1. 22705 Management Planning and Control
Seminar 7 Integrated performance measurement systems/Integrated MCS

2. Seminar 7 - Integrated performance measurement systems/Integrated MCS
How to think about Control problems and the costs of control
Identifying control costs
In-class exercise: outsource vs direct control
Tighter controls: costs and benefits
In-class activity 9 and 10: Mobitel Ltd Case 1 & 2
Designing and evaluating management control systems
Source material: Textbook chapters 5 and 6

3. Seminar objective To revise key concepts covered in the course so far
To tie together key concepts to enable you to design / evaluate integrated management control systems

4. How to think about Control problems and the costs of control

5. Control problems and the costs of control
Control systems are expensive to set up and maintain
Direct, indirect, and opportunity costs of capital
To effectively evaluate of the costs and benefits of control, you must develop a deep understanding of:
What is being controlled and why
Generally linked to organisation objectives
What are the key control problems, for which it make sense to pay for costly control solutions
Identification of the likely cost of control related to identified control problem

6. Control and “good” control
“Good control” is said to take place when there is …
a “high” probability that the firm’s objectives will be achieved
a “low” probability that major unpleasant surprises will occur
In this respect, tight control is “good” because it provides a high degree of certainty that people will act as the organization wishes (assuming away harmful side-effects)

7. What are the key control problems, for which it make sense to pay for costly control solutions
You need to investigate and identify:
Actual control problems – which are present
Potential control problems – which may emerge
You can define these using the 3 key control problem categories
Lack of direction, motivation, or personal limitations
OR: use other categories which make sense to organisation participants, such as:
Coordination problem (lack of direction and motivation are implicit)
Lack of decentralization leading to less than optimal decision making and / or control
Key point: diagnose the problem in terms that the problem presents itself and with respect to the risks associated with achieving org. objectives

8. Identifying control costs

9. Cost of control Control benefits
A higher probability that people will both work hard and direct their energies to serve the organization’s interests
Control costs
Direct out-of-pocket costs
Quantifiable: cost of cash bonuses, internal audit staffs
Difficult to quantify: time spent on planning and budgeting activities, on pre-action reviews, etc.
Harmful side-effects
Behavioral displacement
Gamesmanship
Operating delays
Negative attitudes

10. Behavioral displacement
Behavioral displacement occurs when the control system encourages behaviors that are not consistent with the organization’s objectives
With results controls, it occurs when the results’ measures are incongruent with the organization’s true objectives, often due to:
Poor understanding of the desired results
An over-emphasis on “measured” results
Not all of what counts is countable!
With action controls, it can be manifested by:
Means-ends inversion
Employees are induced to pay more attention to what they do and lose sight of what they try to accomplish
Rigid, non-adaptive, bureaucratic behavior

11. Gamesmanship
Refers to the actions managers take to improve their performance indicators without producing any positive economic effects
Data manipulation
Trying to “look good” by fudging the control indicators
Data management: affecting the reported results through accounting methods (e.g., reserves) or operating methods (e.g., delaying expenses)
Falsification: reporting erroneous data
Creation of slack resources
Consumption of resources in excess of what is required

12. Operating delays
Mostly associated with action controls, notably, delays caused by:
Lengthy review processes (such as with pre- action reviews)
Cumbersome authorization layers
Bureaucratic organizations
When responsiveness is important, operational delays can be quite costly

13. Negative attitudes Job tension, conflict, frustration, resistance
Often coincident with many harmful behaviors, such as gaming, lack of effort, absenteeism, turnover
Action controls often “irritate” employees
It is difficult for people to enjoy following a strict set of procedures for a long period of time
Results controls
When there is a lack of employee commitment to the performance targets
For example, when targets are too difficult, not meaningful, uncontrollable
When performance evaluations are perceived as being unfair

14. In-class exercise part A: Outsource vs direct control
Imagine you are an MA in an organisation which has a building which needs cleaning each evening
You have to work out the appropriate MCS. The building has 16,000 m2 office space (53.33 cleaner hrs per evening, 261 nights per year)
The activities you are expected to control include: vacuuming of floors, empty of bins, dusting, cleaning of toilets, clean up ad-hoc mess, etc.
Question: Using the M&V framework (Action, Results, People), what management control system would you suggest?

15. In-class exercise part B: You have been given some extra information about the option to outsource rather than implement a MCS.
The ‘in-house’ MCS involves employing experienced part time cleaners and one shift supervisor to supervised and manage the team. An internal reporting system to identify and respond to where cleaning is less than needed is the same across both options.
Outsourced provider
Your company
Productivity (m2 cleaned per hour)
330
300
Cleaner rate per hr ($incl. on cost)
$24
Supervision cost per night ($)
$189
$141.75
Yearly contracting cost
$5,000
$1,000
Recruitment and training (as a percentage of salaries cost) 3% 5%
The building has 16,000 m2 office space and is cleaned 261 nights per year. Which option is better and why?

16. Using the market for control
What do we learn from this example:
The key direct control costs are often readily accessible
The outsource provider probably has a better way of recruiting and managing employees, and may have better technique / technology.
If you did not outsource, your profit would be $_______ less than competitors, putting you at a disadvantage
Different organisational and market configurations generate different costs and benefits
The highest net benefit solution is considered more efficient
In this case, using competition in a market based control strategy

17. Tighter controls: costs and benefits
Whilst tighter control is generally considered better, they are often more costly (both indirect and direct costs)
Tighter controls: costs and benefits

18. Tight action controls Behavioral constraints Physical
Extra protection usually costs more
Administrative
Restricting decision making to higher organizational levels provides tighter controls if:
Higher-level personnel can be expected to make more reliable decisions
Those who do not have authority cannot violate the constraints
Preaction reviews
Become tighter if the reviews are frequent, detailed, and performed by diligent, knowledgeable persons

19. Tight action controls (continued)
Action Accountability
The amount of tightness of control generated by action accountability depends on:
The definition of (un)desirable actions
Definitions must be specific, yet complete
For example, “act professionally” vs. “obtain three competing bids before releasing a purchase order”
Definitions must be understood and accepted
The effectiveness of the action-tracking system
Employees should feel that their actions are noticed, and noticed relatively quickly
The reinforcement provided
That is, the significance of the rewards or punishments

20. Tight results controls
The achievement of tight results controls depends on:
The definitions of the desired results areas
Congruence and completeness
Choosing measurable performance dimensions that reflect an organization’s “true” objectives
For example, # visitors for the success of a museum? # of patents for the success of R&D departments? Annual profits for a firm with significant growth prospects?
Specificity
Disaggregation + quantification
For example, “keep customers happy” vs “less than 1 pct. customer complaints”

21. Tight people controls
The tightness of personnel controls depends a great deal on the overlap between individual and organizational objectives
Selection and training
Cultural controls are often more stable
For example, strong “company cultures
Changing a company culture is usually very costly

22. Control combinations
In order to achieve tighter control, managers often use multiple forms of controls that can either reinforce each other or overlap
To achieve (tighter) control over all the factors critical to the entity’s success, including those that are, say, hard to measure (by means of results controls) or “proceduralize” (by means of action controls)
Technology based controls can be tight by design ie prison; behavioural control tightness is has more to do with the style of use as well (i.e. strong action accountability in weekly meetings as part of monitoring vs daily loose action accountability as part of monitoring)

23. In-class activity 9: Mobitel Ltd Case 1
In-class activity questions / objectives:
Draw a business model diagram of the organisation for Case 1. What are some of the key strategic objectives of the organisation during Case 1?    
Describe the design and operation of the management controls which form the management control package in your case period
Evaluate how well internal consistency was achieved in the management control package for your case period.

24. In-class activity 10: Mobitel Ltd Case 2
In-class activity questions / objectives:
Draw a business model diagram of the organisation for Case 2.  What are some of the key strategic objectives of the organisation during Case 2? 
Describe the design and operation of the management controls which form the management control package in your case period
How did the MCP change between periods (Case 1 versus case 2), and explain why the changes were made?
Evaluate how well internal consistency was achieved in the management control package for your case period.

25. DESIGNING AND EVALUATING MANAGEMENT CONTROL SYSTEMS

26. DESIGNING AND EVALUATING MANAGEMENT CONTROL SYSTEMS
We now discuss a general framework that can be used by those who are interested in designing MCS or in improving existing systems.
Four key questions / steps need to be addressed:
What is desired?
What is likely to happen? (what are the likely control problems)
Which controls are likely to address the control problems and at what cost?
Select controls and decide how tight should each control be applied
Evaluate control strategy and adapt to change over time

27. 1. What Is Desired?
MCS cannot be evaluated without an understanding of
the objectives
the strategies
the demands of the role(s) being controlled
What does the organisation want its employees to do?
The understanding of what is desired is most valuable if it is defined in terms of the actions desired
Unless the optimal actions are not known, in which case: what results are desired
Knowledge of what is desired is more useful for MC purposes if it can be translated into knowledge of specific demands on the roles of employees in organizations
Avoid motherhood statements
Hint: Some behavioural displacement problems can be mitigated if objectives are specific

28. 2. What is likely to Happen?
Management should investigate the potential for each of the controls problems
What are the key control problems?
Lack of direction
Motivational problems
Personal limitations
If likely actions or results are different from key actions/results, more or different MCS may be required.
Need to ask employees do they understand what is required?

29. Understanding The Desired Actions/Results
One way to understand what must be controlled is to identify key actions that must be performed in order to provide the greatest probability of success.
These key actions are easier to identify for routine tasks
For non-routine tasks key actions are not well understood ( e.g. problem solving, team building ) - require professional judgment
Another way to understand role demands is in terms of “key results”. – “things which must go right”
Key results may or may not be stable. This will depend on whether there is a change in the strategy
key actions are likely different for lower level and middle management. E.g. focus on unit level production vs personnel development and team building

30. Control Problem Avoidance Management Control Systems Action Controls
3. Which controls are likely to address the control problems and at what cost?
Control Problem Avoidance
Management Control Systems
Action Controls
Results Controls
People Controls
Not all MCs are equally effective at addressing MC problems.
Of the controls which may work, you are looking for the greatest net benefit (benefit less costs).
Benefit- increased probability of success
Cost – direct and indirect costs

31. Control choice diagnostic
Ability to measure results on important performance dimensions
Knowledge of which specific actions are desirable
High
Low
Excellent
Poor
Action Control
and/or
Results Control
(e.g., large projects)
(e.g., movie director,
entity manager)
People Control
(e.g., research lab)
Air tex, usc, (not knowing what should be done) vs. casino (where you do know) vs. strategic vs. management controls as illustrated by Wong pharmacy vs. Leo’s Four-Plex Theater;

32. Table 6.1 Control types and control problems
Lack of direction
Motivational problems
Personal limitations
Results control
Results accountability ×
Action controls
Behavioural constraints ?
Pre-action reviews
Action accountability
Redundancy
Personnel/cultural controls
Selection and placement
Training
Provision of necessary resources
Creation of a strong organizational culture
Group-based rewards
Source: based on K. A. Merchant, Modern Management Control Systems: Text and Cases, Prentice Hall, NJ, p. 253 (in textbook, p. 210)

33. Table 6.1 Control types and control problems
Table 6.1 is a good guide, but it is not gospel
That is: there are exceptions to this table, some of which we have highlighted with “?”
E.g. redundancy can provide an incentive for non preforming employees = motivation problem
Although there are exceptions, the underlying idea that different control types are more effective in addressing certain control solutions is valid
You may like to revise the advantages and disadvantages of Action, Results, and Personnel controls from seminar 2.

34. 4. Select controls and decide how tight should each control be applied
Select controls which are likely to address the control problems at greatest net benefit
Chose the right level of tightness.
Using a mixture of both tight and loose controls- all staff must follow policy and procedure and still have result control as main objective for management

35. Chose the right level of tightness
This depends on:
the potential benefits of tight controls
E.g. consider the benefits of tight inventory control in a store vs a services firm
the costs of tight controls
E.g are harmful side effects likely such as behavioural displacement
The strategic importance of the control problem
More controls should be exercised over strategically important areas than over minor areas

36. 5. Evaluate control strategy and adapt to change over time
Don’t forget to evaluate the control strategy as it is being implemented
Tinker with the system
Controls change as the organisation changes (consider Mobitel Ltd case)
External pressures such regulation
Ongoing SWOT analysis of organization strategies and capabilities

37. Summary How to think about Control problems and the costs of control
Identifying control costs
In-class exercise: outsource vs direct control
Tighter controls: costs and benefits
In-class activity 9 and 10: Mobitel Ltd Case 1 & 2
Designing and evaluating management control systems