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Managing
The role of accounting for innovation
managing innovation processes processes

when relationships matter

Johnny Lind 7
Stockholm School of Economics, Stockholm, Sweden
Received 11 September 2015
Revised 23 March 2016
17 May 2016
Abstract Accepted 27 May 2016
Purpose – This paper studies how accounting information is used by actors in an innovation process.
It investigates how accounting information influences and is influenced by the different actors. The purpose
of this paper is to develop a more thorough understanding of the role of accounting in making the choices that
form temporary solutions.
Design/methodology/approach – An in-depth case study of the development of a standard software
release within the telecom industry.
Findings – This study has shown that accounting was a key ingredient when temporary solutions were
formed in the innovation processes. Actors used accounting to stabilize the content of the release in the
formation of the gate documents and used accounting to destabilize the content between the temporary
solutions. It is difficult to evaluate whether the use of accounting improved or harmed the innovation. Further,
the study also revealed that the use of accounting influenced and was influenced by previous and prospective
future deals. This put new challenges on the use of accounting because it involved negotiation processes that
influenced the accounting figures.
Practical implications – The findings provide insights into the procedures for finding temporary solutions
in the innovation process and the role of accounting in these procedures.
Originality/value – This paper contributes by providing a more thorough understanding of the role of
accounting regarding the choices that comprise the temporary solutions within the innovation process.
In addition, it shows how accounting has a critical role both for settling on and modifying temporary
solutions. Hence, the research demonstrated how studies of the role of accounting in innovation processes can
contribute to the industrial network approach by giving a more thorough understanding of network
dynamics and the process of attaining stability and instability in business networks.
Keywords Innovation, Decision making, Product development, Networks, Accounting, Telecom industry
Paper type Research paper

1. Introduction
Innovation processes have long been a popular topic for Industrial Marketing and Purchasing
(IMP) scholars (Dubois and Araujo, 2006; Freytag and Young, 2014; Håkansson, 1989;
Håkansson and Waluszewski, 2002). Managing innovation processes has been seen as a
complex challenge within the IMP literature (Ford et al., 1998; Hoholm and Olsen, 2012).
Accounting and managing are closely related, notably in the field of management accounting.
According to standard text-books, the main objective is to support managers by providing
information that will help them make decisions to fulfill the companies’ objectives (Horngren
et al., 2009; Seal et al., 2009). Some scholars claim that the development of specific accounting
methods was a prerequisite for the growth of large multinational companies (Chandler and
Daems, 1979; Johnson, 1983). Hence, accounting has been a significant tool for managing large
and complex organizations for decades. Despite this, however, accounting and its role within
innovation processes has been neglected within the IMP inspired research.
A large number of empirical studies within the IMP literature performed in different
industries and countries have shown that innovation is often an interactive process involving
IMP Journal
Vol. 11 No. 1, 2017
I would like to thank Alexandra Waluszewski, Trevor Hopper, Amalia Lind, Ebba Lind, two anonymous pp. 7-24
reviewers and participants at the IMP workshop in Manchester 2015. This research has been supported by © Emerald Publishing Limited
2059-1403
grants from Svenska Handelsbanken Foundation for Social Science Research. DOI 10.1108/IMP-09-2015-0054
IMP several actors and their use of different technical resources (Dubois and Araujo, 2006; Håkansson
11,1 and Waluszewski, 2002; La Rocca and Snehota, 2014; Ostendorf et al., 2014). Dubois and Araujo
(2006, p. 35) stated that, “Innovations can emerge from complex and distributed interaction
patterns rather than being pursued by a single system integrator.” The IMP studies have shown
that a specific innovation process is often characterized by a large number of issues that need to
be resolved, and which concern several constituents with interests that are often conflicting.
8 The constituents involved need to find mutually acceptable temporary solutions to move the
innovation forward (Dubois and Araujo, 2006; Hoholm and Olsen, 2012). Thus innovation
processes can be described as a gradual process of applying temporal solutions.
Accounting is a tool for decision making enabling the managing of organizations. Actors
use accounting to evaluate the financial and non-financial consequences of different choices
by providing the actors with systematic information about different future courses of action.
Simon et al. (1954, p. 3) stated that accounting can answer questions associated with problem
solving such as “Of the several ways of doing the job, which is the best?” Empirical studies in
various industrial markets indicate that accounting for decision making is closely linked to the
temporal solutions in the innovation processes (Carlsson-Wall et al., 2009; Carlsson-Wall and
Kraus, 2015; Jørgensen and Messner, 2009, 2010. The actors within the companies concerned
use accounting to guide their choices for the courses of action in the innovation process.
Quantitative financial measurement, such as internal rate of return calculations, is a natural
part of accounting. However, empirical studies have demonstrated that non-financial accounting
practice was an important ingredient for understanding innovation processes within industrial
markets (Carlsson-Wall and Kraus, 2015; Jørgensen and Messner, 2009). This paper applies a
broad definition of accounting which includes systematic quantitative financial information and
non-financial information that influences the choices in the innovation process.
This paper reports an in-depth case study on the role of accounting for decision making
in an innovation process within the telecom industry. In it, we have investigated how
accounting influences and is influenced by the interactions of the different actors. The aim
was to develop a more thorough understanding of the role of accounting in making the
choices that form temporary solutions.
The remainder of this paper is organized as follows. The next section reviews the
literature on accounting as a tool for decision making and is informed by an interactive view
of the world. Section 3 describes the methods applied in the study. Section 4 gives an
empirical account of the role of accounting in innovation processes. The paper ends with a
discussion of the findings and concluding remarks.

2. Accounting for decision making in an interactive business world

Since early 2000, a growing body of literature has emerged studying the role of accounting
within an interactive business world (Carlsson-Wall et al., 2015; Håkansson and Lind, 2007;
Håkansson et al., 2010). The papers are mainly based on in-depth case studies with a focus on
accounting in general or on a specific accounting technique. They have focused on processes
such as evaluation and prioritization of customer relationships, critical strategic choices,
purchasing of commodity products and supplier selections, managing of interdependencies in
interconnected supplier relationships and innovation processes. However, one of the most
significant contributions made to understanding of the role of accounting for managing events
across company boundaries within an interactive business world of alliances and networks is
an analytical paper published almost 15 years ago (Tomkins, 2001).
Tomkins (2001, p. 164) stated that “accounting techniques may not need revision, but the
way in which accountants perceive their roles and employ their techniques and information
bases may well change.” The accounting information is needed to support the actors by
providing the information required for the ongoing negotiations to determine the actions
and profit sharing within long-term business relationships. The negotiations are interactive,
which imposes specific demands on the accounting required. According to Tomkins (2001, Managing
p. 163), accounting itself has to be “a reflexive product of the developing negotiation.” Each innovation
significant decision associated with a negotiation needs new calculations of the costs and processes
benefits for the totality and for each party involved. Further, the risk/return for the entire
investment and for all involved needs to be evaluated. An investment must be profitable in
aggregate and for all the parties for it to be approved. Thus, mastering events across
boundaries is a collaborative and interactive process that needs new accounting information 9
to be provided continuously and repeated detailed analysis. The accounting has to be
sufficiently flexible to simulate the effects of a decision on third and fourth parties in the
network and to evaluate its consequences for the future development of the network.
Tomkins (2001) identified several challenges when accounting is used in an interactive
business world. The need for more detailed and flexible accounting within close and long-term
business relationships has been supported by a large number of empirical studies in various
industries (Agndal and Nilsson, 2009; Alenius et al., 2015; Carlsson-Wall et al., 2015; Cooper and
Slagmulder, 2004; Dubois 2003; Håkansson and Lind, 2004; Kajüter and Kulmala, 2005). Agndal
and Nilsson (2009) studied inter-organizational cost management within three different supplier
relationships. They observed that the most intensive use of inter-organizational cost management
was associated with high interdependencies in the supplier relationships, and the accounting was
mainly used in the early phases of product development. The companies even initiated joint
functional analysis before the buyer had completed their supplier selection. The emphasis on an
intensive interaction and use of accounting in the early phases of product development has also
been observed in other studies (Carlsson-Wall et al., 2009; Cooper and Slagmulder, 2004).
Another challenge identified by Tomkins (2001) was the need to identify the effects that a
decision in one relationship would have on the connected relationships. In their study of
customer accounting in the telecom and paper industry, Lind and Strömsten (2006) showed
that the companies evaluated customers differently depending on their closeness to the
specific customer. Connected customer relationships were evaluated with customer
valuation analysis. This customer accounting technique made it possible to capture indirect
benefits from connected relationships and extend the time horizon for when the customer
had to be profitable. This facilitated the investment of more resources in these customer
relationships. Other attempts to measure indirect effects have been observed in various
settings and industries (Alenius et al., 2015; Dubois, 2003; Kajüter and Kulmala, 2005).
Dubois (2003) studied the purchasing of commodity items and she showed how the
company had created a new measure, the “total cost of exchange,” that included the costs of
handling the relationship with the counterpart. The new measure made it possible for the
company to extend the purchasing decisions to include the effects of third parties. Alenius
et al. (2015) and Kajüter and Kulmala (2005) showed how companies measured effects on
third and fourth parties in their open book accounting (OBA) system.
The need for flexible accounting was another challenge that Tomkins (2001) identified.
However, it is difficult for companies to create an accounting system that can be used to
assess the indirect effects of specific decisions on a regular basis. Expressed differently, it is
difficult to anticipate or determine which indirect effects influence a specific decision.
Indeed, ad hoc calculations were the common means of creating “flexibility” in decision
making situations (Alenius et al., 2015; Dubois, 2003; Kajüter and Kulmala, 2005; Lind and
Strömsten, 2006). The periodicity of the ad hoc calculations was found to differ between the
studies. In some of them, only a few calculations are made each year and in others, they are
made on a more regular basis.
In his seminal paper, Tomkins (2001) further stated that accounting is always a simplified
model of interactions within the complex network of interconnected counterparts. Actors use
this simplified model to make the world in which they need to move more manageable, and to
guide them as they explore future avenues for the innovation processes. Several studies have
IMP shown how accounting influenced the innovation process (Agndal and Nilsson, 2009;
11,1 Carlsson-Wall et al., 2009; Jørgensen and Messner, 2009, 2010; Nixon, 1998). Target costing
was an accounting technique used in product development (Agndal and Nilsson, 2009;
Carlsson-Wall et al., 2009), for example, and Agndal and Nilsson (2009) showed that target
costs were broken down into functions and components and decomposed still further into cost
hierarchies at the operational level. Both the buyer and the seller used this information in their
10 joint effort to improve product functionality with a reduced cost. During their joint meetings,
the companies discussed different trade-offs in the product design based on the accounting
available. In their in-depth case study of ABB Robotics and one of its key suppliers, an engine
supplier, Carlsson-Wall et al. (2009) revealed that Robotics ended the long-term relationship
with the supplier because the latter could not meet the target cost. The relationship between
the two companies had worked well for a long time and they tried to find an acceptable
solution, but the difference in cost expectations proved to be insurmountable. In a different
study, one on a medium-sized family owned Danish company, researchers revealed
that accounting had an enabling role through the use of stage-gate models, contribution
margin measures and payback models for coordination of product development activities
( Jørgensen and Messner, 2009, 2010). Earlier, Nixon (1998) had considered product
development within CCM Ltd, a producer of continuous casting machines and discovered that
accounting in the form of cost targets integrated disparate perspectives in the company and
created a platform for dialogue between the relevant actors.
Carlsson-Wall et al. (2009) showed how the target costing with its functional analysis
influenced the daily work of the development engineers. The latter became cost conscious when
they suggested new solutions following rejections of technically acceptable solutions that were
deemed too expensive. Solutions had to be acceptable from both a technical and financial point
of view. For each function, the requirement to meet the target cost guided the search for new
solutions to each problem identified. The actors involved within the company and its suppliers
tried to find a technically workable solution at first that met the target cost within a specific
function without involving the other functions of the Robot. However, when it became obvious
that this would be impossible, the search was extended to include other functions. Carlsson-
Wall et al. (2009, p. 21) concluded that target costing “serves as an anchor that frames the
pragmatic decisions to be made during the collective problem solving and improvisation.”
Target costing guided the actors to find viable compromises in technical, organizational and
financial terms that were mutually acceptable for all of the companies involved.
Accounting simplified the interactive word and made it more manageable (Tomkins, 2001).
Accounting has an enabling role when it stimulates interaction between actors and guides the
search process to identify new solutions in the innovation process. The study by Alenius et al.
(2015) of OBA within the retail industry supports this claim. They stated that “it is the
information content of the OBA that supported the involved companies to find temporary
solutions” (p. 10). Detailed information about products and production processes were used by
the buyer and seller to guide them to identify efficiency improvements and better resource
combinations. However, a consequence of this emphasis on accounting is that those actions,
actors and resources that OBA did not consider did not received any attention. One of the
interviewees stated that “[…] we couldn’t see costs on a single product level, only for product
groups. Then the open book calculation was redesigned and it became clear that we needed to
work on improving efficiency […]” (Alenius et al., 2015, p. 199).
The simplification also means that the accounting may miss some critical issues.
Accounting constitutes an incomplete model of operations and can guide the actors along an
unsuccessful direction. The incompleteness of accounting measurement is exemplified by
Bürkland and Zachariassen (2014) in their study of the interrelationship between the
enterprise resource planning system, accounting measurement and the operations within a
food manufacturing plant. They showed that the company studied created complexity and
confusion for the accounting users when it added greater particularity to the accounting. Managing
The more detailed accounting did not support the actors with more useful information; innovation
rather, the opposite was true. Thus, even in a relatively standardized setting such as a food processes
manufacturing plant, accounting is just a simplified model of the operations; and a model
that can guide the actors to take actions that are unsuccessful for the future of the
enterprise. The complexity of an innovation process in an interactive business world can
be assumed to be greater than that for a food manufacturing plant, and as such the 11
incompleteness of accounting can be expected to play a role. However, several simultaneous
studies have stated that the incompleteness of accounting is one reason for buyer supplier
relationship failure (Agndal and Nilsson, 2009; Dubois, 2003; Kajüter and Kulmala, 2005).
This is a huge challenge for accounting in an interactive business world as consistency and
accuracy in the cost calculations are put forward as being beneficial for creating successful
inter-organizational relationships (Agndal and Nilsson, 2009; Kajüter and Kulmala, 2005),
but this is evidently not always the case.
Several studies have shown that accounting can have a role as innovation killer (Ezzamel
et al., 2008; Froud et al., 2006; Strömsten and Waluszewski, 2012; Waluszewski and Wagrell,
2013). In their study of venture capital (VC) in a biotech start-up, Strömsten and
Waluszewski (2012) demonstrated that VC governance, with its financial logic, had a strong
influence on the logic governing innovation. The VC company emphasized the importance
of accounting in the form of the time to market, the application of stage-gates and the
fulfillment of milestones by evaluation through discounted cash flows. Strömsten and
Waluszewski (2012, pp. 242-243) stated that “the VC governance and the control it exercised
led to an early freezing of resource features as a way to save time in the development
process.” This delivered short time success, but ended up in disaster as it killed the
innovation. Waluszewski and Wagrell (2013) made similar observations in their study
of public purchasing and the innovation journey of ProstaLund. They found that the
public purchasing policy, with its focus on the purchasing costs of isolated solutions in
single transactions made it impossible to support the ProstaLund innovation that needed
long-term supplier relationships to be successful. The accounting, with its narrow definition
of cost-efficiency and its methods for investment evaluations, hampered the possibilities of
investing in a new successful treatment for the patients.
The narrow focus of accounting, with its emphasis on financial quantification and the
behavioral consequences of this, has been on the accounting research agenda for more than fifty
years (Dearden, 1969; Johnson and Kaplan, 1987; Simon et al., 1954). Eccles and Pyburn (1992,
p. 41) stated that “Financial measures, like a football scoreboard, can tell you who is winning but
not what plays to call.” Financial measures have long been criticized for encouraging short-term
financial performance (Emmanuel et al., 1990; Kaplan, 1984). The methods applied for the
evaluation of long-term investment, such as discounted cash flows, have also been criticized for
their strong emphasis on short-term quantitative financial performance (Christensen et al., 2008;
Kaplan, 1986). This critique of the financial evaluations of investments and of how they destroy
innovations is nicely illustrated by Christensen et al. (2008).
In considering the role of accounting in the fuzzy front-end of innovation process
Carlsson-Wall and Kraus (2015) demonstrated that financial measurement was not used.
The uncertainty and unpredictability in the front-end innovation process made it difficult to
quantify the future expectations of the innovation. They found that accounting in the form
of non-financial information influenced the innovation processes. The company under
consideration used a “technology maturity staircase (TMS)” to evaluate the progress of the
product innovation. The research and development (R&D) department used the evaluation
to give their argumentation more rigor and structure. Hence, through the TMS, the R&D
department could develop a coherent story of the product innovation, from how it had
progressed so far to what it would become. This made it possible for the R&D department to
IMP show progress in the product innovation and mobilize commitment from critical actors for
11,1 the project, i.e. internal actors such as the top management, and external actors such as
public funding agencies. Carlsson-Wall and Kraus (2015, p. 8) concluded that “accounting
practices have an important role in helping the innovator gather a trustworthy chain of
arguments for mobilizing internal and external support and resources. We see a less
prominent role of accounting practices in the knowledge exploration process.”
12 The reviewed studies demonstrate that accounting contributed in different ways
when choices were made in business processes. Accounting has an enabling role when it
stimulates interaction between different actors and guides the search for new solutions.
Accounting simplifies the interactive world and makes it more manageable. It is critical for
decisions on the future survival of a product innovation project, but plays a minor role
during explorations to find new solutions. The role of accounting is more about evaluating
different solutions, however, accounting has a darker role when it guides the innovation
process in a non-beneficial direction. Accounting with its incomplete model of the operations
can sometimes drive innovation to meet short-term targets at the cost of long-term
flexibility. It occasionally even guides the actors in a direction that puts a stop to a
prosperous innovation. Thus, accounting can be both an enabler, and a hindrance to
innovation processes.

3. Methods and the setting for the empirical study

3.1 Research design
The roles of accounting for decision making within an innovation process were studied
through a single case study design (Dyer and Wilkins, 1991; Halinen and Törnros, 2005).
This is a suitable design when the topic is an unexplored and complex phenomenon (Dubois
and Gadde, 2002). The in-depth case study was conducted within the telecom industry and
the role of accounting was mainly studied from the perspective of Ericsson and its
relationship with Telia. The two companies have been part of the telecom industry since
their foundation more than 100 years ago. The development of standard software releases
and the services provided in conjunction with these releases were used to capture the
innovation process in the telecom industry.
Four release projects (R6, R7, R8 and R9) and one end service (Dirigent) project were
considered within the two companies. The study focused on the radio technology part of the
standard software development. The development of a standard software release was a
complex project that continued for several years during which many choices had to be
made. The project involved a large number of companies and several organizational units
within these companies. The single case study design made it possible to investigate how
the focal innovation emerged and how actors with sometimes common and conflicting
interests used accounting to influence this development. Thus, the large number of
interviews on both sides of the supplier-customer interface and a focus on a specific
innovation process was intended to give a more thorough understanding of the role of
accounting in innovation processes in an interactive world.
The empirical study started at the end of 1997 and most of the data collection was
conducted during 1998 and early 1999. The researcher had the full support of both
companies. This was shown in several ways. All interviewees selected accepted the
invitations to participate in the study, and access was granted to Ericsson’s intranet as well
as economic reports, internal letters, detailed statements, organizational charts, documents
relating to strategy and technical and commercial reports. Further, the researcher was
assigned two different offices within Ericsson, one within the central accounting unit and
the other within the Key Account Telia unit.
The access to offices at Ericsson enabled the researcher to spend more than six months
at the company on a daily basis and to participate in social activities such as lunches and
coffee breaks. Thus, the data collection consists of interviews, direct observation, access to Managing
the intranet and written documents. Triangulation was a guiding principle in the empirical innovation
study. The major source of information took the form of 69 semi-structured interviews and processes
informal discussions that lasted between one and three hours, with an average duration of
1.5 hours. The interviews were conducted with employees from various organizational
levels within the two companies. Almost all organizational levels were covered, from vice
presidents to development engineers and project members. The interviewees represented 13
almost all functions from accounting and top management to operations, marketing, design
centers, system development and strategic product development.

3.2 The technical structure of the telecom industry and the cellular systems
For a long time, Ericsson has been one of the leading companies within the telecom industry.
Since the late 1980s, it has been one of the largest cellular system suppliers in the world.
A cellular system consists of three major subsystems: switching systems (SS), base station
systems (BSS) and operation support systems (OSS). The BSS are situated around the
geographic area that constitutes the cellular system. The three subsystems consist of
hardware and software. Telecom operators such as Telia Mobile, Vodafone or Orange often
have several cellular systems operating at the same time. During 2016 Telia Mobile operates
three cellular systems: GSM, 3G and 4G. The company had a similar situation in the late
1990s when it worked with the NMT, GSM and 3G cellular systems. The parallel use of
several cellular systems is indicative of the long economic life time of a cellular system.
The GSM system, which is still used by most of the telecom operators, was introduced in the
early 1990s. Hence, the GSM system has been in operation for more than 20 years and, as
such, it is critical to continuously update the systems with new content to make it
competitive. Further, it is also important for the telecom operators that the cellular system
standards can communicate with each other.
The cellular systems used by the telecom operators differ. Telia Mobile’s GSM cellular
system in Sweden has a different configuration compared to Vodafone’s GSM cellular system
in UK. Thus, the hardware and software combinations differ, which means that the two
systems will have a different functionality. The cellular system is updated on an annual basis
with new software with new functionalities, which opens up possibilities for the telecom
operators to create new end solution services. A key issue for Ericsson, however, is to decide
which new functionalities the company should develop and to offer these to its customers in
the annual software release.

3.3 Ericsson and its customer relationships

According to the CFO, in the late 1990s the ten largest customers accounted for more than
50 percent of Ericsson’s revenue. Most of these customers had had a relationship with
Ericsson over a long period of time. In particular, the customer relationship with Telia had
persevered for more than one hundred years. Historically, this relationship had been very
important for Ericsson, and in the late 1970s the two companies had developed the
well-known digital AXE switch together in the joint research company Ellemtel. This
customer relationship has continued to be of high importance for the company. In 2009
Ericsson and Telia Mobile initiated the first commercial 4G cellular system together and
they further plan to launch a commercial 5G cellular system in 2018. Other long-term
customer relationships Ericsson had were with Vodafone, Orange AT&T, France Telecom,
Deutche Telecom and China Unicom. As mentioned previously, the customers had different
configurations in their cellular systems and thus placed different demands on how Ericsson
should prioritize the resources available for development.
Some customers demanded new software to improve their own operations and, to enable
them to become more cost efficient. Others viewed themselves as frontrunners for new
IMP advanced technological solutions and wanted more sophisticated services for their end
11,1 users. An example of the conflicting demands from the late 1990s was how the customers
viewed the importance of developing the dual band feature, which made it possible for the
cellular operators to switch between the GSM 900 and the GSM 1800 cellular system.
Ericsson’s customers who had reached the maximum capacity utilization within the GSM
900 cellular system insisted that they needed this new functionality. Telia, for example, soon
14 identified this need because their GSM 900 cellular system in Stockholm could not deliver
enough capacity to mobile phone users. However, Mannesmann did not prioritize this new
functionality because it had not received the license to build the GSM 1800 cellular system in
Germany and thus did not need the dual band feature.
The customers’ sometimes conflicting demands on the functionalities Ericson should
develop were further complicated by the fact that many customers had more than one
cellular system supplier. Telia Mobile, for example, used both Ericsson and Nokia. Nokia
delivered BSS to the Gothenburg area and the Northern part of Sweden, while Ericsson
delivered all the SS and BSS to the other parts of Sweden. This put further demands on Telia
Mobile and its suppliers as Telia had to persuade both Ericsson and Nokia to develop the
dual band feature simultaneously to deliver the same services to its customers.
Mannesmann on the other hand, had Siemens and Ericsson as their cellular system
suppliers and needed to coordinate their upgrades. Thus, Ericsson was closely related to its
competitors, Nokia, Siemens and Huawei, for example, through their common customers.
A critical issue for Ericsson was which features it should prioritize in the development of
new standard software. Determining this necessitated answering certain questions: Which
customers are the most important? Which customers have knowledge about future needs
and can be viewed as lead users? Do some customers have close relationships with a critical
competitor and, as such, contribute important information?

3.4 The organization of the standard software development

Ericsson organized standard software development in annual release projects, whereby
customers were offered new functionalities to their GSM cellular system on an annual basis.
A standard software release contained several features such as remote loading and dual band.
The remote loading feature, for example, helped customers to improve the efficiency of their
operations by making it possible to change the software in the radio base stations remotely.
The new standard software release was regarded as such a complex project that it was
organized within three almost independently managed sub release projects. There was one
project for each sub system: BSS, SS and OSS. More than 300 employees located in
different development units around the world were involved in a sub release project.
The average development time for a standard release project was around three years and it
took a further year to implement the release within the customer’s cellular system.
Consequently, the units responsible for the sub cellular system had to operate four parallel
release projects simultaneously.
To conclude, the standard software release development evolved within a network of
embedded relationships characterized by technical, organizational and financial
interdependence. Within the telecom industry, the buyers and sellers were intertwined in
a complex network. Sellers of cellular systems were closely connected through common
buyers, and buyers were closely connected through common suppliers. This complex
setting created a situation where interests clashed, which resulted in tensions, opportunities
and contradictory demands. The development of the standard software release occurred
gradually through a series of temporary and pragmatic compromises.
The empirical study presented here was conducted almost 20 years ago and the telecom
industry has evolved dramatically since then. An obvious critique, therefore, is that the
phenomena observed are outdated. However, the fundamental situation for the actors
involved and how they jointly develop the cellular systems has not changed. In 2016, Managing
Ericsson still has several customers with conflicting demands. Hence, it is necessary for innovation
Ericsson to prioritize between its customers’ needs. Telecom operators such as Telia Mobile processes
simultaneously operate several cellular systems and they often have more than one telecom
supplier for a cellular system. The cellular system still has a long economic life time and
needs to be regularly updated with new software content. Further, it needs to fulfill the
functionalities of SS, BSS and OSS. Innovation processes in the telecom industry are still 15
created within a network of embedded relationships that are characterized by technical,
organizational and financial interdependencies. Thus, a study of the development of
standard software releases from the late 1990s can still contribute relevant knowledge.

4. The role of accounting within the development of the standard software

release R7
4.1 The pre-study document
The R7 release was initiated in August 1995 by the strategic product management (SPM)
unit within the BSS unit. Experienced members from the SPM unit had some brainstorming
meetings and wrote a short pre-study document in which they drafted the basic framework
of the release. The document, just a few pages long, described the key features and main
areas to be encompassed in the release. The project manager of the R7 and other central
managers stated that this first pre-study draft was mainly influenced by: the long-term
business plan, previous release projects, the Standards setting body ETSI, customer
demands and the system management unit within the BSS unit.
The long-term business plan described Ericsson’s preferred position within the telecom
network five years down the road. The road map linked to the plan described how the company
should reach that position. The business plan consisted of a long-term financial plan with a full
profit and loss statement based on growth of mobile phone subscribers, market share and cost
figures for the subsystems. Features postponed in previous projects were reevaluated, thus
experience from previous projects was reused. Information from the standard setting body
ETSI, in which Ericsson and other telecom suppliers and operators were represented, was a
third influence. ETSI provided information about decisions on future standards and how
companies had acted and argued in the discussions before the decisions. Customer demands at
this early stage were informally collected by the SPM unit directly from the customers or
through the key account units responsible for a customer. The final influence came from the
system management unit that gave input on how the existing system could be improved.
The first draft of R7 was given to evaluation teams, comprised of experienced members
from the system management unit and the SPM unit. Each team was responsible for a sub
area of the release such as radio network management, operation, maintenance and
administration of BSS, transmission management to BSS and radio network performance
monitoring. The main task for the evaluation teams was to develop a more precise
description of the technical content of the main areas and functions of the release. The teams
evaluated whether it was technically possible to develop the suggested functions and
determined if they had sufficient competence and resources to accomplish the task. Within
Ericsson, the development was conducted in a large number of organizational units known
as design centers. A central challenge was whether the competence existed at each of the
design centers to develop certain aspects of a release. Given the knowledge of the work force
in each design center was rather specialized, it was not easy for the staff to be productive in
another design center. Hence, dispersion of knowledge could only change gradually between
releases. As the work was highly specialized, the staff developed expertise related to their
specific design center and transmitting the knowledge was a lengthy process.
The teams appointed to perform the evaluations also made a preliminary estimation of
the costs involved in developing the suggested functions. The responsibility and
IMP competence for estimating costs were mainly in the domain of the system management unit.
11,1 However, the evaluation teams also included a few members from the SPM unit who
emphasized the importance of customer benefits for the functions and were responsible for
estimating the potential sales for each area and function. With the input from the evaluation
teams, the SPM unit re-wrote the pre-study document for R7 at the end of 1995. This
document was the official pre-study of the R7 release.
16 It did not include any estimation of the sales and costs for areas and functions of the
release, but it described which areas and functions Ericsson viewed as the most promising
to develop at this time. For example, the pre-study emphasized the high speed functionality
to make it more suitable for the transmission of data in the cellular system, and a new radio
channel algorithm which allocated radio channels to different mobile phone users.
When the pre-study document was finished, it was distributed to a few individuals
working for some key customers. Four customers were invited to participate in these
discussions with the SPM unit. Members from the SPM units visited these key customers and
had informal discussions to gauge their reactions to the content of the pre-study.
These informal meetings enabled the SPM unit to judge whether the outline of the release
met customer expectations or if changes were needed. At this stage, customers seldom
emphasized specific features. The comments were more general, concerning, for example,
which parts of the cellular system Ericsson should concentrate its development resources on.
One area that received the most attention at this stage was the cell planning process,
which ensured that geographical areas were covered and avoided interference between mobile
phone users. According to many interviewees within Ericsson, there were just a few
customers with sufficient technical knowledge, technical resources and vision of future
cellular systems to comment on a project for a release at this early stage. According to the
interviewees, one such customer was Telia Mobile. Thus, Telia Mobile was in a position to and
was permitted to give feedback on the content of the cellular system more than three years
ahead of the release.
According to the vice president of development in Telia Mobile, this informal meeting
was a good opportunity to influence Ericsson to pursue development in a direction that
would be suitable for Telia Mobile. At this early stage of the development project, in his
view, it was possible to change some foci and gain attention for their needs without paying
for it. However, it was important to be knowledgeable and the representatives from Ericsson
must value the comments given. If they did not, then the opportunity would go to people
representing other customers. Further, if the comments made were highly appreciated, the
representatives of the company could be invited to an exclusive informal research meeting,
that took place four times a year. This meeting was organized by the research unit
responsible for future generations of cellular systems within Ericsson. There, the vice
president of development within Telia Mobile could influence Ericsson’s long-term business
plan at the SPM unit which was the point of departure in developing the content in a new
release project and next cellular system generation.

4.2 The market document

Employees from the SPM unit and the system management unit started to develop and
re-write a more precise specification for R7 based on inputs from the informal discussions
with the selected customers. The SPM unit estimated the commercial benefits associated
with different areas and potential features. Simultaneously, the system management unit
investigated whether development of the features desired was feasible and, if so, what they
would cost. This interactive process between the two units within Ericsson continued for
several months and resulted in the market document. This document described what could
be developed within the R7 release in detail. Many of the features offered were
improvements of the existing ones, so-called in-service performance features. However, the
document also contained several new options. The high speed functionality, for example, Managing
was demanding and required the compression of data and prioritization of time channels. innovation
Hence, the market document was a comprehensive list of a large number of specified processes
features and their basic ingredients.
When the market document was finished, some ten or so of Ericsson’s most important
customers were contacted. Telia Mobile was one of them. They were selected according to
two main criteria: business volume and competence. A customer with a significant existing 17
or a high expected business volume was a prioritized customer that Ericsson wanted to
involve in the development process. However, a customer that did not have a significant or
expected business volume, but was knowledgeable and at the frontier of cellular system
technology development, was also prioritized by Ericsson at this stage. These two
categories of customers were contacted by the Key Account Management (KAM) unit
responsible for that particular relationship.
Telia Mobile was approached by the technical specialist at Ericsson’s KAM unit
Telia Mobile and a senior member from SPM. They presented the market document to
employees at the BSS unit within the development department in Telia Mobile.
Simultaneously, technical specialists for the switching system and OSS presented the
market document to members from their respective corresponding unit within Telia
Mobile. The units in Telia Mobile received the market document for their part of the
cellular system and analyzed the importance of the suggested features. When needed,
members from Telia Mobile contacted technical specialists from Ericsson’s KAM Telia
Mobile unit for more information. Sometimes it was necessary for the technical specialist
to involve members from the SPM unit and the system development unit to clarify issues
raised by Telia Mobile.
Telia Mobile came back with written comments on each feature in the market document
for the respective sub system (BSS, SS and OSS) of R7. Here Telia Mobile prioritized the
features and elaborated on its view of the necessity of the various features and their
functionality. According to several interviewees from that firm, the prioritization of features
was a tricky task. However, the comments on the market document enabled Telia Mobile to
identify the importance of certain features and thus increase the probability that Ericsson
would develop them.
It could also be problematic for Telia Mobile to show that a feature was important for
them. As the development director in Telia Mobile stated, “If we emphasise some features
very strongly, Ericsson will remember that when we negotiate the price for the features
in the release some years ahead.” Several interviewees argued that it was necessary to
take that into consideration when they commented on features. According to the
development director at Telia Mobile it was better to influence Ericsson earlier in the
development phase of a release, but sometimes it was necessary to use the opportunity to
make it clear to Ericsson that some features were most important. One example was when
Telia Mobile needed the dual band functionality in the GSM cellular system for which they
had not got Ericsson’s attention earlier in the development phases. Here Telia Mobile did
not succeed despite using all possible ways to influence SPM and system management
units within Ericsson.
According to one senior development engineer in Telia Mobile, the most certain way of
influencing Ericsson and other telecom companies was to join other cellular system
operators in the standard setting body and thereby almost force the telecom companies to
develop specific functionalities. Several interviewees in Telia Mobile stated that this always
was a possibility, but a problem associate with it was that it meant they could not use that
functionality to increase their competitive advantage. When it came to the dual band
functionality Telia Mobile was unable to mobilize the other cellular system operators to put
enough pressure on the telecom companies.
IMP 4.3 The selected feature document
11,1 The SPM unit started to prioritize the features to develop in the release based on the
comments received on the market document from the telecom operators. According to
the manager of the SPM unit, two main aspects guided the prioritization of the features: the
long-term business plan and a commercial business case for each feature. However, he also
noted that if they discovered a new important feature in the interactions with customers that
18 could not be developed on commercial grounds but was viewed as being of high strategic
potential, the feature was included in the release. The manager emphasized the importance
of always bearing the business plan in mind when evaluating a feature to determine if it
fitted in with the long-term view of the future cellular system functionality. However, with
the business plan in mind, each feature was evaluated on its profitability and the most
profitable ones were prioritized.
The anticipated cost of a feature was based on time estimations from the system
development unit made by the most experienced development engineers. These estimations
were evaluated by the management team of the system development unit. According to the
manager of the traffic design unit, the management team used rule of thumbs when they
judged the estimated time for a feature. Another point of reference for that judgment was a
database in which it was possible to determine the engineering hours used to develop the
features for previous releases using the development engineers’ activity reports. This made it
possible to investigate the total development time spent on a feature, although one subunit
manager within the system development unit claimed that these data were not always reliable.
The revenue anticipated for a feature was assessed from the justification given by the
selected telecom operators and the extent to which they were emphatic that the features they
commented on should be included in the market document. However, Ericsson gave the
assessments of some customers more significance than others. The importance of a customer
depended on the size of the operator’s cellular system, the number of subscribers and the
future growth of subscribers, along with the customer’s revenue, cash flow and profitability.
A profitable customer with a large cellular system, a large number of subscribers, and high
growth potential received more attention than one expected to generate a lower sales volume.
However, several interviewees from both the development units and the customer units within
Ericsson stated that it was difficult to decide how honest the customers were when they
commented on and prioritized the features in the market document.
The SPM unit had a point of reference in the Capri information system in which
information about all previous offers Ericsson had made to its customers was stored. The
information had a high level of detail and it was possible to identify the price Ericsson had
put on single features and how these were aggregated to determine the total offer for the
release. The offers made for previous releases to customers differed in price and content
depending on the customer. Thus, Ericsson offered a unique package in terms of the
features and functionalities to each customer that depended on the software content of the
customers’ cellular system. The SPM unit also systematized all the deals and specified how
much each customer had paid for the previous releases. The level of detail in the system was
so high that it was possible to track what a customer had paid for each feature in a release,
although determining its accuracy was not easy. The account manager responsible for
market operations elaborated on this accuracy problem. He stated that when they started
the negotiations everything was clearly specified where the features and their prices were
concerned for the release, but after a long negotiation, by the time the customer bought the
release with several changes introduced in the features supplied, the total amount was no
longer easily broken down. Consequently, the information in the Capri system was based on
the judgment of the sales force in the KAM units.
The design centers that developed parts of the release could expand and reduce their
capacity to some extent within their specific areas according to the manager of the SPM unit.
However, an expansion must be aligned with the business plan. Hence, a large expansion Managing
within the radio network management area in one release would be allowed provided that this innovation
area was determined to continue to need the expanded capacity in the future releases under processes
development. Nevertheless, the capacity of the design centers placed limitations on the
number of features that could be developed within a release. The SPM unit used the
prioritization and order of the features, together with the capacity limitations of the design
centers, to redefine the content of the R7 release. This resulted in a document specifying the 19
selected features and describing the detailed content of the R7, which was distributed to the
design centers that would be responsible for the development of individual features.

5. Discussion and concluding remarks

The case study makes it evident that the use of accounting influences the decision making
processes when the content for a new standard software release was being developed.
The content of the release was influenced through financial and non-financial accounting in
the long-term business plan, including rough cost and revenue estimations of the release
content, the formation of different stage-gate documents (pre-study document, market
document and selected feature document), written comments on the market document, and
business cases on each feature. The use of accounting to influence innovation processes is
aligned with previous studies (Carlsson-Wall and Kraus, 2015; Jørgensen and Messner, 2009,
2010; Nixon, 1998). The accounting was applied in units within Ericsson and its customers
and in interactions between Ericsson and its customers. The content of the accounting
differed depending on the characteristics of the customer relationships. Some customers
received much more detailed information than others and were allowed to influence the
innovation process considerably earlier on. The result, that close customers with high
interdependences received and diffused much more detailed and complex accounting
information compared to more arm’s length ones, is in alignment with previous studies
(Agndal and Nilsson, 2009; Carlsson-Wall et al., 2015; Cooper and Slagmulder, 2004; Dubois,
2003; Lind and Strömsten, 2006).
Accounting was used when features in the release were selected and evaluated. Ericsson
and its counterparts used accounting to simplify the development of new functionalities in
the cellular system. As found previously in other studies, the accounting made the complex
world manageable (Alenius et al., 2015; Tomkins, 2001); it also influenced the content of
features in the final release. A key situation when accounting influenced the content of the
standard software release was the formation of the stage-gate documents. It was necessary
that a feature was profitable on its own merits to be prioritized in the formation of the
stage-gate documents. The indirect effects of a decision that had been emphasized in the
previous literature as being important for the outcome were not integrated in the calculation
of the business case for a release (Dubois, 2003; Lind and Strömsten, 2006; Tomkins, 2001).
However, in some exceptional cases when a proposed feature was perceived to be critical for
the development of a future cellular system the SPM unit might calculate the indirect
benefits of retaining it in the release.
The formation of the pre-study document, the market document, and the selected feature
document, stabilized the content of the innovation process at specific periods of time and made
it possible to move the innovation process forward. The pre-study document was the first
temporary solution of the content of the R7 (the release 7). This solution was influenced by
rough cost and revenue estimations that guided the content of the R7 to secure sufficient
profitability. The market document was the second temporary solution specifying the content
of the R7. This solution differed from the pre-study document as it specified the content of R7
in much more detail and described a large number of possible features that could be developed
within the release. The content of the market document was influenced by the revenue
potential and the estimated costs of each feature. It was distributed to the ten most important
IMP customers who responded with detailed feedback on each feature, and their ranking of the
11,1 features. Based on this customer feedback, the business plan, and the business case for each
feature, the SPM unit wrote the selected feature document, the third temporary solution
specifying the content of the R7. Thus, financial and non-financial accounting were closely
linked to temporary solutions and the stabilization of the R7 at these different points in time.
The SPM unit used accounting to guide them as the settled on the features of the innovation
20 and identified a temporary solution for the content of the release.
These findings have similarities with the studies reported by Jørgensen and Messner (2010)
and Carlsson-Wall and Kraus (2015). These papers show the importance of accounting in the
form of stage-gate models to delineate a temporary solution to move the development project
forward. Jørgensen and Messner (2010) emphasized the importance of financial accounting in
the form of contribution ratio level analysis and payback ratio analysis and these financial
calculations were interpreted in an operational context to make it possible to compare different
perspectives of the ideal innovation. Unprofitable project did not survive. Carlsson-Wall and
Kraus (2015) show how non-financial accounting was used to create a coherent story of the
product innovation and to mobilize different actors by providing a temporary solution that
could move the innovation forward. This study showed how the stage-gate model, in
combination with different forms of cost and revenue estimations, stabilized the innovation
processes in the formation of the stage-gate documents. Thus, the use of accounting seems to
offer an enabling role for the innovation process. A difference in this study compared to the
previous ones was that the customers were more involved in the systematic diffusion of
accounting information to the SPM unit. As a result, the customers use accounting figures to
influence the temporary solutions at the stage-gates within Ericsson. Customers had a much
more indirect influence on the calculations in the studies by Jørgensen and Messner (2010) and
Carlsson-Wall and Kraus (2015).
It is evident that accounting made it possible to settle on the content of the release through
the stage-gate documents. However, it was only in retrospect that it was possible to assess
whether the accounting enabled the innovation process to progress in a successful direction,
or not. The study was conducted in the late 1990s and, in 2016 Ericsson and Telia Mobile are
still key actors in the cellular industry. The two companies initiated the first commercial 4G
cellular system together in 2009, and in early 2016 they jointly announced their ambition – to
launch a commercial 5G cellular system in 2018. This is one indication that the use of
accounting successfully enabled the innovation process in the late 1990s. However, it is
difficult to isolate the standard software development of the GSM system from all other
activities within the combined Ericsson and Telia Mobile cellular system business. It is
possible that the innovation progressed despite the influence from use of accounting.
A difference observed in this study compared to previous ones was that actors used
accounting to not only stabilize the content of the R7, but it was also used to destabilize the
content (Carlsson-Wall and Kraus, 2015; Jørgensen and Messner, 2010; Nixon 1998). In the
formation of the gate documents, the pre-study document, the market document and the
selected feature document, accounting tools with different aims were mobilized by actors to
drive the innovation in different directions. This was evident when a few customers were
invited to give input on the pre-study document and when the ten most important customers
returned written comments and a ranking of the features. The customers with their
supporters within the dedicated customer units in Ericsson mobilized accounting to support
specific content of the R7 suitable for that particular customer. Telia Mobile, for example,
emphasized certain features, and if Ericsson decided to develop these, Telia Mobile would buy
them. One problem for Telia Mobile was that it did not have many subscribers and, as such,
the business volume was often not large enough to convince Ericsson to develop the features
it required. It was more important for Telia Mobile to persuade the SPM unit within Ericsson
that Telia Mobile was a lead user and that the emphasized features that Telia Mobile
suggested would in the near future be critical to other telecom operators. However, other Managing
customers to Ericsson applied similar arguments in their comments on the pre-study innovation
document and the market document, and some were much larger operators than Telia Mobile. processes
Hence, customers and actors within Ericsson used different accounting figures to influence the
content of the R7. At specific points in time, the SPM unit defined the content of the R7 and
made a temporary solution for the R7 to move the innovation process forward. This process of
accounting for de-stabilization and stabilization in temporary solutions can be linked to 21
Tomkins’ claim that accounting needed to be so flexible that it can support each new choice in
a negotiation with new profitability figures for each actor involved and for the overall outcome
(Tomkins, 2001). When the content of the R7 was stabilized in the different stage-gate
documents, it was critical that the release and the cellular system would be profitable as a
whole. Further, it was necessary that both Ericsson and operators concerned found the
suggested content of R7 profitable at the time the decision was made. If an operator did not
find the suggested content acceptable, there was a risk that it would end its relationship with
Ericsson and thus increase the probability of the innovation being unsuccessful.
A further issue that influenced the use of accounting and the content of the R7 was the
experience from previous deals and the anticipation of future ones. This was most obvious
in the formation of the selected feature document. Ericsson had created a specific
information system that systematically captured what each customer had paid for each
feature within previous releases. This information was used by the SPM unit when it judged
the sales potential of possible features for inclusion in the R7. Hence, previous deals
influenced the content of R7. The information about previous deals was also used by the
KAM units when they specified the offers to their customers. Thus, the monetary exchange
impacted directly on the innovation process and indirectly through the use of accounting.
The importance of deals for innovation processes was identified by Håkansson and
Olsen (2015) in their study of Opera software. They stated that a deal constitutes an
exchange of money in a relationship and it needs a legally binding contract. Another source
of information used by the KAM unit in Ericsson when it specified the tender was each
customer’s detailed written comments on individual features. Customers were well aware of
this and of how this could influence how Telia Mobile determined the importance of the
features. However, Telia Mobile was somewhat biased when it prioritized and commented
on the features. It was necessary for Telia Mobile to be tactical to receive a better tender.
However, these written comments were central when the SPM unit evaluated the
profitability of the features and when the content of the R7 was decided. Hence, the use of
accounting was affected as a consequence of its possible impact on future deals.
The study revealed how deals, use of accounting and the content of the R7 were interwoven
in a complex net. Previous and the outcome of prospective future deals influenced the
accounting figures and the use of accounting, in its turn, influenced the discussions concerning
future deals between Ericsson and Telia Mobile. The content of the R7 was influenced by the
use of accounting and also by previous and discussions of future deals. The importance of deals
for the use of accounting and the content of R7 created new challenges for accounting. Previous
studies of deals and innovation processes have shown that a deal is a result of negotiation
processes between the companies involved, and not a mirror of the social-material values
created (Håkansson and Olsen, 2015; Perna et al., 2015). This is well illustrated in their empirical
studies of Opera Software and Solibro thin film solar cells (Håkansson and Olsen, 2015; Perna
et al., 2015). Both empirical studies showed that the relationship between the resources a
company invests in an innovation and the monetary gains distributed to the company from it
were almost unrelated. A consequence of the influence of deals on the use of accounting in this
study was that the accounting figures were influenced by negotiation processes in the
development of R7. Accounting is always an incomplete model of operations and it will not be a
better model of them when it is influenced by the negotiation processes (Bürkland and
IMP Zachariassen, 2014). Despite, the lack of completeness of accounting was it used by the actors
11,1 when they decided upon the content of the R7.
This study has shown that accounting was a key ingredient when temporary solutions
were formed in the innovation processes. Actors used accounting to settle on the content of
the release in the formation of the stage-gate documents and used accounting to alter the
content between the temporary solutions. Hence, this shows that more studies of the role of
22 accounting in innovation processes might contribute to the knowledge of the industrial
network approach by providing a more thorough understanding of network dynamics and
the process of stability and instability in business networks. Studies of accounting can also
uncover and explain some of the reasons for a particular development path in the business
network. However, it is difficult to assess whether the use of accounting improves or harms
the innovation. Further, the study also revealed that the use of accounting influenced and
was influenced by previous and prospective future deals. This put new challenges on the
use of accounting because it involved negotiation processes that influenced the accounting
figures. How these affects the decisions and the future development of innovations needs to
be determined through empirical studies in various industries. Thus, more in-depth case
studies on the interrelationships between the use of accounting, deals and innovation
processes are welcome.

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Corresponding author
Johnny Lind can be contacted at: johnny.lind@hhs.se

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