What is the What is the Suggested What is likely Cost / Benefit

current desired effect choice of to happen if analysis

situation controls to be control is
implemented / implemented?
changed

The process of designing a good

management control system
A management control system basically seeks to gather information and use the
information gathered to evaluate the performance of different organizational resources
like human, physical, financial and also organization as a whole.

In designing a management control system, we ask ourselves two questions. They are:

1. What is desired: Here we critically examine the roles of each member of the
company, from the top to the bottom. Then we develop an understanding of the
critical determinants of success. What is desired entails assessing what an
organization wants the employees to do; For example, where I work every employee
on appointment is given a detailed list of job goals. The job goal list the activities
they would be performing, What is desired of them and what they are expected to
achieve under normal working conditions. Also there has to be a link between the
organization’s overall objectives and employee’s job goals.

In setting up a management control system, the more knowledge of the company’s

objectives, the better. Greater and more certain knowledge yields a larger set of feasible
control alternatives, provides a better chance of being able to apply each alternative
tightly and reduces the chance of creating a behavioral displacement problem. When
setting up guides to management control system, specific objectives are preferred to
wide or general ones. General objectives such as “The strategy of this corporation is to
be the number one pension fund in Nigeria” or the objective of this organization is to
maximize shareholders wealth”, provides only general guidance to the determination of
what employees are to do. Specific guidance such as to maintain a 15% return on the
invested funds (RSA) or to increase the amount of money invested for others in the
RSA fund by 1billion naira. These objectives provide specific guidelines and resources
are deployed to ensure that the company meets the targets.

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Knowledge of what is desirable is only useful if it can be translated into knowledge of
the specific demand on the roles of employees in the organization. Role demands can
be specified by determining the actions or the results that determine success or failure
in that role.

In setting up a management control system on what is desired, we need to determine

the action that must be put in place to achieve the desired results. To determine the
actions to take is a daunting task because of the variability of services provided, the
competence of the employees and quality of the employees. It is relatively easy to draw
up a shortlist of key actions for lower level personnel like production- line or factory
workers because their work is highly routinized and largely mechanical; but for a
professional service firm, the key actions may be the hiring decision, determining the
type of employees you would like to have and assessing the ability of every applicant
you are thinking of hiring.

Most key actions for higher level managers are not well understood. They may include
problem solving, personnel development, team building and investment decision
making. When assessing the ability of higher level managers, it may be difficult to
determine the competence except by similar professionals with similar or greater
professional qualifications and experience.

Another way to understand the role of demand is in terms of key results. Key results are
those results that are critical to achieve In order for the business to achieve its
objectives. Key results may be stable in that they are regularly expected to be achieved
or they may be unstable and adjusted based on changing business environmental
conditions or a strategy change.

2. What is likely to happen: Managers are needed to investigate the potentials for
each of the control problems, lack of direction, motivational problems or personal
limitations. They should dig deep by interviewing employees, finding out if the
employees understand their tasks (key actions) or what they are to accomplish (key
results). Whether there is proper motivation and whether they are able to fulfill their
desired role.

If what is desired and what is likely to happen are in sync, or not greatly different, then
the organization has an effective management control system. If they are different, then
the organization has to address the basic management control system design questions
which are: What controls should be used? And how tightly should each be applied.

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DECISIONS TO BE TAKEN IN DESIGNING A MANAGEMENT CONTROL
SYSTEM
▪ Choice of Controls: The specific set of management control mechanisms to be
selected from among the feasible alternatives should be those that the benefits
would exceed the costs. They can be ranked, and it is advisable that the proposed
management control system with the highest net benefit be chosen. The benefits of
a management control system are derived from the increased probability of
success; but since management controls are usually costly to implement and
operate, then the costs must be subtracted from the benefits provided.
▪ Choice of Control Tightness: In any organization, tight control is most beneficial
over the area’s most critical to the organization’s success. The decisions as to
whether controls should be tight or loose depends on three factors which are:
1. The potential benefit(s) of the tight control
2. What the cost would be
3. Harmful side effects if any

1. Tight control may be restrictive to employees and may impede their ability to be
innovative and work with freedom to deliver expected results. So in choosing a
tight control, the benefits have to outweigh the costs. Costs that may be incurred
when implementing tight control includes research costs on determining
benchmarks or performance standards, and also they might require new integrated
systems. In a situation where the business environment is unpredictable and the
need for creativity is high tight control would likely cause behavioral displacement
and stifle creativity.

2. MANAGEMENT CONTROL SYSTEMS: RELATING CORPORATE STRATEGY TO

PERFORMANCE EVALUATION

Management Control Systems (MCS), as described in the English literature, acquire and use
information in order to assist the coordination of planning and organizational control
decisions, with the goal of improving the collective decisions within the organization ( Horngren,
Foster & Datar, 2000
). MCS consider that the controls are characterized by the use in business
management, covering performance measurement and reward systems by achieving
predetermined levels (Otley, 1999).

The managerial control can have different levels of formalization, spontaneity, financial
emphasis, varying in each organization according to the system adopted, which will depend
on the personal characteristics of their managers, the characteristics of the organization and
characteristics of the social and organizational context. The MCS were defined in various
ways, having the concept of being the process by which managers assure that resources are
obtained and used effectively and efficiently in achieving the goals of the organization
(Anthony, 1965).

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 defines the MCS as means for successful implementation of the strategy.
Simons (1995)

Strategic uncertainties assume that decisions and unusual and difficult to evaluate behavior
imply limited and insufficient predictive models for desired results. These factors also result
in difficulty controlling the formulation of the planning, the performance evaluation and the
necessary corrective actions.

MCS were also more generally defined as mechanisms of systematic use of management
accounting to achieve a goal, encompassing the use of other types of control, such as
personal or cultural controls (Chenhall, 2003). Abernethy and Chua (1996)propose that it is a system that
includes a combination of control mechanisms designed and implemented by managers to
increase the likelihood that organizational actors will behave in a manner consistent with the
organization's goals.

Thus, the MCS comprise formal and informal mechanisms and processes used by
organizations to measure, monitor and manage their performance in order to implement
strategies and achieve their goals. The MCS must have specific characteristics that make
them effective, such as the alignment with the strategies and goals of the organization, the
compatibility of the organizational structure with the managers’ responsibility for decision,
the motivation to achieve the targets associated with the guidelines of the strategic plan
(Horngren, Foster & Datar, 2000).

These mechanisms depend on the information flow, which needs to be structured to meet
the systems of people, equipment, procedures, documents and communications, so as to
collect, validate, perform operations, transform, store, retrieve and present data to be used
in planning, budgeting, accounting, control and other management processes for various
administrative purposes (Schwartz, 1999).

The structured flow must be able to measure the level of the evaluated performance,
relating strategy to organizational results. The strategy is influenced by the external
environment, which also affects the design and use of MCS. These, in turn, support the
process to enable the achievement of strategic goals. The performance measurement is one
of the MCS components (Vieira, Major & Robalo, 2009).

Source: http://www.gemanalyst.com/designing-and-evaluating-management-control-systems/
http://www.scielo.br/scielo.php?script=sci_arttext&pid=S1807-17752014000100169

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