Service Organizations

2 Service Organizations in General Management control in service industries is somewhat different from management control in manufacturing companies

3 Service Organizations in General Characteristics : Absence of inventory bufferAbsence of inventory buffer Difficulty in controlling qualityDifficulty in controlling quality Labor intensiveLabor intensive Multi unit organizationsMulti unit organizations Characteristics : Absence of inventory bufferAbsence of inventory buffer Difficulty in controlling qualityDifficulty in controlling quality Labor intensiveLabor intensive Multi unit organizationsMulti unit organizations

4 Service Organizations in General a.Absence of inventory buffer Goods can be held in inventory but services cannot be storedGoods can be held in inventory but services cannot be stored Although a manufacturing company can earn revenue in the future from products that are on hand today, a service company cannot do so. A service company must try to minimize its unused capacityAlthough a manufacturing company can earn revenue in the future from products that are on hand today, a service company cannot do so. A service company must try to minimize its unused capacity The cost of service organizations are essentially fixed in the short runThe cost of service organizations are essentially fixed in the short run A key variable in most service organizations, therefore, is the extent to which current capacity is matched with demand.A key variable in most service organizations, therefore, is the extent to which current capacity is matched with demand. a.Absence of inventory buffer Goods can be held in inventory but services cannot be storedGoods can be held in inventory but services cannot be stored Although a manufacturing company can earn revenue in the future from products that are on hand today, a service company cannot do so. A service company must try to minimize its unused capacityAlthough a manufacturing company can earn revenue in the future from products that are on hand today, a service company cannot do so. A service company must try to minimize its unused capacity The cost of service organizations are essentially fixed in the short runThe cost of service organizations are essentially fixed in the short run A key variable in most service organizations, therefore, is the extent to which current capacity is matched with demand.A key variable in most service organizations, therefore, is the extent to which current capacity is matched with demand.

5 Service Organizations in General b. Difficulty in Controlling Quality A manufacturing company can inspect its products before they are shipped to the customer, and their quality can be measured visually or with instrumentsA manufacturing company can inspect its products before they are shipped to the customer, and their quality can be measured visually or with instruments A service company cannot judge product quality until the moment the service is rendered, and then judgments are often subjectiveA service company cannot judge product quality until the moment the service is rendered, and then judgments are often subjective b. Difficulty in Controlling Quality A manufacturing company can inspect its products before they are shipped to the customer, and their quality can be measured visually or with instrumentsA manufacturing company can inspect its products before they are shipped to the customer, and their quality can be measured visually or with instruments A service company cannot judge product quality until the moment the service is rendered, and then judgments are often subjectiveA service company cannot judge product quality until the moment the service is rendered, and then judgments are often subjective

6 Service Organizations in General c. Labor Intensive Manufacturing companies add equipment and automate production lines, thereby replacing labor and reducing costs.Manufacturing companies add equipment and automate production lines, thereby replacing labor and reducing costs. Most service companies are labor intensive and cannot do thisMost service companies are labor intensive and cannot do this d. Multi Unit Organizations Some service organizations operate many units in various locations, each unit relatively small.Some service organizations operate many units in various locations, each unit relatively small. c. Labor Intensive Manufacturing companies add equipment and automate production lines, thereby replacing labor and reducing costs.Manufacturing companies add equipment and automate production lines, thereby replacing labor and reducing costs. Most service companies are labor intensive and cannot do thisMost service companies are labor intensive and cannot do this d. Multi Unit Organizations Some service organizations operate many units in various locations, each unit relatively small.Some service organizations operate many units in various locations, each unit relatively small.

7 Professional Service Organizations Special Characteristics : a.Goals b.Professionals c.Output and Input Measurement d.Small Size e.Marketing Special Characteristics : a.Goals b.Professionals c.Output and Input Measurement d.Small Size e.Marketing

8 Professional Service Organizations a.Goals A dominant goal of manufacturing company is to earn a satisfactory profit, specifically a satisfactory ROA A professional organization has relatively few tangible assets, its principal asset is the skill of its professional staff, which does not appear on its balance sheet In many organizations, a related goal is to increase their size. a.Goals A dominant goal of manufacturing company is to earn a satisfactory profit, specifically a satisfactory ROA A professional organization has relatively few tangible assets, its principal asset is the skill of its professional staff, which does not appear on its balance sheet In many organizations, a related goal is to increase their size.

9 Professional Service Organizations b. Professionals Professional organizations are labor intensive, and the labor is of a special type Professional tend to do the best job they can, regardless of its cost c. Output and Input Measurement The output of a professional organizations cannot be measured in physical terms. Revenues earned is one measure of output, but these relate to the quantity of service rendered, not to their quality. b. Professionals Professional organizations are labor intensive, and the labor is of a special type Professional tend to do the best job they can, regardless of its cost c. Output and Input Measurement The output of a professional organizations cannot be measured in physical terms. Revenues earned is one measure of output, but these relate to the quantity of service rendered, not to their quality.

10 Professional Service Organizations d. Small Size With a few exceptions, such as some law firms and accounting firms, professional organizations are relatively small and operate at a single location There is less need for sophisticated management control system e. Marketing In a manufacturing company there is a clear dividing line between marketing activities and production activities. Such a clean separation does not exist in most professional organizations d. Small Size With a few exceptions, such as some law firms and accounting firms, professional organizations are relatively small and operate at a single location There is less need for sophisticated management control system e. Marketing In a manufacturing company there is a clear dividing line between marketing activities and production activities. Such a clean separation does not exist in most professional organizations

11 Professional Service Organizations Management Control Systems : a.Pricing b.Profit Centers and Transfer Pricing c.Strategic Planning and Budgeting d.Control of Operations e.Performance Measurement and Appraisal Management Control Systems : a.Pricing b.Profit Centers and Transfer Pricing c.Strategic Planning and Budgeting d.Control of Operations e.Performance Measurement and Appraisal

12 Professional Service Organizations a. Pricing The selling price of work is set in a traditional way in many professional firms Fees generally are related to professional time spent on the engagement. In manufacturing companies, the profit component of the selling price is normally set so as to obtain, on average, a satisfactory ROA employed a. Pricing The selling price of work is set in a traditional way in many professional firms Fees generally are related to professional time spent on the engagement. In manufacturing companies, the profit component of the selling price is normally set so as to obtain, on average, a satisfactory ROA employed

13 Professional Service Organizations b. Profit Center and Transfer Pricing Support units, such as maintenance, information, processing, transportation, telecommunication, printing and procurement of material and services, charge consuming units for their services c. Strategic Planning and Budgeting In general, formal strategic planning systems are not as well developed in professional organizations as in manufacturing companies of similar size. b. Profit Center and Transfer Pricing Support units, such as maintenance, information, processing, transportation, telecommunication, printing and procurement of material and services, charge consuming units for their services c. Strategic Planning and Budgeting In general, formal strategic planning systems are not as well developed in professional organizations as in manufacturing companies of similar size.

14 Professional Service Organizations d. Control of Operations Much attention is, or should be, given to scheduling the time of professionals. The billed time ratio, which is the ratio of hours billed to total professional hours available e. Performance Measurement and Appraisal Judgments made by superiors are the most common Appraisals by a professional’s peers, or by subordinates, are sometimes part of a formal control system The budget can be used as the basis for measuring cost performance, and the actual time taken can be compared with the planned time. Internal audit procedures are used to control quality d. Control of Operations Much attention is, or should be, given to scheduling the time of professionals. The billed time ratio, which is the ratio of hours billed to total professional hours available e. Performance Measurement and Appraisal Judgments made by superiors are the most common Appraisals by a professional’s peers, or by subordinates, are sometimes part of a formal control system The budget can be used as the basis for measuring cost performance, and the actual time taken can be compared with the planned time. Internal audit procedures are used to control quality

15 Financial Service Organizations Financial service organizations include commercial bank and thrift institutions, insurance companies and securities firms

16 Financial Service Organizations The Financial Service Sector General observations can be made about the financial sector : a.Financial services are very important in the overall performance of economy b.30 years ago, financial services, existed as distinct and separate industries. c.Financial services firms have used the IT revolution to innovate new products and discover new methods of trading d.The need for controls in the financial services sector has become paramount. e.During the 1990s, new form of financial instruments (such as derivatives) designed by financial service firms sometimes resulted in millions of dollars of losses for their clients. The Financial Service Sector General observations can be made about the financial sector : a.Financial services are very important in the overall performance of economy b.30 years ago, financial services, existed as distinct and separate industries. c.Financial services firms have used the IT revolution to innovate new products and discover new methods of trading d.The need for controls in the financial services sector has become paramount. e.During the 1990s, new form of financial instruments (such as derivatives) designed by financial service firms sometimes resulted in millions of dollars of losses for their clients.

17 Financial Service Organizations The Financial Service Sector The corporate scandals during 2000 have created a huge push for investment banks to spin off their Research Department. The arguments for spin off are many : a.This separation will ensure objective research data. b.At present, cost of research is being subsidized by investment banks c.Investor confidence will improve if they are convinced that research is unbiased. On the other hand, arguments against such a spin off, are a.The cost of research will go up if they are set up as separate firms b.To keep costs down, research departments may issue short reports instead of a rich. The Financial Service Sector The corporate scandals during 2000 have created a huge push for investment banks to spin off their Research Department. The arguments for spin off are many : a.This separation will ensure objective research data. b.At present, cost of research is being subsidized by investment banks c.Investor confidence will improve if they are convinced that research is unbiased. On the other hand, arguments against such a spin off, are a.The cost of research will go up if they are set up as separate firms b.To keep costs down, research departments may issue short reports instead of a rich.

18 Financial Service Organizations Special Characteristics : While the general principles and concepts of management control systems apply, they need to be adapted to the following special characteristics of the financial services industry : a. Monetary Assets b. Time Period for Transactions c. Risk and Reward d. Technology Special Characteristics : While the general principles and concepts of management control systems apply, they need to be adapted to the following special characteristics of the financial services industry : a. Monetary Assets b. Time Period for Transactions c. Risk and Reward d. Technology

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20 Corporate Strategy Implications for Management Control Strategic planning Conglomerates tend to use vertical strategic planning systems Related diversified firms tend to be both vertical and horizontal Single industry firms tend to be both vertical and horizontal Implications for Management Control Strategic planning Conglomerates tend to use vertical strategic planning systems Related diversified firms tend to be both vertical and horizontal Single industry firms tend to be both vertical and horizontal

21 Business Unit Strategy Mission The mission of existing business should “pure build” at one end and “pure harvest” at the other hand. To implement the strategy effectively, there should be congruence between the mission chosen and the types of controls used. Mission The mission of existing business should “pure build” at one end and “pure harvest” at the other hand. To implement the strategy effectively, there should be congruence between the mission chosen and the types of controls used.

22 Business Unit Strategy Competitive Advantage A business unit can choose to compete either as a differentiated player or as a low cost player. Competitive Advantage A business unit can choose to compete either as a differentiated player or as a low cost player.

23 Top Management Style Implications for Management Control The various dimensions of management style significantly influence the operations of control systems Style affect the management control process Implications for Management Control The various dimensions of management style significantly influence the operations of control systems Style affect the management control process

24 Top Management Style Implications for Management Control Personal versus Impersonal Controls Some managers are “number oriented”, and they deriving tentative conclusions from it. Other managers are “people oriented”, they usually arrive at their decision by talking with people Implications for Management Control Personal versus Impersonal Controls Some managers are “number oriented”, and they deriving tentative conclusions from it. Other managers are “people oriented”, they usually arrive at their decision by talking with people

25 Top Management Style Implications for Management Control Tight versus Loose Controls A manager’s style affects the degree of tight versus loose control in any situation. The manager of a routine production responsibility center can be controlled relatively tightly or loosely. The actual control reflects the style of the manager’s superior Implications for Management Control Tight versus Loose Controls A manager’s style affects the degree of tight versus loose control in any situation. The manager of a routine production responsibility center can be controlled relatively tightly or loosely. The actual control reflects the style of the manager’s superior

26 Summary  Business units have missions that can be classified as “build”, “hold” or “harvest”, and their managers can also decide to build competitive advantage based on low cost or differentiations.  Control systems should be designed in the context of each organization’s unique, external environment, technology, strategy, organization structure, culture and top management style

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