Management Control Systems Chapter 3: Action, Personnel & Cultural Controls Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

Recall that ... Management Control is about taking steps to help ensure that the employees do what is best for the organization. Three issues: Do they understand what we expect of them ... Lack of direction Will they work consistently hard and try to do what is expected of them ... Lack of motivation Are they capable of doing what is expected of them ... Personal limitations

Control alternatives … Controls can focus on: the actions taken the results produced the types of people employed and their shared values and norms. ACTION CONTROLS RESULTS CONTROLS PEOPLE CONTROLS Or any combination of those ...

Action controls … Ensure that employees perform (or do not perform) certain actions known to be beneficial (or harmful) to the organization. Prevention / detection Most action controls are aimed at preventing undesirable behaviors.

Effectiveness of action controls ... They are usable and effective only when managers: Know what actions are desirable ... Difficult in highly complex and uncertain task environments. (e.g., research engineers or top-level managers) Have the ability to make sure that the desirable actions occur ...

Behavioral constraints ... Physical constraints Locks, passwords, limited access, … Administrative constraints Restriction of decision-making authority; Separation of duties. Primarily directed at one control problem: eliminate motivational problems.

Preaction reviews ... Scrutiny of action plans, budgets. Review / modification / approval. Can potentially address all three control problems: Alleviate lack of direction; Provide motivation; Mitigate personal limitations.

Action accountability ... Holding employees accountable for the actions they take. It requires: Defining what actions are (un)acceptable; Communicating these definitions to employees; e.g., work rules, policies and procedures, codes of conduct. Observing or otherwise tracking what happens; Direct observation / supervision; Periodic tracking (e.g., “mystery shoppers”); Evidence of actions taken (e.g., activity reports). [Rewarding good actions, or] punishing actions that deviate. It potentially addresses all three control problems.

Redundancy ... Assigning more people (or machines) to a task than necessary. e.g., backup people / computing facilities Limited in addressing the control problems: Provide motivation; Overcome personal limitations. also: rather costly

Pros and cons of action controls ... The most direct form of control Tend to lead to documentation of the accumulation of knowledge as to what works best. Organizational memory An efficient way of coordination: i.e., they increase the predictability of actions and reduce the amount of inter-organizational information flows to achieve a coordinated effort. Only for highly routinized jobs May discourage creativity, innovation, and adaptation May cause sloppiness May cause negative attitudes e.g., little opportunity for creativity and self- actualization Sometimes very costly

Control alternatives … Controls can focus on: the actions taken the results produced the types of people employed and their shared values and norms. ACTION CONTROLS RESULTS CONTROLS PEOPLE CONTROLS Or any combination of those ...

People controls ... People controls ensure that employees ... Will control their own behaviors Personnel control Self-monitoring Will control each others’ behaviors Cultural controls Mutual-monitoring People controls are part of virtually every management control system + becoming more important in … “flatter and leaner organizations with empowered employees.”

Personnel controls … Personnel controls build on employees’ natural tendencies to control themselves, because most people … have a conscience that leads them to do what is right; find self-satisfaction when they do a good job and see their organization succeed. labels ... Self-control Intrinsic motivation Ethics and morality Trust and atmosphere Loyalty

Methods to implement personnel controls ... Generally, it is about … “… finding the right people, giving them a good work environment and the necessary resources” … Selection and placement Finding the right people to do a particular job. Training Give employees a greater sense of professionalism; Create interest in the job by helping employees to understand their job better. Job design + provision of necessary resources So that motivated and qualified employees have a high probability of success (e.g., equipment, staff support, freedom from interruption, etc.)

Cultural controls ... Cultural controls or mutual-monitoring tap into social pressure and group norms and values. Cultural controls are effective because members of a group have emotional ties to one another. Cultures are built on shared ... traditions; norms; beliefs; ideologies; attitudes; ways of behaving, etc.

Five ways to shape culture … (I) Codes of conduct Codes of ethics; corporate credos, mission statements, etc.; Formal written documents with broad statements of corporate values, commitments to stakeholders, and the ways in which top management would like the firm to function. Fundamental guiding principles of the company. Group-based rewards e.g., bonus, profit-sharing, employee ownership of company stock; Cultural controls rather than results controls because the link between individual performance and rewards is weak.

Five ways to shape culture … (II) Intra-organizational transfers Improve the socialization of individuals in an organization and inhibit the formation of incompatible goals and perspectives; Improve identification with the organization as a whole as opposed to subunit identification. Physical and social arrangements e.g., office plans, interior decor, dress codes and vocabulary, etc. Tone at the top Top management statements must be consistent with the culture they are trying to create, and importantly, their behaviors should be consistent with their statements.

Start with people controls ... Must always be relied on to a certain extent; Have relatively few harmful side-effects; Involve relatively low out-of-pocket costs. However, it is rare that people controls will be sufficient. In most cases, it is necessary to supplement them with … action controls; results controls. Maybe, you just shouldn’t put all your trust in people !?

Cases Internal Revenue Service (p.88 ff.): Evaluate the change of the IRS’s collection function from the COF organization to the ACS system As Tim Brown, assistant commisioner for Collection, what would you do? When,. if ever, is computer monitoring appropriate? What safeguards to privacy can you envision? Alcon Laboratories, Inc. (p.99 ff.) How would you characterize the control strategy used in the R&D area? Evaluate the control strategy: what, if anything, would you suggest Alcon managers do differently?

Requirements Cases must be ready and e-mailed to jversend@cs.uu.nl by thursday 13 th may 12:00 a.m. Cases must preferably be in powerpointslides Names of teammembers and e-mail adresses must be included In order to participate in the final examination, all cases must be made. They will be graded as OK or not-OK. All cases minus one must be OK in order to participate in the final examination.