Challenges of constructing performance measurement standards in fast growing organizations Professor Marko Järvenpää Professor Jukka Pellinen PhD Henri Teittinen University of Jyväskylä, School of Business and Economics Paper to be presented at the PMS conference in Nice, 2009

Introduction Growth / fast growth  pressures to develop management control systems (see e.g. Churchill and Lewis, 1983; Greiner 1973/1998).  more sophisticated management control systems.  bureaucracy, hierarchy, formal communications and management control in certain forms. Albeit bureaucracy and hierarchy are devices of efficiency, those tools may create organizational inflexibility and restrict operations. For aiming fast growth this may be a problem.  Thus this study will focus to potential tensions between growth and management control systems in fast growing organizations.

Introduction We have gathered our data by being in the process of developing performance measurement system The case organization has grown by acquisitions, and due to that there became a need for company wide and standardized performance measurement system.

Literature review Management control ”classics” Anthony (1965), Otley & Berry (1980), Merchant (1985), Otley (1994), Simons (1995), Malmi & Brown (2008) Tensions in the literature Flexibility and control, Tight or loose control, Centralized vs. decentralized management, Financial vs. strategic orientation, Local or global, Short term vs long term, Change or stability, Financial or non-financial control, Accounting or non-accounting style Different types of growth Organic, Establish new companies, Acquire new subsidiary, Networking Financial or strategic control, Existing control systems (replacing) or building new control system in new parts of growing company

Literature review Strategy Phases of growth Change Entrepreneurial strategy? Build mission? Porter? Networks? Phases of growth Greiner (1972), Churchill & Lewis (1983) Change Scapens & Roberts 1993, Cobb et al. 1995, Burns & Scapens 2000, Granlund 2001… Studies in fast growing companies Granlund & Taipaleenmäki 2005 (New Economy Firms) Järvenpää & Länsiluoto 2007 and 2009

Research method Our case study has a pragmatic nature. It aims to understand management control challenges in fast growing organizations. We argue that with practice based approach we will get deeper understanding to the challenges of management control in fast growing organizations. Our focus is in the examination of tensions between entrepreneurial and hierarchical management control system.

Research method We have examined: 1) what kind of group level measures business unit managers use and how they use them, 2) what other measures business unit managers are using, and 3) what kind of management control systems are needed at business unit level. This report is based on the preliminary findings of our research project. We have totally 16 interviews 13 business unit managers and 3 business line managers between the July and September 2008. In addition: informal discussions and meetings with the chief financial officer plenty of internal documents and reports as empirical source and We have met the company management several times during the project.

Case

Case Fast growth vs. sophisticated management control systems Standardization + integration vs. entrepreneurial flexibility Group control vs. entrepreneurial control We may ask: How does standardized management control system (performance measurement system) work in fast growing organizations?

Findings We identified four different kinds of tensions in the process of developing management control system in fast growing organization. These tensions exist in the following categories: 1) strategic group control vs. independent business unit control, 2) formal vs. informal working rules, 3) standardized group level measures vs. business unit based measures, and 4) financial vs. non-financial management control.

Tensions between strategic group control vs Tensions between strategic group control vs. independent business unit control

Tensions between formal vs. informal working rules

Tensions between standardized group level measures vs Tensions between standardized group level measures vs. business unit based measures

Tensions between financial vs. non-financial management control.

Preliminary conclusions We know quite a little on management control in fast growing organizations and tensions therein. We have extended our understanding on that phenomenon by our findings: “What kind of challenges and tensions there exist in management control in fast growing organization, of which growth is based on acquisitions?” In this setting there is a simultaneous challenge to 1) develop new MCSs and 2) implement them in the new acquisitions and 3) integrate new acquisitions into the integrated machine shop at the same time.

Conclusions Our first finding is that venture capitalists set down very tight targets of growth and profitability for the company. (c.f. Granlund & Taipaleenmäki 2005) These targets will be communicated through the organizations by very hard budget control. This observation is theoretically understandable in our case, because the business unit (small machine shops) have been acquired by acquisitions and those operates quite independently. Thus these business units (machine shops) are controlled by budget (focusing mainly to the turnover and profit). Budgeting is not very detail. The main control tool seems to be the budget of annual profit and loss statement.

Conclusions Our second finding is that management control system implementation (including performance measurements) has been quite a strong program. Previous machine shop supervisors have become business unit managers. They have had none management accounting education and they have learned both financial and management accounting tasks in practice. Business controller of Unimet has support them by internal workshops and seminars. Group wide ERP has been implemented New CFO position has been established Standardized group wide performance measurement system has been implemented …

Conclusion We have identified four different kind of tensions between growth and management control. 1) strategic group control vs. independent business units, 2) formal vs. informal working rules, 3) standardized group level measures vs. business unit based measures, and 4) financial vs. non-financial management control. In addition (which has not been discussed): 5) group identity vs. business unit identity Understanding the tensions may help us to prepare to overcome these tensions, and even more important is to ask how should management control be developed in fast growing organizations.

Conclusion Theoretically the starting point of the integrated machine shop (Unimet Group) would be one common strategic planning, common working rules, systems, operational planning, more centralized organization structure and new performance measures and incentive bonus systems supporting the whole group rather than individual business units. Autonomous and independent (related to the entrepreneurial business culture) are in conflict with the theoretical perspective. But would it be possible to achieve these both (integrated and entrepreneurial) at the same time? Management control at group level is planning and controlling budgets and financial measures. Management control in business units is more social and non-financial by its nature. Focus is in customer relationships, personnel, know-how, quality and tidiness.

Conclusion We conclude that theoretically the development of constructing management control system in fast growing organization (by acquisitions) seem to move: from social control (which informed the business units before acquisitions) to strong financial control, which may continue to the more centralized strategic planning (see e.g. Goold & Campbell 1987, Goold & Quinn 1990). Machine shops were at first integrated to the network and thereafter changed to the counters in the group level planning.