Management Control Systems

Management Control Systems

1. To ensure that behaviours and decisions of employees are consistent with the org's objectives / strategies

2. CS must operate within an effective control environment

   • Prevents failures if environment is strong
     • No point having a control system if it can be overridden by employees

3. More controls doesn't mean better control

   • Implement more if benefits exceed implementation costs

4. Causes of control problems

   • Motivational problems
     • Employees act in their own personal interest at the expense of the org
     • Self-interested; doing as little as possible to gain a high reward
     • Controls align the interest of both parties
   • Personal limitations
     • Lack of aptitude, training, experience, stamina, knowledge of tasks
     • Limitations in ability to perceive new probelms, remember important facts, process info properly
     • Controls adequately support employees
   • Lack of direction
     • Do not know what the org wants from them
     • Even if they are trying their best, it may not be contributing to org obj

5. Control problem avoidance

   • Strategies to minimise problems
   • Risk sharing
     • Allows org to partially avoid problems
     • Purchase insurance to cover liabilities for infrequent large loss events
   • Activity elimination
     • Turns over potential risks and profits of activities the org cannot control due to lack of resources
     • Subcontract, licensing agreement
     • 3rd party
     • Common to outsource IT services - secondary activity
   • Automation
     • Eliminates human problems of inaccuracy, inconsistency, lack of motivation
     • Computers, robots, expert systems
     • May replace some control problems with others
       • Programmer error risks, fraud
   • Centralisation
     • Key decisions made at top management levels
     • Prevents org from having to bear the consequences of poor judgement of lower level managers

6. Action controls

   • Most direct form of control
   • Dictates what the employees should and shouldn't do
     • Ensures employees perform certain actions known to be beneficial
   • Behavioural constraints
     • Physical constraints
       • Physical or virtual devices
       • Locks, computer passwords, fingerprint readers
       • Prevents unauthorised access, reminder that they can be caught
       • Choice depends on degree of control required and context
         • More sophisticated = more expensive
     • Administrative constraints
       • Place limits on ability to perform all or a portion of a task
       • Separation of duties
         • One person isn't control of all
       • Restriction of DM authority
         • Assume higher managers make better decisions
         • Different managers given different authority limits
     • Motivational problems only
     • Poka-yoke
       • Both types combined to form a step that is built into a process to prevent deviation from correct order of steps
       • E.g. so you can't use microwave with door open
   • Preaction reviews
     • Scrutiny and approval of action plans before a course of action is undertaken
     • Carried out by someone more experienced than the preparer to identify mistakes and implause assumptions prior to plan implementation
     • All problems
     • Tight if reviews are frequent, detailed and performed by knowledgeable reviewers
   • Action accountability
     • Holding employees accountable for their actions
     • 4 steps of implementation
       • Defining what actions are acceptable / unacceptable
         • Congruence, specificity, completeness
       • Communicating those defined actions to employees
         • Work rules, policies / procedures, contract provisions, codes of conduct
         • Understandability
       • Observing or tracking what happens
         • Direct supervision or monitoring on product lines
         • Periodic tracking e.g mystery shoppers
         • Examine evidence: activity reports, expense documentation
       • Punishing unacceptable behaviour or rewarding good actions
         • Understanding
     • All problems
   • Redundancy
     • Involves assigning more employees to a task than is strictly necessary
       • Excess capacity
     • Increases probability that a task will be satisfactorily completed
       • e.g where a lapse in concentration could breach security
     • Common in computer facilities, security functions
     • Rarely used
       • Expensive
       • Assigning more than one employee to the same task usually results in conflict, frustration or boredom
     • Motivational problems and personal limitations
   • Conditions determining the effectiveness of action controls
     • Knowledge of desired actions
       • Ability of the org to define and articuate what actions are / aren't desirable
       • Not always possible if tasks aren't repetitive like in a production line
         • If highly complex and environment is uncertain, it isn't possible
           • E.g sales peoples: how should they use their time?
     • Ability to ensure that desired actions are taken
       • Behavioural constraints and preaction reviews:
         • Ability varies directly with the reliability of the devices or procedures the org has in place to ensure desired actions are taken
         • For controls to be reliable, need a well-designed CS operating in a strong control environment
           • Weak CS have poor internal controls
           • Weak control environment means management can override
       • Action accountability:
         • Action tracking effectiveness
           • Precision
             • Amount of errors in the indicators used to tell what actions have taken place
             • Direct supervision: can supervisors accurately distinguish good from bad actions?
             • Do records reliably tell whether proper actions were taken?
           • Objectivity
             • Freedom from bias
             • Are self-reports objective?
             • Objectivity checks
               • Direct supervision, internal auditors, advanced monitoring technologies e.g GPS
           • Understandability
             • Actions for which individuals are to be held accountable need to be understandable
             • Cannot penalise employees for not complying to policies they don't understand
               • Would destroy employee morale
           • Timeliness
             • So that interventions are possible before harm is done
             • Much of the motivational effect of feedback will be lost when tracking is significantly delayed
           • POUT
   • Too many may stifle innovation and be rigid
   • Pros and cons
     • Disadvantages
       • Not feasible where there needs to be in-depth knowledge of desirable actions, which only exist for highly routinised jobs
         • Tendency to focus on easy-to-monitor actions, causing behavoural displacement to actions of lesser importance
       • Discourage creativity, innovation and adaptation, resulting in employees beoming passive
       • Can cause sloppiness as people rush through things if they are familiar with the procedure; or can become overwhelmed with too many passwords, so stay logged in
       • Causes negative attitudes; people don't like to be told what to do
       • Preaction reviews costly
     • Advantages
       • Most direct form of control, best for must be right, first time actions such as significant investment decisions
       • Lead to documentation of the accumulation of knowledge as to what works best
         • Efficient way to transfer knowldge and act as a form or org memory
       • Policy and procedures are an efficient way to aid org coordination, reducing inter-org info flows required to achieve coordinated effort

7. Cultural controls

   • Exist to shape org behavioural norms and to encourage mutual monitoring
     • Through shared traditions, norms, beliefs, values etc
   • Relatively unobtrusive but powerful
     • Seen as the norm, accepted practice
     • Not seen by employees as a form of control
   • Gets in the way of needed change
   • Codes of conduct
     • Set the tone on how things should be done
     • Shapes org culture
     • Formal, written documents
     • Provide broad, general statements
       • Organisational values
       • Commitments to stakeholders
       • Ways management want it to function
     • Effective implementation when reinforced with training, informal discussions, mentoring meetings, enforcement mechanisms (ethics hotline, whistle blower), tone at the top
     • LOD & PL
   • Group rewards
     • Incentives based on collective achievement
     • Bonus, profit-sharing on overall company
     • Encourage teamwork and mutual monitoring
     • Ownership and engagement culture
     • All controls
   • Intra-organisational transfers
     • Help transmit culture through employee socialisation
     • Better understanding of problems
     • Inhibits the formation of incompatible goals and perspectives
     • LOD & PL
   • Physical and social arrangements
     • Physical: office plans, architecture, internal decor
       • Open office encourages innovation and team work
     • Social: dress code, vocabulary, institutional habits
       • More informal dress might help with creativity
     • PL only
   • Tone at the top
     • Top management must act as role models to set the right tone
     • Statements must be consistent with type of culture the org is trying to create
       • Actions should be consistent
     • LOD only
   • Best to create a strong culture at the start of orgs life
     • If a strong culture doesn't exist, it can be embedded through training and reinforcement
   • Strong culture is resistant to change
   • Along with P, less obtrusive, lower cost, usable in most settings, fewer harmful side effects

8. Personnel controls

   • Build on employees' natural tendencies to control or motivate themselves
     • Increase likelihood of self-monitoring
     • Help clarify expectations
     • Ensure that employees have the capabilities and resources to do a good job
   • Selection and placement
     • Finding the right people to do a specified job
       • Predictors of success: education, experience, past successes, personality, social skills
       • Matching job requirements with applicants' skills, reference checks, interviews, social media
     • All controls
   • Training
     • What actions or results are expected
     • How the assigned tasks are best performed
     • Formal: in-company training, in-classroom
     • Informal: employee mentoring, virtual community on socials
     • LOD & PL
   • Job design and provision of necessary resources
     • Not too onerous, motivational
     • PL
   • Foundation of success
   • Inherently tight in charitable / voluntary orgs and small family businesses

9. Process of designing / improving MCS

   • 1: What is desired?
     • Obj and strategies of org
   • 2: What is likely to happen? Is there a gap between 1 and 2?
   • 3: What controls should be used to reduce the gap / address control problems?
   • 4: How tightly should controls be applied? Benefits vs costs

10. Results controls

    • Use output to ascertain whether the desired outcomes have been achieved
      • Can be used even without knowledge of how it will be achieved
        • Less direct form of control
    • All control problems
      • Direction to employees as to what is expected
      • Better results will lead to higher rewards = motivation
        • Interests of org and self-interested employees align
      • Pay-for-performance attracts and retains confident employees and encourages them to develop to earn rewards
    • Deviation from targets will feedback for corrective action
    • Allows decentralisation of DM to lower level managers, increasing flexibility and accountability
    • Steps (and criteria for implementation)
      • 1: Defining performance dimensions
        • Must reflect true org obj
          • Critical to success of org
        • 3 C's
          • Congruence: with true org obj
          • Completeness: Include all areas in which org desires good performance
          • Controllability: Employees held accountable for unfavourable outcomes under their control
            • Results controls will not be effective if the results measures are affected by many significant uncontrollable factors
      • 2: Defining performance measures
        • Must be congruent with performance dimension
        • Common that employees are responsible for multiple measures
          • Provide weightings to each measure to clarify importance and allow aggregation
          • Too many measures dilutes focus
            • No more than 5-8 measures, at least 5-10% importance weighting
        • CPOUTC
          • Congruence: with desired results dimensions
            • So that the measure will give an accurate picture of the dimension it was intended to measure
          • Precision (repeated measures show same results) and accuracy (degree of closeness to true value)
          • Objectivity: not influenced by feelings, emotions, interpretations; unbiased
            • Must be measured by not the same person who is being evaluated
          • Understandability: understand what they are held accountable for; effective communication, may need training
          • Timeliness: lag between performance and measurement and reward; motivation if low
          • Cost efficiency: measurement is expensive; ensure benefits exceed costs of measure
      • 3: Setting performance targets
        • Improve motivation because employees know what they will have to achieve to be rewarded
        • Clear goals
        • Specificity: specific targets will increase tightness
          • Quantify targets and disaggregate to improve ease of measurement
        • Communication and internalisation: employees will internalise a target only if they understand it
          • Qualifications, controllability over areas, participation in goal setting will affect degree of understanding
      • 4: Providing rewards
        • Desired motivational effect
        • Extrinsic rewards: monetary or non-monetary
        • Intrinsic rewards: internally generated through a sense of achievement
        • Type desired depends on personal taste and circumstances
          • Tailoring is expensive and complex, unfair
        • Meaningful rewards: significant to person
        • Directly and definitely linked to accomplishment: no excuses tolerated; motivate employees no matter what
    • Pros and cons
      • Advantages
        • Feasible, even if knowledge of desirable actions is lacking
        • Allows org to influence behaviours of employees whilst allowing autonomy
        • Provides on the job training
          • Employees learn by doing and making mistakes instead of being told what to do
        • Relatively inexpensive compared to action controls because performance measures are often collected for other reasons anyway
      • Disadvantages
        • Congruence problems if there is imperfect knowledge of desirable results
        • Measurement issues arising from measures not meeting the qualities of good measures may provide less than perfect indications of goo or bad actions
        • "Noise" in measures may subject employees to the risk of uncontrollabe factors
          • May result in employee dissatisfaction, frustration and a perception of unfairness
        • Holding employees responsible for a high number of measures can be conflicting and overwhelming
        • Not always possible to set budget targets at a challenging but achievable level when planning requires that targets to be set at a realistic level
        • Not all employees like to be empowered, not enjoying responsibility that results controls impact

11. A tighter MCS increases likelihood that org obj will be achieved

    • Greater assurance that employees will act in org's best interests
    • Delicate balancing of tightness of all types of controls
    • Tighten controls over areas most critical to org success, but benefits must exceed costs
      • Benefit is greater when performance is poor

12. Control system costs

    • Decision to implement more MCS depends on whether benefits exceed costs
    • Direct costs
      • Monetary costs required in design and implementation
      • Not always easy to quantify, such as time spent
      • E.g., paying cash bonuses, maintaining staff, time spent in carrying out preaction reviews
    • Indirect costs / harmful side effects
      • Unintended consequences
      • Causes
        • Inherent negative side effects
          • E.g action controls do because people don't like to be told what to do
        • Poor MCS design
          • Use of profits may result in LT value destruction
        • Wrong type of controls
          • Action controls in a decentralised org can stifle innovation and flexibility
      • Behavioural displacement
        • When MCS encourages behaviours not consistent with orgs obj
        • Happens when employees concentrate efforts on achieving targets incongruent with org objs
        • When org defines a set of results measures that are not congruent with org obj
          • Focus on easily quantifiable results
        • Employees pay attention to what they do while losing sight of what they are to accomplish
        • If defined actions are incongruent
        • Recruiting wrong type of employees through incomplete recruitment checks, insufficient training
        • Results accountability
        • Action accountability
        • All P&C
      • Gamesmanship
        • Actions that employees take to improve their performance indicators without producing positive effects for org
        • Creation of slack resources
          • Consumption of org resources by employees in excess of what is required to meet obj
          • Common when tight results controls are used
            • Managers that are rewarded based on achievement of budget targets will negotiate more easily achievable targets, obscuring true performance and distorting decisions
          • Slack does reduce stress, increase org resilience to changes and make available resources that can be used for innovation (allows for mistakes)
        • Data manipulation
          • Falsification: reporting erroneous data; misreporting
          • Data management: changing reported results while providing no real economic advantage
            • Undertaken to make performance look better or worse
              • Accomplished through changing accounting methods or altering operating decisins
            • Affects accuracy of orgs info system, so indirect costs are high; harmful in LT to real economic value
        • Results accountability
        • Action accountability
      • Operating delays
        • Unavoidable consequence of preaction reviews and behavioural constraints
        • E.g. delays from limited access to stock room
        • E.g. decisions requiring multiple levels of approval
          • May impede customer responsiveness
      • Negative attitudes
        • Tension, conflict, frustration, resistance
        • Coincide with gameplaying, lack of effort, employee turnover
        • Do not occur with P&C controls which are less obtrusive
        • Causes
          • Targets too difficult, not meaningful, not controllable, unethical
          • When measurement deemed unfair bc employees are held responsible for uncontrollable factors
          • Rewards unequitable
        • Most people act negatively to action contols
        • Results accountability
        • All action controls
      • Smaller risk with P&C controls