Management Control Systems

! Control Systems and Behaviour

l Formal and Informal Control Systems
uDirect Control
¬The formal, bureaucratically based rules and procedures
¬E.g. clocking-in procedures, information access rules, job
specifications.
uIndirect Controls
¬The various aspects of organisational culture and ethos that emerge
from the day-today activities,
¬These impinge often more powerfully upon individual behaviour.

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uOrganisations can be properly described as controlled systems in that:

¬They seek to achieve certain goals and objectives.
¬Despite the fact that:
– such goals may not be common to all participants, and
– may suffer from being displaced over time (i.e. corporative vs.
individual goals).

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 l Budgetary Controls
uOrganisational controls range, therefore, from the specific and
quantitative to the more diffuse and qualitative.
uBudgetary controls are clearly most useful in supporting those formal,
specific controls that can best be expressed in quantitative terms.
uHowever, two limitations must be borne in mind.
¬Firstly, because of their specific and quantitative nature, budgetary
controls can never form the totality of an organisational control
system;
¬They must be interwoven with the rich variety of diffuse, qualitative
and non-financial controls that are bound into the norms and values
of the organisation (some Non-Financial Measures are discussed in
the Balanced Scorecard).

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¬Secondly, the adding of more and more specific controls to a system:

– does not necessarily lead to overall control,
– because it attempts to specify a whole range of appropriate
behaviours in circumstances where the exercise of managerial
judgment is required (i.e. management discretion).
uThus the art of effective control lies in selecting the correct balance
between the various types of controls that are available.

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 ! Concepts of Control
l Definitions of ‘Control’
uThere are two main themes:
¬Control as domination: Where one person imposes his or her will
upon others by the exercise of power and authority.
¬Control to achieve planned results: This which emphasises the
gathering of information to monitor and regulate activities so that
some desired outcome is obtained.
uThis second theme is the area of cost management and cost control.

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THE CONTROL FRAMEWORK

OBJECTIVES

ALTERNATIVES
FEEDBA
CK

CHOICE

Predictive IMPLEMENTATION
Model
Rewards Systems RESULTS
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 l The Four Necessary Conditions of Control
uObjectives or goals must exist, for without a well-defined aim or purpose,
control has no meaning.
uThe output of the process must be measurable in the same terms as the
objectives being pursued.
uA predictive model of the process being controlled must exist.
uThere must exist the ability to take effective corrective action, to reduce
the deviation of actual performance from desired performance, (i.e.
Feedback Replanning Implementation must be possible).

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l Issues in Control Systems Design

uKey Design Questions:
¬What are the dimensions of good performance that the organisation is
seeking to promote?
¬How are appropriate standards of performance to be set, both for the
whole organisation and for the segments that make it up?
¬What are the rewards and penalties that will be associated with good
or bad performance?

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 uDimensions of Good Performance (The first Key Design Question)
¬This first question is the most fundamental and the most difficult to
answer as there is rarely a single objective that completely defines
what is meant by a ‘good’ performance.
¬Even if profitability is taken as a major objective, there still remain
questions as to:
– Short-run as against long-run profitability, and
– its relationship both to financial constraints (e.g. liquidity, asset
structure, methods of financing), and
– to other more general constraints (e.g. employment policies,
customer relations, corporate image, social responsibility).

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uSetting Standards of Performance (The second Key Design Question)

¬The second question is closely related to the first, as an immediate
conflict arises between:
– what is desirable, and
– what is attainable.
¬senior managers being more likely to emphasise desirability, and
lower level managers being more concerned with feasibility.
¬Where means-end relationships are not well-understood:
– the people in the best position to predict outcomes are often the
managers,
– these managers will ultimately be held accountable for meeting set
standards.

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 uLinking Rewards with Performance (The third Key Design Question)
¬Quantitative performance targets will be effective only to the extent to
which the manager is motivated to achieve the targets set.
¬This requires the establishment of mechanisms to link target
achievement with (valued, although not necessarily financial)
rewards.
¬These mechanisms can take a variety of forms, ranging from:
– the encouragement of cohesive peer groups, in which members
assist and encourage each other in achieving targets (Japan)
– the explicit linking of substantial monetary rewards to target
attainment (Western)

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l Types of Control
uBudgetary Support of Control Systems
¬Budgetary systems can be used to support four main types of control.
¬These are:
– Behaviour (or action) controls;
– Output (or results) controls;
– Input controls.; and
– Personal controls.
¬The management accountant must be aware of how the balance
between the various controls can be managed.

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 uBehaviour (or Action) Controls
¬The main constraint upon the use of budgetary control as a means of
achieving overall management control is:
– the degree of knowledge of means-end relationships possessed by
the controlling manager,
– concerning the process being managed.
¬Lower Levels: Here the process is sufficiently well-understood:
– for the manager to be able to give specific and detailed
instructions about exactly what should be done,
– in order to achieve desired objectives.

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uOutput (or Results) Control

¬There are many circumstances, however:
– in which managers do not possess the detailed knowledge
necessary to operate behaviour controls, and
– must resort, therefore, to output (or results) controls.
¬Here senior managers:
– specify the required results,
– however, leave the detailed means by which they are to be
achieved to the discretion and specialised knowledge of
subordinates.
¬Results controls are the dominant form of control operated at middle
and upper management levels in most large business organisations.

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 uInput (or Resource) Controls
¬Unfortunately, it is not always possible to specify even overall output
targets in financial terms.
¬For example:
– how can the performance of some service departments such as
legal departments, or research and development divisions, be
assessed in the short-term?
– here only input controls can be used because outputs can be
specified only in the broadest, qualitative terms.
¬These input (or resource) controls specify:
– the resources that are allocated to a manager,
– but no attempt is made to specify required outputs in financial
terms.

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uPersonal Controls (Individual Self-Control)

¬Personal controls should not be overlooked, despite the fact that they
are not normally related to the budgetary system.
¬Individuals often do what is in the organisation best interest because
they are:
– self-motivated, or
– influenced by social (group) pressures (i.e. Co-operative
behaviour).
¬Most people derive some self-satisfaction from:
– doing a good job, and
– seeing their organisation succeed.
¬As a consequence, managers can often get good results without using
more formal controls by tapping these natural motivations.

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 l Levers of Control

Diagnostic Control Systems

“LEVERS OF Belief Systems

CONTROL”
Boundary Systems

Interactive Control Systems

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l Integrating the Levers of Control

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