Management Control Systems Chapter 6: Designing and Evaluating MCS Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

Designing control systems ... Two basic questions: What is desired ? What is likely to happen ? If what is likely is different from what is desired, then two basic MCS-design questions must be addressed: What controls should be used ? How tightly should each be applied ?

What is desired ? Start from objectives and strategies ... They should be important guides to the actions that are expected, especially if they are specific … e.g., “Become a leader in the industry ” vs. “15% ROI and 20% sales growth.” Identify the key actions (KA) i.e., actions that must be performed to provide the greatest probability of success. Identify the key results (KR) i.e., the few key areas where things must go right for the business to flourish.

What is likely ? Three questions: Do employees understand what they are expected to do (key actions) or to accomplish (key results)? lack of direction Are they properly motivated? lack of motivation Are they able to fulfil their desired roles? personal limitations The discrepancy between what is desired and what is likely will determine the choice and the tightness of the management control systems.

Choice of controls ... The different types of controls (action, results and people controls) are not equally effective at addressing each of the control problems. Lack of direction Personal limitations motivation Results accountability Action controls - Behavioral constraints - Preaction reviews - Action accountability People controls - Selection / placement - Training - Provision of resources - Strong culture - Group-based rewards 

Start with people controls ... Must always be relied on to a certain extent; Have relatively few harmful side-effects; Involve relatively low out-of-pocket costs. However, it is rare that people controls will be sufficient. In most cases, it is necessary to supplement them with … action controls; results controls. Maybe, you just shouldn’t put all your trust in people !?

Pros and cons of action controls ... The most direct form of control. Tend to lead to documentation of the accumulation of knowledge as to what works best. Organizational memory An efficient way of coordination: i.e., they increase the predictability of actions and reduce the amount of inter-organizational information flows to achieve a coordinated effort. Only for highly routinized jobs. May discourage creativity, innovation, and adaptation. May cause sloppiness. May cause negative attitudes. e.g., little opportunity for creativity and self- actualization. Sometimes very costly e.g., preaction reviews

Pros and cons of results controls ... Behavior can be influenced while allowing significant autonomy. They yield greater employee commitment and motivation. They are often inexpensive. e.g., performance measures are often collected for reasons not directly related to management control. Often less than perfect indicators of whether good actions have been taken. They shift risk to employees (because of uncontrollable factors). Hence, they often require a risk premium for risk averse employees. Sometimes conflicting functions: Motivation to achieve targets should be “challenging”; Communication among entities targets should be slightly conservative.

Choice of control tightness ... What are the potential benefits of tight controls? In any organization, tight control is most beneficial over areas most critical to the organization’s success. What are the costs? Are any harmful side-effects likely?

Control system change ... As firms grow, their controls evolve, usually towards … Increased formalization of procedures ... for action accountability purposes; and/or Development of more elaborate information systems ... for results control purposes.

Keep a behavioral focus ... There is no one best form of control ... What works best in one company (or area within a company), may not work in another ... e.g., accounting personnel vs. design engineers. Therefore, it is important to keep the focus on the people involved, because … It is their responses that will determine the success or failure of the control system ! The benefits of controls are derived only from their impacts on behaviors!

Overview ... ? Can people be avoided? (e.g., automation, centralization) Control-problem avoidance Can you rely on people involved? Can you make people reliable? Have knowledge about what specific actions are desirable? Able to assess whether specific action was taken? results are desirable? Able to measure results? Yes No Action controls People controls Results controls ?

Depending on ... Action Control Results Control People Control Ability to measure results on important performance dimensions Knowledge of which specific actions are desirable High Low Excellent Poor Action Control and/or Results Control (e.g., large projects) (e.g., movie director, SBU-manager) People Control (e.g., research lab)

Cases Disctech, Inc. (p.207 ff.): Airtex Aviation (p. 238 ff.): What went wrong? What shoud Bill Winslow do to restore confidence at Disctech and prevent similar occurrences in the future? Airtex Aviation (p. 238 ff.): Did Airtex need a nes control system at the time of the takeover? Evaluate the control system that Frank and Ted implemented. Should anything be done differently?