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Management Accounting Research, 1999, 10, 203-230

Article No. mare.1998.0104

Available online at on IDE bL@

Beyond the budgetary control system:

towards a two-tiered process of
management control
David E. W. Marginson
This paper reports on a research study which sought to explore some of the processes
of control operating within a major British organization, Telco Ltd. This organization
provides a range of communications and information services to both business and
private customers. The initial theoretical perspectives which guided the data collection phase of the study are outlined at the outset of the paper. The findings of the
case are then presented and discussed in relation to these initial perspectives, as one
of the aims of the study was to develop more complete perspectives that were better
able to explain the phenomena that were observed. However, the study was also
largely exploratory and inductive in nature, the researcher at all times remaining open
to alternative explanations of the observations that were made, i.e. every effort was
made to ensure that the data from the study informed theoretical explanations which
are developed. On the basis of the studys evidence, a two-tiered model of manage0 1999 Academic Press
ment control is presented.
Key words: management control; cybernetic paradigm; organizational behaviour;
contingency theory.

1. Introduction
T h e objective of the research work reported i n this paper was to gain a fuller
understanding of some of the processes of control which operate within organizations, particularly those operating across different levels of the organizational hierarchy. T h e aim was also to impose as little prior theoretical structure as possible o n t h e
investigation. T h i s led to a relatively intense case study methodology being adopted,
with the researcher being open to alternative explanations of the observations that
were made. As with Berry, Loughton a n d Otley (1991)) however, it was clearly
acknowledged that n o observation can b e free of a theoretical context. Accordingly,
the theoretical perspectives, which informed the data collection aspect of the research, are presented below. T h e studys approach is based o n the following lines of
1. As n o observation can b e free of a theoretical framework, it is important to

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School, Loughborough University, Ashby Road, Loughborough, Leicestershire LE11 3TU,

Received 16 October 1998; accepted 20 December 1998.


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01999 Academic Press


D. E. W. Marginson

appreciate (as far as possible), and make explicit at the outset, the theoretical
perspectives that are being brought to bear on the investigation.
2. The use of multiple theoretical perspectives helps to avoid the possibility of
interpreting phenomena in the light of a single theoretical standpoint, i.e. the
approach seeks to minimize the danger of seeing phenomena as one would
expect to see them (Theory-in-theory-out).
3. The approach adopted is better able to highlight the limitations of each of the
theoretical perspectives considered, thereby allowing for the development,
modification, or, indeed, rejection of a particular perspective in the light of
As alluded to above, the theoretical perspectives adopted at the outset served as
guiding perspectives, rather than firm theoretical foundations, i.e. every effort was
made to ensure that data from the study informed the development of theoretical
explanations. As such, the approach resembles that employed by Berry et al. (1991)
in their study of the control processes of a Financial Services organization. The initial
guiding perspectives are also the same in both studies. Although these similarities
are coincidental rather than deliberate, the present study does provide an opportunity
for the reader to compare and contrast the control processes of two quite different
organizations. However, the main objective of the research study was to develop more
complete theoretical perspectives (particularly the management control perspective)
which would explain more adequately the phenomena that were observed.

2. Initial perspectives
The researcher began his investigation mindful of the following theoretical perspectives which he was bringing to bear: a management control perspective, a cybernetic
perspective, a contingency theory perspective, and an organizational behaviour perspective. A brief outline of each is given below.
The management control perspective
This perspective has its roots in the work of Robert Anthony who, in his seminal
theoretical study of 1965, distinguished management control from both strategic
planning and operational control. These distinctions, and the problems they avoided
(i.e. both the issue of how company objectives are formed, and the issue of the
differing methods of operational control which are required in different production
technologies) enabled Anthony to define management control as the process by
which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of organizational objectives. Management control was
thus established as a mid-range process, which provides the link between higher
level strategic planning and the control of operational activities which normally occur
at lower organizational levels.
The essence of management control is about gaining the co-operation of individuals or collectives of individuals who may share only partially congruent objectives,
and channelling those efforts towards a specified set of organizational goals (Ouchi,
1979; Flamholtz, 1983). Following Anthonys work, accounting controls have historically been viewed as the principle means by which management control is effected

A Two-tiered Process of Management Control


(Otley, 1994). However, it is possible to extend this to include any such mechanism
or procedure that has been consciously and deliberately designed to help ensure that
members actions support the interests of the organization. (See, for example,
Merchant (1 986)) who put forward the idea of action, results and personnel controls.)
Otley (1 994) and Langfield-Smith (1 997) also suggest that the traditional orientation
towards accounting controls and accounting information is no longer sufficiently
broad to capture contemporary approaches to the pursuit of effective control.
Unfortunately, however, Simons (1 995) apart, there is currently little available
evidence to substantiate these arguments.
In terms of the management control perspective, therefore, the present study
sought to investigate the nature and extent of the role played by the companys
various formal control systems and informal processes in gaining the co-operation of
managers and in channelling their efforts behind senior managements current
strategic agenda. Moreover, the process of management control is effected by and
through people and is thereby recursive at successive managerial levels (Wilson and
Chua, 1993). Therefore, the study sought also to investigate some of the processes
which managers used to ensure that their subordinates behaviour was congruent with
senior managements wishes (as managers understand these to be).
The management control perspective as described above is thus functionalist in
nature, in that it focuses on those activities which are necessary for the organization
to cohere and coalesce as an entity (Berry et al., 1991). As such, behaviour that does
not appear to support these features is likely to be classified as dysfunctional, even if
such behaviour appears rational to the individual. This includes the behaviour of
individuals in their capacity as a manager of subordinates, and as subordinates
themselves. Use of this perspective thus allows for an investigation of the adaptations
individuals are required to make in order to remain acceptable to the organization. It
also allows for the study of a superiors requirements of his or her subordinates in this
respect. The primary focus of the management control perspective is therefore on
objectives and adaptation, rather than being on the members of the organization.
The Cybernetic perspective
Cybernetics is the study of control in and of systems. It is normally associated with
lower level systems, such as mechanical or organic systems. However, Otley and
Berry (1980) and others argue that, by deploying Checklands (Checkland, 1981)
soft systems methodologies to the analysis of organizational control systems, cybernetics can be equally applied to more complex systems, such as organizations.
The use of the cybernetic perspective in this study draws on the concept of the
predictive model and the issue of single/double-loop learning (Argyris and Schon,
1978). The use of the predictive model stems from the reasoning that all controlled
systems need to contain a predictive model in order to evaluate the effects of
alternative control actions and thereby maintain a degree of control over the situation
at hand. (For example, at a relatively simplistic level, we are able to predict with a
high degree of accuracy the effect that an alteration to the setting of a room
thermostat will have on the temperature of the room.) Thus, it is of interest to
It was initially assumed (and subsequently substantiated) that senior management would be responsible
for determining the organizations objectives, however tentative.
For an elaboration of this point, the reader is referred to Beers (Beer, 1988) hierarchy of systems.


D. E. W. Marginson

enquire as to the nature of these predictive models, where they are located and how
they are used. Indeed, use of the cybernetic perspective provides for an investigation
of the various plans and policies that may exist at various levels in the company and
the ways in which amalgamation of these predictive models may be attempted. It is
anticipated that most will have a formal existence in the shape of analytical exercises
undertaken by managers and staff specialists. However, others may be less well
documented, existing in the aggregate of individual managers behaviour, whilst they
each act in apparently uncoordinated ways.
The cybernetic perspective is also used to investigate the feedback aspect of control
processes. The concept of cybernetics is error based, in the sense that once a
deviation or mismatch between actual outcomes of the activity under control and the
objectives set for that activity is observed, this causes a control action to be implemented to reduce or remove that error. This process is generally known as single-loop
learning. In contrast double-loop learning involves the ability to question and
evaluate whether or not it is the objective being imposed on the control system that
should be altered. In view of the high degree of environmental uncertainty faced by
the chosen company, part of the research work focused on the feedback processes
operating within the company, and the extent to which managers responded to the
information provided by these processes within established cognitive frameworks
(single-loop learning), or used such information to challenge the continued appropriateness of current standards or objectives in the light of unfolding events (double-loop
The organizational behaviour perspective
Although the concept of organizational behaviour is a rather vague and amorphous
subjectY3it usefulness as an academic discipline derives from its consideration of the
specifically human dimensions of control processes, as it is generally accepted that
individuals experience of their organizational roles shapes their organizational behaviour and beliefs. Thus, for the purposes of this study, the organizational perspective is defined in these terms, in that an individuals own perceptions, both of
situations and of explanations of the reasons for particular actions, are regarded as
valid data. As such, part of the study sought to investigate managers views about the
companys various control processes (for example, which they found most useful,
given the nature of their role, and which they regarded as most influential over their
own organizational behaviour). The research methods adopted therefore included
relatively free-ranging interviews, which provided a forum for managers to express
their views about such matters.
Taking an organizational behaviour perspective also meant the adoption of an
insightful epistemological stance within the study, as these more subjective interview
data demanded an interpretative approach to data analysis. Furthermore, in terms of
the study as a whole, it was possible to use these subjective perceptions as an aid to
triangulation. That is, the subjective perceptions were used to generate potential
explanations for more objectively observed phenomena, whilst the more objective
data were used to assess the validity of subjectively held opinions.

3See Otley (1984) for a discussion of this point.

A Two-tiered Process of Management Control


The contingency theoy perspective

Broadly speaking, contingency theory is premised on the argument that a control
system needs to be matched to the circumstances in which it is required to be
operatedY4i.e. situations influence what the appropriate mode of control should be.
The present study sought to discover some of the circumstances which affect the
design and use of the companys formal control systems (i.e. both the antecedents
and consequences of control systems design). By seeking to investigate as many of the
companys control processes as possible, the study was also able to consider the
totality of control procedures adopted within the company and the extent to which
they may be inter-related (i.e. whether or not, within the context of the overall
control environment, various control mechanisms and procedures appear to act as
compliments or s ~ b s t i t u t e s ) . ~
Overall picture
These four theoretical approaches to the study of control in organizations can be
viewed as both complementary and conflicting; complementary, in that they offer
inter-related but alternative explanations which may add richness to the interpretation of the data, and conflicting to the extent that they are based upon different
epistemological and, in some instances, ontological assumptions (Berry et al., 199 1).
By adopting a number of initial perspectives, it was hoped that the researcher would
use them as guiding perspectives, rather than firm theoretical frameworks, and
thereby remain open to discovering and developing alternative ways of understanding
the phenomena observed. The study was therefore exploratory in the sense that it
sought to build a theoretical framework that would provide the basis for explanations
of other cases.
It was also recognized, however, that such an approach is unlikely to be without
cost, this manifesting itself largely in the intellectual and emotional demands that are
placed upon the individual researcher when s/he seeks to conduct research in this
manner. Particularly problematic in this respect is the adoption of different theoretical perspectives within a single study. This requires the researcher or researchers to
manage the intellectual tensions that will inevitably exist between interpretative
approaches, such as the organizational behaviour approach, the functionalism of
cybernetics and the positivist focus of contingency theory (see Marginson, 1996, for a
fuller discussion of this point).

The case study

The research work was undertaken by way of an in-depth case study of a relatively
large British organization, Telco Ltd. (see below). The motivation for the study was
4Moreover, the achievement of an appropriate match is argued to lead to higher organizational performance. This point is elaborated by the work of Govindarajan and associates, see, for example, Govindarajan and Gupta (1985) and Govindarajan (1988).
5This is a potentially important observation, given that previous contingency work in this area has tended
to focus on the impact of contingent factors on single elements of control systems design (see, for example,
Govindarajan and Fisher, 1990).


D. E. W. Marginson

exploratory (Ryan, Scapens and Theobald, 1992).6 The period of investigation lasted
approximately 2 years. This enabled the researcher to observe the development of the
companys processes of control over an (albeit limited) time period. A single case
strategy was chosen in an attempt to explore, in some depth, the various control
procedures and processes that typically comprise an organizations overall control
picture, and the nature and extent of the relationships among these processes (Otley,
1984; Berry et al., 1991).
Choice of company
There was no attempt to apply any specific theoretical pre-conditions as regards the
identification of a suitable candidate. However, there was a general desire to seek out
a company that appeared to be operating within a fast-moving, dynamic business
environment, as a firm faced by such circumstances was considered more likely to
provide the researcher with an interesting case.
General background to the company7
Telco Ltd. is a subsidiary of a major British-based communications organization.
The company operates from a number of geographically dispersed sites around the
U.K. However, certain core functions are located at four sites in and around London,
and most of the investigation was conducted at these four sites.
Telco is a relatively youthful organization, the companys inception being as a
consequence of one of the major privatizations of the early 1980s. Indeed, until the
early 199Os, the company enjoyed something of a protected status, as successive
(U.K.) Conservative governments sought to increase the element of competition
within an industry which was dominated by its newly privatized competitor. However, a gradual relaxing of the regulatory environment during the nineties, enabled
other companies to enter the communications industry. As a result, the size of the
industry, in terms of the number of competitors, grew from a handful to over 40
during the course of the investigation. (The companys response to such changes in
the industry, and the consequences of the actions taken, are discussed later.)
The company is a relatively large British organization, which, at the outset of the
investigation (Spring, 1994-see below), employed approximately 1 1,000 people.
However, by the end of the investigation, the size of the workforce had been reduced
by some 2200 people (largely from Engineering and Administrative support staff).
This down-sizing was at the behest of a new Chief Executive, and was his response to
a set of interim financial results which showed a 10 percent down-turn in profits from
the previous set of interim figures. This development, he argued, was the portend of
much worse results if drastic action wasnt undertaken.
Telco s main business activities
Telco supplies a range of communication and information services to both business
6The usefulness of the case study as an exploratory research tool, involving the potential for theory
development is now well documented in the literature (see, for example, Scapens, 1990). The reader is
referred to Yin (1983, 1993) for a discussion of appropriate research protocol for such studies (which the
present study largely adhered to), and Marginson (1996) for a comprehensive discussion of the potential
and problems of exploratory/explanatory case-based research.
7This and the following sub-sections provide a synopsis of some of the main aspects of the company and
the developments which took place within the company over the course of the investigation. A full set of
notes on the points raised in the paper is available from the author.

A Two-tiered Process of Management Control


and private customers. The company is particularly strong in the corporate sector,
with both large private enterprises and public corporations providing Telco with its
main source of revenue. For example, in 1994 Telco had contracts to supply and
maintain a variety of services with 80 out of the top 100 organizations (as measured
by the number of people employed). Provision of these services requires managers to
oversee a range of routine activities and operations, most of which are connected in
some way with maintaining the companys network infrastructure. However, during
the course of the investigation, internal activity also comprised a good deal of
project-based work. Much of this work was aimed at modifying and improving
products and services, developing new ones, and re-designing various workflow
processes (such innovations were particularly apparent during the cultural change
programme-see below). The work was effected through cross-functional teams,
many of which comprised a mixture of line managers (8-10 managers from different
levels) and operating experts from different business units. Project teams were
initiated and disbanded as and when necessary, and at any one time most managers
were members of a least one project team, some more than one. These teams were
largely autonomous units, in that they were responsible for all aspects of the
modification and/or development and instigation of a particular product or service.
Smaller task forces were also much in evidence. These were largely responsible for
the resolution of problems associated with the companys more routine activities.
It appeared normal practice for the various projects and programmes to be subject
to modification and adjustment as events unfolded, and outcomes often bore little
relation to their initial concepts. For example, an initial idea to provide visual links
between business customers developed into facsimile communications direct from
the Personal Computer. Although most projects appeared to run their full course, not
all initiatives were successful in this respect, and a number of projects (some relatively
large ones, in terms of financial investment, A17 m in one case) were reported to
have folded prior to completion. As such, it appeared that learning was a key factor in
the activity of the company (see Mintzberg, 1987).
Organizational structure and managerial hierarchy
At the outset of the investigation, Telco was organized on a broadly functional basis,
comprising two customer facing (sales/marketing) business units and three service
type units. The former were largely responsible for generating revenue for the
company, and the latter supported these units with a variety of a services, ranging
from the main network infra-structure to research and development. Finance and
Personnel functions were, however, centralized, being run from the companys
headquarters in central London. Towards the end of the investigation, the companys
structure comprised five smaller customer-facing business units that were supported
by two main service units. This change to the companys macro-organization structure was instigated by Telcos senior management, and represented one of its
responses to an increasingly competitive business environment.
Consistent with what is becoming a defining feature of the contemporary organization (see, for example, Otley, 1994)) Telco has relatively few layers of line management. For example, the largest business unit (in terms of the number of employees)
operated with four layers of management (including the person at senior management, or board level), together with one, sometimes two engineer levels.
The organization chart exhibited a relatively high degree of fluidity, in that


D. E. W. Marginson

job-titles were altered regularly) and there were frequent adjustments to a managers
tasks and responsibilities. Managers contended that such fluidity or rate of change
was a consequence of the ever-changing strategic needs of the department or business
Managerial interdependencies
One further interesting feature of the companys internal environment was the rather
high incidence of observed (and acknowledged) mutual interdependence of managerial activity) i.e. managers were often reliant upon one another for the accomplishment of many of their own tasks and objectives. In effect, there was little independence of responsibilities. Mutual interdependency was said to be strongest within
departments) and for project-related activity. However, it also appeared to transcend
departmental and business unit boundaries.

4. Research period
This study was conducted between the spring of 1994 and the spring of 1996, and
permitted the researcher to observe the development of control procedures during
this period, together with the behavioural effects thereof. Access was negotiated via
the Finance Director. Periodic discussions also took place with four other members
of Telcos senior management team. This allowed the researcher to gain an understanding of the genesis of some of the more major or significant organizational
developments that took place during the course of the investigation) and their
managerial and policy context.8
The period of research coincided with a number of significant developments in the
life of the company. These included: the enactment of a cultural change programme;
the down-sizing of the workforce; global strategic change (Quinn, 1980) in the form
of the companys withdrawal from a relatively large sector of the industry; and a
change of both Chief Executive and Finance Director. A further development during
the latter part of the investigation was the pursuit of greater cost control following the
companys change of strategy. A brief explanation of each of these developments is
provided in order for the reader to gain an appreciation of the organizational context
within which the various control procedures were operating.
The cultural change programme
Soon after the beginning of the study, Telcos senior managers embarked upon a
programme of events, which had the specific aim of changing the companys current
business or strategic focus. This they described as being largely price-driven (low-cost)
and matching in approach (i.e. based around offering cheaper alternatives to all
products and services supplied by its larger rival). Senior management maintained
that this should change to one centred around innovation) creativity and the provision of value-added services in order for the company to advance its position within
an industry which was experiencing a downward cost trend for established services)
rapid technological advances) and a 10-fold increase in the number of participants.
1 use the term significant to describe those events or developments which were mostly instigated by senior
management or the board of the parent company, and which were intended to have a considerable effect
on the companys operations.

A Two-tiered Process of Management Control

21 1

Senior managers also believed that the existing strategic focus had become deeply
rooted in the collective behaviour of the company, and could not be changed without
a concerted effort to change managerial attitudes. A cultural change programme
(the terms used by Telcos senior management) was therefore introduced with the
specific aim of imbuing the workforce with a new strategic agenda. This programme
was undertaken with the aid of a business consulting firm, and involved a series of
formal strategy sessions, or briefings which lasted between 3 and 5 days, according to
the seniority of the group of managers attending a particular session. At these
sessions, senior managers would present their ideas regarding the companys future,
explain why they believed a change was necessary and invite comments from
managers. By the end of the sessions, those present were supposed to have identified
ways in which they could execute the new agenda in their part of the business,
making a formal record of these ideas in the process. The programme also involved
the circulation of formal documents, such as mission statements, credos and magazine articles, all of which were used to reiterate senior managements message about
the need for a change of strategic emphasis. The formal element of the programme
was supported by a number of more informal promotional activities, such as fun
days, roadshows, mock award ceremonies, and so on. Although varying in format,
frequency and intensity, the activities associated with the programme continued for
approximately 10 months.
Strategic change
The programme of events came to an end rather suddenly following the announcement, in the autumn of 1994, of a down-sizing of the workforce and the companys
exit from a major sector of the private customer market. However, the new Chief
Executive made it clear that he supported many of the values promoted by the
programme (e.g. greater mutual co-operation among managers, focus on customer
service), and wished to see these established as the norms of company activity.
In addition to the above changes, the new Finance Director signalled the need for
greater cost control within the company, and implemented a number of changes
aimed at achieving success in this respect. These measures largely concerned the
methods by which Finance collected data on costs and the way senior management
was informed of a particular business units financial performance. For example, a
number of monthly reports which senior management received were revised and
amalgamated into one document which provided a more detailed breakdown of
actual versus budgeted expenditure for each business unit. However, the broad
framework of the budgeting process remained largely unaffected by these developments (see below).

5. Research focus
The focus of the research was on the control procedures operating across different
sections of the organization, and through different levels of the managerial hierarchy.
Not unsurprisingly, this part of the programme came in for a good deal of criticism from managers,
especially following the demise of the programme. The basis of the critcism was that the strategy sessions
gave insufficient time for reflection, and that the obligatory signing-up aspect carried coercive connotations.


D. E. W. Marginson

In order to keep the study within manageable limits for the sole researcher, the
following themes were pursued during the fieldwork:
1. Management control: the nature of the organization structure in relation to the
location of strategic, managerial and operational decisions; the nature of the
formal budget procedures, the manner of performance evaluation; and, the
role of other control procedures and processes in the pursuit of behavioural
2. Cybernetics: the nature, location and use of models for control, both those
formally established and those tacitly in use. Also, the occurrence of
single/double loop learning in relation to the feedback aspect of the control
3. Organization behaviour: the nature of vertical and horizontal relationships in
the organization; the use made of the various control procedures by managers
and reasons for such use; perceptions on control processes and behavioural
effects thereof.
4. Contingency theory: the antecedents and consequences of control procedures in
use, the nature of changes to these control procedures and the extent to which
differences in context might lead to variation in managers use of control
procedures and processes.
Data collection methods
Data on the companys control procedures and processes were collected from a range
of sources. These included: interviews (and re-interviews) with line managers and
staff personnel (see below), telephone conversations with key informants (Yin, 1983))
archival records, business press reports, internal company documents supplied by
interviewees, annual business unit/company reports, non-participant observation at
meetings, and from generally being around. Importantly, these various sources of
evidence were used to provide multiple measures of the same issue (triangulation),
rather than simply being used as mixed methods of data collection. Analysis and
interpretation of the data was an iterative process, which often involved gathering
additional material in order to fine tune ideas and corroborate (through seeking to
disconfirm) explanations (Dent, 199 1; Marginson, 1996). Findings were regularly fed
back to managers for review in order to check the veracity of the researchers
understanding of various issues.
Interview schedule
Initially, six line managers from each of four of the companys business units were
interviewed during the spring and summer of 1994. These six managers spanned
three hierarchical levels within each business unit (levels 1-3, sometimes levels 2-4).
The four business units represented the range of activities undertaken within the
company, from the main network support service through R & D to Sales and
Marketing. Re-interviews were conducted with (mostly) the same 24 managers
during the summer, autumn and winter of 1995. In addition, a number of discussions were held with staff specialists from Finance and Personnel, and contact was
maintained with certain key informants in the intervening period between interviews (Yin, 1983).

A Two-tiered Process of Management Control


The underlying purpose of the interviews was to meet the main subjects of the
research (and to observe the control mechanisms) in order to ascertain the extent to
which managers used the various formal control mechanisms at their disposal. The
purpose was also to gain insight into the effects of the design and use of these systems
on managers organizational behaviour, and the effects that the more informal
control processes appeared to have in this respect. Interviews were therefore of a
semi-structured nature. This allowed the meetings to be guided by the beliefs and
perceptions of respondents, as well as permitting factual information about the
various control processes to be obtained. Interviews of this nature also enabled the
researcher to obtain further insight into the history, content and culture of the
organization. The theme of the interviews included the following:
The roles which managers held within the company.
The general nature of managerial interrelationships.
Managers use of the various in/formal control processes at their disposal.
Managers attitude towards these various in/formal control mechanisms.
How managers monitored and evaluated subordinate performance.
How they themselves were evaluated, and how they felt about this.
Any alterations/modifications which managers made to their use of and/or
attitude towards the various control processes.
T o hear some of the organizational gossip, the unwritten public knowledge of
the company.
In retrospect, the interviews were successful in elucidating the desired information.
Each individual interview provided a partial perspective regarding the many issues of
interest, and in total, they gave a rich picture of the processes of control operating
within the company. Furthermore, interviews identified differences among managers
in their use of the companys formal control mechanisms and their perceptions as to
the efficacy of these mechanisms.
6. Research findings

The research findings are discussed from the point of view of each of the initial
theoretical perspectives. Material from the case is used to illustrate and substantiate
ideas and arguments raised in the discussions, rather than being presented as a
separate section in the paper. A full set of descriptive notes is available from the
The management control process
One of the most striking aspects of the case study concerned the manner in which
managers co-operation was both sought and gained at Telco, and how senior
management sought to channel managers efforts behind its current strategic agenda.
Structurally, the companys management control system broadly resembled that of
both traditional control models (e.g. Anthony, 1965) and their contemporary counterparts (e.g. Simons, 1995). For example, the company operated with accounting
responsibility centres and systems of performance appraisal. Senior management also
used a number of key performance indicators (KPIs) to reflect what it saw as


D. E. W. Marginson

important dimensions of company performance. In their design, however, both the

companys accounting control systems and performance appraisal schemes departed
from the norm in may respects (see below). More importantly, perhaps, managers
efforts appeared to be influenced more by the presence of informal, social, rather
than formal controls. The following seeks to elaborate and explain.
Accounting control systems. Traditionally, accounting control systems are viewed as
integral to the management control process (Anthony, 1965). More precisely, schemes
of responsibility accounting and the budgetary control system are seen as responsible
for channelling individual managers efforts towards a specified set of financial goals
and sub-goals (Lowe and Puxty, 1989). Evidence from Telco, however, suggests that
accounting may not always play such a prominent role in the pursuit of behavioural
congruence. At Telco, accounting data were neither designed nor used to effect any
form of explicit control over managers decisions and actions. Nor were managers
budgetary or other business activity goals a decomposition of corporate plans.
Instead, the budgetary process was used primarily to establish managers initial
spending requirements in relation to an agreed set of actions and activities for the
forthcoming period. In other words, the allocation of resources appeared to follow
managers intentions and actions, rather than being a precursor to them.
The companys operational budgetary system was the main vehicle for allocating
funds required to support agreed actions. Structurally, the system was framed around
a number of individual cost centres which tended to match the organization chart.
However, the sub-division of such centres tended to extend no further than managerial level 3, and rarely beyond level 4. Distribution of resources through this
framework was effected largely through discussion and negotiation in relation to an
individuals set of commitments. At the highest level, senior managers would allocate
funds between business units on the basis of resource availability, their future
strategic intentions for each unit (e.g. expansion/contraction), and on level 2 managers submissions in this respect. Subsequent to this, level 2 managers distributed
funds among members of their departments on the basis of on-going or routine
requirements (e.g. funding for staff training) and agreed commitments for the
forthcoming period. The prevailing management ethos or culture encouraged managers to seek out ways in which they might further the companys aims and objectives
(see below). A managers commitments represented an agreed set of actions that s/he
would endeavour to accomplish in the forthcoming period, thereby (in theory)
furthering the companys interests. This system of contribution management, as it
was called, also allowed for groups of managers to seek funding for various initiatives.
A persons commitments would be negotiated and agreed upon during periodic
(usually semi-annually) review sessions involving him or herself and his or her line
manager. By and large, financial resources for both on-going activities and new
initiatives were allocated to individual managers on an overall, rather than itemized
In an attempt to reflect both the difficulty in identifying the cost items which
individuals were singularly responsible for, and the uncertainty surrounding the

Given the relatively flat organization structure and the high level of overlap of managerial responsibilities that existed throughout the company, senior management felt that there was no benefit to be derived
from extending the scheme of responsibility accounting any further down the company to what were
effectively team leader and supervisory grades.

A Two-tiered Process of Management Control


medium-term accuracy of the distribution process (both being due largely to two
issues: the high level of task interdependence and the uncertainty surrounding
managerial initiatives), an element of flexibility was often attached to a managers
budgetary allocations. This took the form of tolerance limits which represented
percentage amounts (usually approx. 10%) by which managers, with good reason,
could exceed (or indeed, under-spend) their original budget allocations before questions would be asked by senior management and/or the companys Finance function. In effect, these tolerance limits appeared to be managers (and the Finance
functions) attempts to accommodate the inherent limitations of single point estimates of budget requirements under conditions of perceived uncertainty. The role of
Finance was to monitor and report on managers, but more particularly, a departments performance in relation to its budgetary allocations. These reports were
relayed to departmental heads mostly on a monthly basis. A copy of the report was
also made available to all other members of the department.
No bonus incentive scheme was attached to the operational budgetary process, i.e.
managers, either individually or collectively, were not explicitly rewarded for beating
or achieving budgetary targets. Furthermore, an individual managers budgetary
performance was subject to little, if any, formal monitoring or review. The main
mechanism for formally evaluating managers performance was the performance
appraisal system. This system, however, neither in its design nor use, made any
reference to budgetary performance (see below). Instead, managers efforts in this
respect (at whatever level) appeared to be controlled by the same informal or social
control processes which influenced peoples behaviour toward any quantitative performance measure, financial or otherwise, for which s/he was currently responsible.
In effect, so long as there were no substantial budget over-runs (or, indeed, underspends), the issue of financial performance was not discussed at a formal (or for that
matter, informal) level. The influence exerted by social controls on managers
behaviour, individually and collectively, is discussed further in the section on organizational behaviour.
The above provides an overview of the design and operation of Telcos responsibility for accounting and budgetary allocation systems. The findings suggest that an
organizations management control system need not always be based around accounting information. Arguably, accounting information at Telco was fulfilling a role
which was somewhat different to that normally assumed of such information (see, for
example, Anthony, Dearden and Bedford, 1984). Managers appeared to treat accounting information as but one part of the information jigsaw. By and large, they
did not view such information as a control tool, either for controlling their own
activities, nor a mechanism of control over others. Interestingly, accounting controls
did not become any more prominent either during or after the performance crisis of
late 1994. This is contrary to what one might expect. Further probing of this issue
by the author revealed an entrenched negative attitude towards accounting information among managers, particularly from level 2 downwards. This attitude appeared to
have an historical heritage, in that it appeared difficult for managers to shake off their
general insouciance towards budgets and the like which had developed during the

The new Finance Director did initiate a number of cost crusades aimed at reducing the companys
growing cost base. However, structurally, there was no attempt to make individual managers any more
accountable for budgets than was already the case.


D. E. W. Marginson

1980s) even when cost became a topical issue within the company. A comment from
one manager graphically illustrates this point: Budgets? w h o cares about budgets when
youre making money. Such evidence suggests that, besides contextual factors such as
managerial interdependencies, prevailing managerial attitudes may also help to
determine the role played by accounting control systems in organizations. Nevertheless, evidence from Telco does brings into question the universal applicability of
models of control which are underpinned by accounting information systems (see, for
example, Dermer, 1977; Maciariello, 1984).
Strategic planning, management control and operational control. Another feature of
Telcos activities, which contrasted with Anthonys (Anthony, 1965) model of control
in particular, was the lack of any significant hierarchical distinction in the role played
by the companys managers in the formation of strategy. Indeed, the concept of the
strategy formulation-implementation dichotomy-a
pillar on which conventional
models of management control rely (Anthony, 1965)pappeared to lose any meaning
within this company.
The prevailing orthodoxy of management control is based on a hierarchical
distinction between the processes of strategy formulation and strategy implementation (Johnson and Scholes, 1989). This distinction derives primarily from Anthonys
1965 model, in which strategic planning is seen as the domain of senior management, whilst middle managers are responsible for overseeing the implementation of
these plans through the exercise of management control. The third tier of this model,
operational control, is viewed as the responsibility of lower management cadres.
Telcos middle managers (i.e. managers at levels 2, 3 and 4)) however, were
observed to be heavily involved in strategic-related activities. In effect, these managers often acted as both formulators and implementors of various strategic initiatives
which they sought to graft onto senior managements broad strategic framework.
This framework comprised the whats (e.g. the companys profit target for 3 years
hence, and the percentage contribution towards this profit from different parts of the
business), together with a set of values which senior management believed should
underlie managers decisions and actions (e.g. customer focus, world-class service).
The hows were then mostly left to the discretion of managers, either individually or
more often as teams of managers (e.g. how can this team contribute to the companys
goals-through the launch of new/differentiated products or services, through an
improvement of existing services, etc., and how might we go about this?). As a result,
managerial initiatives to address the hows would develop from the plethora of
meetings and consultations that occurred throughout the company. Some of these
initiatives would run their full course, whilst others would be disregarded in infancy.
More formally, the 225 group (so named in recognition of the number of managers it
comprised) would meet periodically to share information on current initiatives and to
seek to agree upon a broad policy for moving the company forward.
Berry et al. (1991) observed that Anthonys model is lacking in the analysis of the
processes of interdependence which must exist between the levels of strategic,
managerial and operational control. Evidence from this study, however, appears to
change the nature of the argument. The findings suggest that, in circumstances where
entrepreneurial or strategic action is largely devolved throughout the management
hierarchy, the extent of interdependence between these levels of control is not the
issue, but the appropriateness of using such labels and distinctions per se, particularly

A Two-tiered Process of Management Control


between strategic planning and management control. It was evident from the investigation that managers prime concern or involvement was with strategic issues.
Indeed, for reasons discussed below, conventional hierarchical control activities were
notable for their absence. Arguably, therefore, Anthonys three-way distinction was
not applicable or appropriate in this instance. Instead, managerial activity at Telco
appeared to be controlled by a two-tier system, which was based largely around
social rather than administrative controls. (This point is explained in the following
The nature of accountability. This rather loose, or diluted approach to management
control (in a hierarchical sense) was reflected in the nature and direction of managerial accountabilities. The differential distribution of legitimate authority implies that
managerial accountability is sequential in nature, i.e. one person at a lower level
would be accountable or answerable for his or her actions to his or her immediate
superior who, in turn, would be answerable to his or her hierarchical superior, and so
on. Such accountability is often formalized in performance appraisal. Otley (1 988)
argues that the performance appraisal is the cornerstone of management control,
largely because it represents the point at which managers must account for their
At Telco, accountability was more reciprocal and mutual in nature. Managers
frequently spoke of having a number of stakeholders in their actions, rather than just
their immediate superior, i.e. a number of people would be dependent on that person
in some way or other in order that they could accomplish their own duties and tasks.
In turn, managers commented that they were also often one of a number of
stakeholders in someone elses actions. These accountabilities transcended the formal
organization structure, with individuals often being accountable to people from
different hierarchical levels and different areas of the business unit (and sometimes
beyond). The prevalence of such accountabilities appeared to be as a consequence of
the rather high level of mutual independencies among managers, together with the
high incidence of teamworking within the company.
It was evident that, within this context of acknowledged and accepted mutual
accountabilities, managers co-operation was both sought and gained through the
influence of social, rather than administrative controls (see below). This social
pressure appeared to be managers collective attempts to compensate for the frequent
absence of any formal line authority between the parties to a transaction. In other
words, because many mutual interdependencies lay outside the normal line relationship, managers did not have the necessary formal authority to insist on delivery of
promises. They had therefore, as a collective, developed, or promoted, a system of
social control to help ensure that each individual did his bit. In effect, it appeared
that social pressure was acting as a substitute for formal authority.
The company did, however, seek to retain an aspect of hierarchical accountability.
Formal performance appraisals were designed so as to provide a forum for the
evaluation of a managers performance in relation to what s/he promised to deliver
under the contribution management system. This system was essentially a variation
on the MBO scheme of objective setting, and largely encompassed the major areas
not amenable to quantification (see Fitzgerald et al., 1989, for a discussion of the
MBO system of control). For example, items such as staff and customer development
were assessed and monitored. The contribution management system also provided


D. E. W. Marginson

one of the means by which senior managements current agendas were cascaded or
disseminated through the management hierarchy.
Formal appraisals were designed to occur semi-annually (although, in many cases,
it appeared that they did not occur at all from one year to the next). They were
supposed to be used as counselling sessions, rather than recriminatory post-mortems,
i.e. superior and subordinate were expected to discuss general aspects of a subordinates performance and consider the implications for the future. The system sought
also to reflect the collaborative nature of managerial activity. For example, the
mechanisms of the system allowed subordinates to furnish their superior with
information relating to activities that they had been, or were involved with, but which
lay outside their direct line relationship. The system was designed to accommodate
input from colleagues and subordinates in the appraisal process, usually by way of
documentary evidence. It was left to subordinates to decide whether or not to
include such evidence.
In practice, most managers held a fairly dismissive attitude towards the companys
formal appraisal system, largely because of the presence of mutual accountabilities in
their working relationships. The general feeling was that such hierarchical control
measures were neither required, nor relevant in the circumstances. Indeed, many
managers commented that some (and, in some instances, all) of their subordinates
work was in support of others rather than their own responsibilities. Therefore, they
often lacked the necessary depth of understanding of a subordinates overall performance to make an informed and meaningful appraisal of such performance even if
they wished to do so. Instead, managers tended to view their hierarchical role in this
respect as one of coach, with the review being centred on training and development,
rather than evaluation of past performance. The appraised similarly did not consider
the formal appraisal to be a meaningful or useful evaluative process. Most preferred
instead to rely upon information received through the grapevine, and feedback from
those they had supported in some capacity (such as project team managers), as a
measure of how well they had done, or were doing.I3
The above has discussed three of the main features of conventional control models
as they relate to the situation encountered at Telco. Lowe and Puxty (1 989) point out
a number of other aspects of the prevailing orthodoxy in management control, many
of which they consider to be potential limitations of this orthodoxy. These include
the internal focus of traditional models (Anthonys in particular) and the concern
with feedback. Lowe and Puxty argue that conventional wisdom on control represents and inward-looking philosophy of control which can only take place after the
event (e.g. variance analysis), an approach which is unlikely to be reflected in
practice. Their arguments are supported by events at Telco. What passed for a
management control framework was observed to be both outward and forward-looking in nature. This was most evident in the design of the contribution management
system, which encouraged managers to consider what and how they might be able to
contribute to the future success of the business, rather than dwelling on past
The system of performance appraisal in operation at Telco was known as the 360 degree method of
appraisal which is apparently a relatively recent innovation in the area of Human Resource Management
(see Armstong, 1996).
Indeed, when initially asking the question How do you know when youve done a good job? none of
those interviewed made any reference to the formal appraisal system.

A Two-tiered Process of Management Control


p e r f ~ r m a n c e . Moreover,
a considerable amount of time and effort appeared to be
expanded in recruiting the right sort of person to the company, suggesting a strong
element of input control within the overall administrative control system (Johnson
and Gill, 1993).
Evidence from Telco suggests, therefore, that the application of Anthonys somewhat structural control model is not automatically appropriate. Indeed, on the basis
of the studys findings, one could argue that this and similar models are, on
occasions, an inappropriate depiction of the practice of control. Simons (Simons,
1995) more recent and broader model of management control is also found to be a
somewhat incomplete depiction of how management control was practised at Telco.
As with Anthony, Simons model also presumes a central role for accounting and
other formal controls in the pursuit of managerial co-operation and behavioural
congruence. Simons model also fails to adequately explain the role played by
informal controls in channelling managers decisions and actions towards senior
managements current strategic agenda. However, the use by Telcos senior management of a cultural change programme in an attempt to instil certain core values in
all aspects of organizational activity aligns well with Simons beliefs systems.
Furthermore, the range of quantitative performance measures (i.e. KPIs) used by
Telcos senior management to direct managers collective efforts supports the arguments of those who consider the management control perspectives orientation
towards accounting controls to be too restrictive in light of recent organizational
developments (see, for example, Otley, 1994).
Towards a new paradigm?. Otley (1994) argues that management control is a key
activity for every business organization as it provides the focus for those activities
designed to help ensure organizational cohesion and survival. He also argues that the
practice of management control within contemporary business organizations is likely
to be developing or evolving in response to changes which are occurring in the
business environment. The reason given is that the context and operation of contemporary business organizations requires flexibility, adaptation and continuous learning
to occur, characteristics which are not promoted by traditional control systems.
The evidence gained from the study of Telco Ltd lends support to Otleys 1994
normative arguments. Moreover, the study provides a number of pointers as to how
the practice of management control may be developing in some organizations.
Overall, the company appeared to operate with something akin to a two-tier management control system, with neither tier being strongly adhered to formal control
At one level there was considerable evidence to suggest that senior management
sought to channel the efforts of managers, both individually and collectively, behind
its various objectives through the use of an array of control mechanisms and
processes. For example, the companys contribution management system was used to
disseminate current strategic agendas through the management hierarchy and to
encourage greater enterprise from managers in order to move the company forward.
Senior management also deployed an array of (higher level) KPIs to help maintain
minimum performance standards in different areas of company performance. Al14
The contribution management system along with the prevailing management ethos or culture appeared
to be particularly influential in encouraging greater enterprise and innovation from managers.


D. E. W. Marginson

though the full cadre of measures appeared to be monitored by senior managers, they
would, from time-to-time, direct managers attention towards certain aspects of
company performance, depending on the results being reported by the various KPIs.
However, perhaps the most striking aspect of the process of control at this level was
the personal nature in which senior management sought to influence the decisions
and actions of lower management cadres. For example, for a period of time during
the course of the investigation, senior management sought greater creativity and
innovative activity from managers. The importance of such behaviour was conveyed
to managers primarily through verbal communication. Vehicles for this dialogue
included occasional strategy days involving senior managers and different management groups and regular question and answer sessions. These would involve a
member of the senior management team and members of a particular department.
The topic(s) at these meeting was usually one or more aspects of senior managements
current strategic agenda and how it might/would/should affect that department.
Senior managers would also attend a number of departmental and other management meetings in order to emphasize the current importance of a particular issue or
objective. The Chief Executive also sent weekly Friday afternoon e-mail messages
to all managers. These messages tended to emphasize broad strategic issues, such as
his view of where the company was at that point in time and where it should be
heading. As with other aspects of organizational activity, incentives and rewards for
innovative action manifested themselves largely in the form of greater peer esteem
which tended to follow perceived success in this respect.
The second tier of control was largely a function of the first. Broadly speaking, it
concerned the way in which managers (at any level) sought and mostly received the
co-operation of their colleagues in the pursuit of senior managements objectives (as
they interpreted them, individually and collectively). As discussed above, this was
mostly through the presence of unwritten rules and shared expectations. In effect,
peer pressure and cultural influences appeared to be more important than administrative controls in ensuring that each manager upheld his part of the deal. This
appeared to be due largely to the presence of mutual accountabilities among managers which, because they often transcended the management hierarchy, had the
effect of reducing (in the eyes of most managers) the relevance or effectiveness of one
of the main tenants upon which traditional management control systems are
based-the differential distribution of legitimate authority.
The above is offered as an example of how the practice of management control had
developed in one organization in response to changes in the business environment.
Further research is required to codify and conceptualize what is happening in practice
for, as Otley (1994, p. 107) suggests, The lag before practice is incorporated into theory
has created a major opportunity for researchers in management control.

A cybernetic approach
As discussed earlier, cybernetics is the study of control in and of systems. The present
study drew on the concept of the predictive model and the issue of single/double-loop
learning (Argyris and Schon, 1978)) relating these to the activities at Telco.
There was evidence of the use of both tacit and more formalized predictive models
at Telco. At the highest level of analysis, that of the organization as a whole, senior
management attempted to pursue a systematic approach to the building of predictive
models of the business in relation to its markets. Senior managers were aided in this

A Two-tiered Process of Management Control


process by a department, the function of which was to undertake SWOT and other
such strategic analyses of alternative courses of action available to the company. The
result was a set of key performance indicators (KPIs) which were deemed to represent
critical aspects of company performance. Senior management would then set what it
believed to be appropriate targets for each of these indicators (such as market share,
profit targets, etc.). These targets had the characteristics of a regulator in that they
were set by senior managers for the company as a whole. Moreover, the senior
management team often responded in a predictable manner to the nature of communicated information by seeking to have sub-standard performance in any of the areas
measured by these KPIs corrected.
However, senior management was also observed to make marginal adjustments to
the level of these minimum or maximum performance standards during the course of
the investigation. Such modifications appeared to be due largely to its attempt to take
account of the uncertain nature of the communications industry in general, and
developments in the regulatory environment in particular. However, the notion of
modelling organizational activity in probabilistic terms had not been pursued.
At the business unit and department level, there appeared to be a plethora of tacit
models existing within the nexus of experience and knowledge of managers and
groups of managers. These managers, either individually or collectively, would
contemplate on both the appropriate objectives for the department and the likely
consequences of pursuing alternative courses of action in an attempt to attain these
objectives, which were often quantified as a set of departmental performance targets
or KPIs. (For obvious reasons, R& D-related departments operated with few quantitative performance targets.) The number of performance targets involved offered a
reasonably adequate variety regulator in the sense addressed by Ashby (1 956).
Departmental heads were primarily responsible for devising appropriate KPIs. The
main criterion for their presence was that they should seek to reflect the companys
critical success factors as devised by senior management. For example, within the
department responsible for network maintenance, maximum acceptable levels were
applied to the percentage of inquiries remaining uncleared within a given time
period. This was used as one of a number of measures, the attainment of which was
supposed to help ensure success in terms of quality of customer service (internal and
external). In effect, many of the KPIs were being used as tangible indicators of higher
level intangible goals, such as customer satisfaction and quality of service. This was
made more evident following the introduction of the cultural change programme. A
number of existing KPIs were replaced by standards which were deemed by the
person or persons concerned to be a more appropriate reflection of the companys
new strategic values. For example, within the network business unit, a few processrelated KPIs were dropped in favour of new KPIs aimed at measuring the speed of
service development. By and large, however, the majority of business unit KPIs
remained unchanged throughout the course of the investigation. Indeed, in contrast
to targets and milestones relating to project-based activity, there appeared to be little
questioning of the continued relevance of existing standards in light of unfolding
events. In other words, single-loop learning (Argyris and Schon, 1978) predominated
the decisions and actions of most managers in relation to business unit and/or
departmental KPIs.
Although business unit and departmental KPIs were meant to reflect senior
managements higher level objectives, the top-down/bottom-up mix of KPIs often


D. E. W. Marginson

led to an expectations gap within the company with regard to what senior management desired and what those at lower levels felt could be delivered. Level 2 managers
considered themselves primarily responsible for seeking ways to reduce this gap and
resolve the perceived differences (for example, between overall customer satisfaction
targets as set by senior management and the results currently being achieved by the
relevant departments/business units in this respect).
There was also evidence to suggest that many managers appreciated both the
external pressures on the organization and the inherent uncertainty and complexity of
internal activities. As such, it was generally acknowledged that different types of
predictive models and output measures were required-senior
managers critical
success factors to provide the organization with its overall and longer-term objectives
(minimum standards), and lower level KPIs to furnish departments with more
meaningful regulators of their day-to-day (shorter-term) performance. There was
thus evidence of two types of predictive models existing at two levels within Telco,
with these models serving different purposes. At the organizational level there was a
systematic approach to establishing appropriate targets (critical success factors) and
predicting the effects of various strategies in relation to these targets. At the departmental level, however, managers tended to rely on their tacit knowledge and
experience of their area of the business to both set objectives and to determine the
most appropriate course of action needed to achieve these objectives.
This rather diffuse form of the cybernetic model of control was particularly evident
in respect of the companys strategically orientated activities (i.e. project and programme work). The main reason for such diffusion was the nature of the companys
strategy process, which spread strategic decision-making and strategic activity
throughout the managerial hierarchy (largely in the form of project work). There were
few systematic approaches to building detailed and co-ordinated plans or action
alternatives and appraising these against unitary, consistent preferences; rather project activity was a somewhat fragmented process of learning, development and
adjustment at various organizational levels. This often gave rise to double-loop
learning (Argyris and Schon, 1978) as individuals and teams throughout different
parts of the company readily questioned the continued relevance/applicability of
existing milestones, policies and objectives in light of unfolding events. Regular and
frequent meetings provided the usual venue for such discussions.
Interestingly, therefore, the type of activity for which performance-related information was available appeared to influence managers cognitive responses. Managers
responded to information on established activities and their concomitant targets
largely within established cognitive frameworks. The aim was to remove the variance
or error which had arisen between pre-determined standards (KPIs) and current
performance. On the other hand, managers were often observed to challenge the
appropriateness of standards and milestones relating to project-based activities in
light of fresh information. These insights raise questions about the embeddedness of
different feedback systems, i.e. the impact that time and tradition may have on
managers willingness to question the objective being imposed on a control system.
The insight afforded by this study provides impetus for a deeper study into how
innovative, empowered organizations attempt to regulate and co-ordinate goalorientated activity with creative innovation.

A Two-tiered Process of Management Control


Aspects of organizational behaviour

There was considerable evidence to suggest that the overall control environment
matched well with the personality and attributes of the people in the company.
Without exception, managers at all levels professed to being suited to a challenging,
empowered environment where individual discretion was paramount. Moreover, the
presence of this type of individual was undoubtedly helping to sustain such an
environment as, for instance, besides seeking high levels of responsibility for themselves, managers in general were also keen to afford their subordinates similar
decision-making discretion. Indeed, the over-riding management philosophy appeared to be one of: tell me what youve done not ask me what y o u should do. As
superiors, managers saw their hierarchical duties in mainly coaching terms; they were
there to help subordinates resolve conflicting demands on their time emanating from
the different stakeholders in their actions. As subordinates, managers saw their
superiors role as largely confined to addressing pay and rations issues. In effect,
little attention was paid to the organizations hierarchical structure. Indeed, it was
evident from managers responses that the main controlling influences, which they
were experiencing, were social rather than administrative in nature (Hopwood, 1976))
horizontal rather than hierarchical.
Managers from all areas of the company were at pains to point out that a good deal
of managerial activity was conducted on the basis of certain shared expectations or
unwritten rules. The phase commonly used by interviewees to describe this situation
was that of mutual trust and accountability, which basically meant that a manager
could be trusted to deliver on his part of the bargain. The influence exerted by such
social controls on managers behaviour was particularly evident in actions relating to
various KPIs and other departmental targets.I5 It was generally understood and
accepted that any member of the department could, indeed should, volunteer to
own (i.e. take responsibility for) a particular KPI if results were suggesting substandard performance. Moreover, once a manager had taken ownership of the KPI,
it was also understood that s/he could then be relied upon to take whatever steps are
necessary in order to clear the problem by the due date. This essentially meant
getting an activity back to appropriate performance levels as measured by the relevant
KPI. More importantly, perhaps, it was also acknowledged and accepted that, in
seeking to address an issue or problem, the manager may seek (and receive) help
from colleagues wherever and whenever necessary.
The presence of such shared understandings appeared particularly important at
Telco. Most interviewees made frequent reference to the overlapping nature of
managerial responsibilities, the presence of mutual interdependencies both within
and across departments, and the general pressures of work. Such circumstances, it
was argued, made it difficult for a manager to do any meaningful checking of that
aspect of a colleagues or a subordinates performance upon which s/he was reliant.
Interviewees also explained that, because of the considerable overlap of managerial
responsibilities, particularly among members of the same department, holding any
single individual as ultimately, or even largely, responsible for a particular activity or

Within the various departments, because of the difficulties in identifying individual responsibilities,
accountability for performance relating to a particular KPI was not formally delegated to specific


D. E. W. Marginson

measure was demonstrably unfair. Responsibility was a group not an individual

thing. Indeed, the imprecision of individual managerial duties had the effect of
further increasing the (reciprocal) dependency of one individual on the actions of
others. Managers readily acknowledged that such reciprocity of dependence could
only work if everyone could be trusted to do their bit. Thus, mutual co-operation
through social influence predominated at Telco.
The influence exerted by these unwritten understandings on managers behaviour
is graphically illustrated by a quote from one particular manager: Telco runs socially.
That is, by peer pressure and unwritten agreements. A lot of transactions are done socially
and informally here. People have to support the team or leave. Its as straightforward as
Apart from such apparent outflowings of altruism and co-operation, however, the
offerings of support to those in need and calling a b r e a k d ~ w n , also
~ appeared to be
based an element of self, in that managers would seek to discover the implications
to themselves of actions taken by others, and the problem(s) they faced. It was
recognized throughout the company that, because of the overlapping or amalgamating of managerial responsibilities, decisions taken by one person were likely to have
significant cost and other implications for colleagues. As a result, many of the
management meetings taking place within Telco were devoted to identifying the
actions required to clear a problem and the likely impact of these actions on the
activities of the people present. (Accountants were often requested to be present at
these meetings in order to provide information on the cost implications of different
proposed actions.)
It is probably fair to say that the above outlook or approach was influential in
making the control environment what it was-one in which managers acted on the
basis of the influence being exerted by social rather administrative controls. Indeed,
the control environment as practised and experienced by managers appeared to
reflect their needs and purposes, rather than those of the organization. In other
words, although senior management sought to preserve an element of hierarchical
control (through the system of contribution management in particular-see Marginson, 1996)) a quite separate system had evolved to reflect the nature of managers
working relationships with colleagues. This one took precedent in the minds of most,
if not all, of those interviewed.
One significant feature of this social control system was the attention given to the
training and development of individuals. Indeed, there was evidence of substantial
concern for the personal development of people who comprised this system. This
manifested itself largely in the way administrative controls, such as the contribution
management system and performance appraisals were being used as vehicles for
addressing issues of personal development (e.g. up-dating of skills) rather than
vehicles for objective setting and performance evaluation. Managers were aided in
this respect by the availability of various in-house training programmes. The concern
The influence exerted by social or cultural controls on managers behaviour is now well-documented in
the sociological literature in particular (see the studies of Fayol, 1949; Tannenbaum, 1972; Schein, 1985,
for example). What these studies do not consider, however, is their role, relative to more formal controls,
in the pursuit of organizational cohesion. Neither d o these studies consider the interplay between social
and formal controls within an organizational context, a point that is returned to later in the paper.
Breakdown was the term used by a person or persons to signify that s/he was facing difficulties in
achieving a target or resolving a problem. Calling a breakdown was signalling that help was required.

A Two-tiered Process of Management Control


for the individual stretched to the use of re-allocation/re-deployment lists. A

persons name would be placed on this list for a period of 6 months if, for whatever
reason, his or her role was no longer required for strategic reasons (effectively making
the person redundant). All managers had access to this information, and during the
period in question a person could find him or herself re-employed in a different area
of the business.
Although, at the collective level, the emphasis was on social rather than administrative controls, there were observable differences in the use of different administrative
controls at the level of the individual. Such differences largely manifested themselves
in a varied use of the companys formal information systems. In essence, some
managers preferred to supplement informally acquired information with the more
formal variety (e.g. departmental reports) when monitoring subordinate performance
(to the extent that this was undertaken), whilst others seemed content to rely on the
informally garnered information alone. This variation in the use of formal information sources was attributed to individual managerial style as no discernible patterns
emerged from the study. That is, differences could not be attributed to factors such
as managerial level, nature of task environment, etc.
The basis of the social control system within the company (trust, co-operation and
mutual/reciprocal accountability) did not appear to alter throughout the investigation, despite the organizational changes which occurred during this time, and despite
the crisis situation which developed in the latter half of 1994. The announcements of
November 1994 heralded a period of major restructuring and downsizing for the
company. Adjustments were made to the hierarchy, budgeting system, and other
administrative controls, such as the business justification programme. The capital
budgeting programme was also considerably curtailed. However, none of these
changes appeared to affect the nature of the control process-in essence, the way the
organization was run. This suggests that it may be possible to separate the process of
management control (how it is effected between individuals in an organization) from
its framework (how the various formal controls are designed and deployed). This
suggestion is discussed further in the following section.
The contingency theoy perspective
The present study sought to discover some of the contingent variables which
appeared to affect the design and use of the companys control systems and processes.
There was evidence to suggest that the design of some of the companys formal
control systems was both an antecedent to and a consequence of organizational
activity. For example, the re-designing of both the system of contribution management and the method of performance appraisal at the beginning of the investigation
was an attempt to effect a change in managerial behaviours. Broadly speaking, these
systems were opened-up in an attempt to foster greater entrepreneurial flair and
more mutual co-operation among managers. Contribution management became
more forward-looking, encouraging managers to commit to a broader set of objectives, and (formal) performance appraisals were designed to acknowledge and reward
effort and personal development in addition to task or goal attainment. Conversely,
modifications to the budgetary reporting system were largely in response to an
increasing cost base and with it a need to measure and document organizational costs
more precisely at the point at which they were being incurred. There was also
evidence of control practices developing to suit the requirements of different manage-


D. E. W. Marginson

ment groups. For example, managers working within one of the support service
departments were observed to implement their own set of monitoring and reporting
procedures. This was in order for them to become better informed about the various
developmental activities occurring elsewhere in the company. More generally, however, issues such as managers information needs, particularly those relating to project
work, and the high degree of mutual interdependency, were minimally addressed in
the design of the companys formal control systems.
Interestingly, the influence of the social control system and, with it, managers use
of the various administrative control systems and processes at their disposal, remained largely unaffected by the major events to affect the company during the
course of the investigation. These included the introduction of the cultural change
programme, the major strategic events of late 1994, and, perhaps more importantly,
the raising of the cost issue and the implementation of cost crusades by senior
management in an attempt to effect greater control of costs within the company.
(This was accompanied by changes to the design of the budgetary system.) This
suggests differences in the factors affecting the design and use of formal control
Macro contingent variables, such as organization size (Merchant, 1981, 1984))
business strategy (Govindarajan and Gupta, 1985)) and technology (Woodward,
1965) have been found to affect the design of formal control systems, particularly the
accounting information system. However, the present study suggests that managers
use (or not) of such systems in dispensing control over their subordinates is largely a
function of more internal issues, particularly organizational culture, individual
managerial style, and the time frame for decision-making. The rather informal nature
of the control situation that endured at Telco appeared to be in response to
managers needs and preferences, rather than those of the company. Indeed, it
appeared at times that the social control system was acting as a substitute for the
companys administrative control system.
This insight afforded by the study provides a further avenue for research into the
overall control environments of companies, and the factors which influence their
7. Conclusions
Telcos control processes were viewed through four different theoretical perspectives
that are rooted in different epistemological approaches. Inevitably, the above discussion provides, to some degree, a playback of these theories. It is hoped, however, that
the reader is aware of the essentially open approach adopted by the author to the
evidence, and that such theoretical determinism is not borne out by the analysis and
discussion. The most striking example of this concerns the management control
perspective. Anthonys and other traditional models of management control were
found to be too restrictive and unable to adequately reflect the process of management control as effected at Telco. Broadly speaking, the social, rather than the
administrative control system, was involved in channelling managers efforts behind
senior managements strategic agendas. Accounting type controls were observed to
play a very minor role in this process.
The epistemological root of the traditional management control paradigm is
functionalism (Berry, 1983)) and its pragmatics lie in an authoritarian managerialism

A Two-tiered Process of Management Control


(Berry et al., 199 1). The general critique of functionalism is that it lacks attentiveness
to values and to people. However, there was little evidence to suggest that managers
were having to adapt their style of operation to comply with the requirements of the
companys formal control systems, other than at the point of entry into the company.
The search for the operation of predictive models at the heart of the control process
was driven from cybernetic theory, itself rooted in a functionalist epistemology. The
predictive models at Telco lay, essentially, with senior managers and, at all other
levels, within the nexus of experience and knowledge of managers and groups of
managers. Elements observed from using a cybernetic model of control included the
establishment of business unit and departmental targets, the measurement and
reporting of departmental performance and the observed capacity to change projectrelated activity on the basis of new developments. T h e degree of formality and
sophistication of such operations varied from well-documented and established
functions, such as credit control, to innumerable tacit models existing within the
nexus of managers interactions.
The epistemological roots of organizational theory were towards the pursuit of
insight-drawing that insight from the participants. There was evidence of managers
at all levels re-interpreting their own values (entrepreneurial spirit), their relationships
with colleagues (professionally-based, with mutual co-operation and trust of paramount importance), and their own abilities and that of others (readily evaluating their
own personal development, and both accepting and proposing further training and
education). Furthermore, managers were seen to be constantly evaluating their own
roles within the company (how they could make a difference to the fortunes of
Telco, or at least to the fortunes of the particular business unit). And, interestingly,
managers at level 2 appeared to re-consider their relationship with Telcos senior
managers quite regularly. This was probably due to the fact that it was they who
managed the business while senior managers focused on the external influences on
the company (e.g. the parent company; financial markets, competitors, and the like).
As Berry et al. (1991) point out, entering the world of the individual (albeit to a
limited degree) leads the researcher to encounter consequences of the control procedures. However, as also argued by the authors, suggestions for amendment must be
avoided as . ..we must acknowledge that unless the issues of values and power are addressed
this theoretical approach will lead the researcher into a kind of collusion with the control
procedures because the theoy leaves us unequipped to design new control procedures
(p. 137).
The contingency theory approach has an epistemology rooted in positivism. It is an
attempt to express relationships between variables. The criticism of this approach is
that, because of the potential interaction of innumerable variables, it creates an
impossibly complex research programme. The present study attempted to apply an
(albeit porous) boundary to the investigation by examining the more significant
factors which appeared to influence the design and use of the companys various
control systems (and vice versa).
Most research projects are carefully bounded to exclude what is not to be studied.
However, the boundaries of this study are unavoidably porous and ill-defined, not
least because of the overlapping nature of the perspectives adopted. Furthermore, as
discussed by Berry et al. (1991)) the policy of adopting four different theoretical


D. E. W. Marginson

approaches to the study of control procedures may be held to be somewhat inappropriate as they may be viewed as having no common measure or standard of
comparison. It should be remembered, however, that the study sought to observe and
explore, rather than merely to define or dismiss in relation to these theories. Indeed,
the four approaches (whatever their limitations) do allow for a richer understanding
of control processes to be obtained than would be possible from any singly. Moreover, it is evident that the findings offer something different and useful to each of the
theoretical perspectives involved.
Final comments

Perhaps the most intriguing features of the case study was the design and use of
Telcos accounting control system. Responsibility accounting in the conventional
meaning of the term was only loosely applied. The sub-division of budgets sometimes
extended no further than the second tier of management. Furthermore, budgetary
targets were not explicitly used as motivational devices, nor was budgetary information included in the appraisal of an individual managers performance (which is
similar to Hopwoods, 1972, non-accounting form of evaluation). Thus, accounting
information served only some of the purposes normally associated with such information (see, for example, Drury, 1993). This lack of both an intended motivational and
appraisal role is contrary to conventional wisdom, which considers accounting information to be the fundamental information source within organizations, and the
cornerstone of management control (see, for example, Anthony, Dearden and Bedford, 1984; Kaplan and Atkinson, 1988; Otley, 1988). In essence, the general
scenario portrayed by this literature is that individual managers are placed in charge
of responsibility centres, receive inducements for meeting targets, and have their
performance against these targets formally evaluated.
Thus, as a final comment, it is suggested that one further avenue for future
research is to investigate the extent to which accounting and other forms of control
are involved in the process of management control within other contemporary
organizations, particularly those of both a similar and contrasting nature to the one
encountered. Arguably, this is an issue of some importance, given the historical
predominance of accounting controls in the management control literature (Otley,
Acknowledgements: The author gratefully acknowledges funding from the ICAEW, through

Professor David Otley, which made possible the research on which this case study is based. I
would also like to thank all the managers at Telco who gave of their time to help in this
research project. The author would like to offer special thanks to Professor Tony Berry for his
critical review of an earlier draft of the paper.

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