- vate information (Stasser & Titus, 1985). Hence, through participation in costing system design, knowledge is exchanged, which results in improved understanding of costs and processes.

To summarize, managers’ participation in the costing system design process may enhance their perception of the usefulness of the information supplied by the costing system or the extent to which they rely on this information for decision-making (cf. Chenhall & Morris, 1986; Pizzini, 2006). In particular, we argue that participation engenders informational effects in that it provides managers with the opportunity to incorporate their own knowledge into the costing system and enables them to learn from what other managers contribute. This reasoning leads to our third hypothesis.

H3: Managers’ participation in costing system design is positively associated with their perceived usefulness of cost information.

Cost information may help managers to enhance process performance by reducing and eliminat- ing unnecessary resources. In addition, it may also provide insight into the causes of high costs, which may help to redesign the underlying processes. In particular, the literature on business pro- cess management indicates that process redesign begins with defining what the business process under consideration means for an organization and then selecting the most critical areas where it can be redesigned (Davenport & Stoddard, 1994). The improvement of these critical areas is referred to as the detection of areas of inefficiency and ineffectiveness. Inefficiency implies that a process generates too much wasteful resources even though it meets operational goals (Wastell, White, & Kawalek, 1994). Cost disaggregation may reveal redundant activities as it can help managers to monitor the performance of each activity within a process and identify value-added versus non value-added activities (e.g. Swenson, 1995; Turney, 1991). The second problem, inef- fectiveness of a process, implies that it fails to satisfy customer requirements. Typical symptoms are customer complaints, late or incomplete output and the need to repeat work (Wastell et al., 1994). In order to redesign a process, performance standards may be set. Variance analysis can then explain the actual performance of a process compared with its standard performance in terms of costs generated or resources consumed at a disaggregated level (Weber, Dodd, Wood, & Wolk, 1997). By revealing the most ineffective parts of a process, such disaggreated information may provide better insight into process performance (Carpinetti, Buosi, & Gerólamo, 2003). Hence, through the analysis of activities, users may identify performance problems by detecting sources of inefficiency and ineffectiveness at the activity level and, subsequently, develop strategies for improvement (Furey, 1993).

When managers perceive the cost information as more useful, they believe that using a cost- ing system could enhance the performance of their work processes by revealing unnecessary

754 S. Hoozée and Q.-H. Ngo

resources and providing insight into the sources of inefficiency and ineffectiveness. As a result, they will be more likely to suggest improvement actions. Accordingly, our fourth hypothesis proposes a positive association between managers’ perceived usefulness of cost information and their perceived contributions to process improvement.

H4: Managers’ perceived usefulness of cost information is positively associated with their perceived contributions to process improvement.

3. Research Method

3.1. Data Collection

The data used in our study were collected through an online survey. The survey instrument was pretested with a practitioner (consultant) and two academics. An invitation asking for partici- pation in this study was sent via email to 3000 Belgian managers responsible for departments of accounting and finance, manufacturing, HR, marketing, R&D, sales or logistics. The email addresses were obtained from a Belgian commercial mailing list provider holding approximately 300,000 email addresses. We targeted managers who work in companies that have more than 50 employees because these companies are more likely to have a formal costing system.

The procedure for sending the surveys consisted of two phases. In the first phase, 3000 invi- tations containing the link to access the survey were sent to respondents by email. In the second phase, we sent a second email to thank the respondents who had completed the survey and to remind the respondents who had not. In total, 354 emails failed to reach target respondents due to invalid email addresses, retirement or firm leaving so that the target sample of this study con- sists of 2646 managers. In total, 173 questionnaires were completed, yielding a response rate of 6.54%. Three respondents were deleted due to problematic answer patterns,4 resulting in a final sample of 170 observations. To investigate the possibility of non-response bias, an early/lat

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