Artificial Intelligence

The How

We are in the midst of a metamorphosis in the processing and use of information. The search term ‘digital twin’ garners almost half a billion hits on Google. Digitalization provides many benefits not the least of which is a 20 to 30% reduction in system, process, and product development costs. Digitalization will also revolutionize how management accountants work. Remember the switchboard operators from yesteryear? A job, around for more than a century, that succumbed to digitalization. The parallel with management accountants lies in us making the connection between operational quantities and their monetary impact to provide decision support information. . General ledgers and historical financial reporting are archaic for internal decision use.  Decisionmakers need causal and real-time information.  The digital twin provides the foundation for the integration of operational and financial information in a way never seen before. 

Sidebar 1: Digital Twin

A digital twin is a replica of an entity or system captured in binary computer code. In business a digital twin reflects an organization’s physical resources (assets, people, equipment), processes, IT systems, etc. and how they interact to deliver products and services. By its very nature a digital twin comprises a causal model of outputs and the inputs required to produce those outputs. It can simulate an entire production run or one movement in a larger process such as the speed, duration and space needed to lift one 5 kg box 1.5 meters from a trolley onto a table. A fully fledged digital twin can not only simulate every motion to construct a nuclear submarine but also every motion required to operate and maintain the vessel.

The digital twin establishes the playing field for the seamless integration of financial information into its causal operational model—the ideal landscape for AI in decision support.

The Where

So, in a digitalized world where stand-alone cost models for internal decision support no longer feature as a value-added asset and the digital twin’s causal model makes method centric costing approaches like Activity Based Costing and traditional financial reporting oriented standard costing obselete, where will management accountants add value? This challenge for MA becomes clear if one considers how much information the typical digital operation will generate. Consider that Citi Global Perspectives and Solutions: Factory of the Future estimates that “A connected factory is estimated to generate 1 petabyte per day, equivalent to 160 million books or 1.05 billion minutes (i.e., 1,997 years of nonstop) MP3 songs.”

Operational information can make strides toward optimizing profitability on its own. However, monetary information designed to highlight operational problems and opportunities and identify optimal alternatives in every decision scenario enhance an organization’s ability to optimize outcomes significantly. Monetary information enhances organizational value creation when it is relevant and applicable to the day-to-day resource and business decisions of managers and employees who build, deliver, or directly support building and delivering products and services to customers.

The challenge for finance to meet this need in the digital age is twofold:

  1. What kind of framework will best facilitate connecting monetary information with digitally driven operations to support internal decision making?
  2. What role can AI play in using monetary information to enhance operational decision support in a digital environment and optimize the conversion of inputs into outputs?