Performance Strategy: Nick Weller Considers the Risks Associated with Organisational Change and the Control Methods Used to Ensure a Successful Implementation

Article excerpt

The effective implementation of strategy requires an appropriate process of change management. Change management, therefore, is a key element of the Enterprise Strategy (paper E3) syllabus. The effects of change and change management are also important in Performance Strategy (paper P3). There were numerous questions in the old P3 exam (Management Accounting--Risk and Control Strategy) about organisations facing different types of change. Similar scenarios will appear in the new P3 paper.

The first question in paper P3, which shares pre-seen material with its equivalents in E3 and F3, may well require you to consider the consequences of change. P3's examiner is likely to throw in new business developments in the unseen material and require you to discuss the associated risks and how control systems should manage the changes.

Let's consider the risks and controls associated with change in three stages: the decision to change, the implementation process and the results.

The decision to change

The first strategic risk at this stage is a lack of awareness that change is required, that customers' tastes are changing or that new competitors' strategies are likely to draw customers away from your business. Then there are the risks associated with the change--eg, developing new products, merging with a rival or investing in a new IT system. The resulting costs of such changes may greatly exceed the benefits. On the other hand, there may be opportunity losses from a failure to pursue changes that could have resulted in significant net benefits.


The 1999 review of UK corporate governance by Sir Nigel Turnbull highlights the need for businesses to respond to changing risks, stating that a sound internal control system depends on evaluating the nature and extent of the risks faced. The consideration of risks must be a regular item on the board agenda, according to the Turnbull report, which emphasises that boards should conduct a wider review of risks annually. Directors should consider changes in the nature and extent of significant risks--ie, those with serious consequences for the business if they materialise--and the company's ability to respond to internal and external changes. Boards should also consider whether the ongoing monitoring of risks in the company--the process that gives the board the information it needs to make its assessments--remains satisfactory.

When a business is considering a big change, it needs a structured process for analysing the transformation. A key element of this process should be that some proposals will be rejected at an early stage. The initial analysis should obviously include a thorough risk assessment in which expert advice may be required on the significance of potential risks and the feasibility of proposed actions. It's also important to consult stakeholders early on--for example, staff who will need to use a new IT system or customers who may be buying a new product.

A rigorous financial evaluation will also be key to this initial analysis. The organisation's investment appraisal processes have to be robust here. For example, using the wrong cost of capital, working to an inappropriate schedule or failing to consider different scenarios may seriously affect the quality of decision-making. The appropriateness and quality of the data used in the process will also require careful analysis. Issues include how much credence to give predictions of perhaps a very uncertain future. Other important aspects are the consistency and objectivity of data drawn from different sources. How heavily can senior managers rely on figures supplied by a department that stands to benefit from the significant investment being proposed, for instance?

A business will also need to consider non-financial feasibility. The technical aspects will obviously be important if significant changes are being proposed for information systems. …