The process of designing a good management control system

A management control system basically seeks to gather information and use the information gathered to evaluate the performance of different organizational resources like human, physical, financial and also organization as a whole.

In designing a management control system, we ask ourselves two questions. They are:

 

What is desired:  Here we critically examine the roles of each member of the company, from the top to the bottom. Then we develop an understanding of the critical determinants of success. What is desired entails assessing what an organization wants the employees to do; For example, where I work every employee on appointment is given a detailed list of job goals. The job goal list the activities they would be performing, What is desired of them and what they are expected to achieve under normal working conditions. Also there has to be a link between the organization’s overall objectives and employee’s job goals.

In setting up a management control system, the more knowledge of the company’s objectives, the better. Greater and more certain knowledge yields a larger set of feasible control alternatives, provides a better chance of being able to apply each alternative tightly and reduces the chance of creating a behavioral displacement problem.  When setting up guides to management control system, specific objectives are preferred to wide or general ones. General objectives such as “The strategy of this corporation is to be the number one pension fund in Nigeria” or the objective of this organization is to maximize shareholders wealth”, provides only general guidance to the determination of what employees are to do. Specific guidance such as to maintain a 15% return on the invested funds (RSA)  or to increase the amount of money invested for others in  the RSA fund by 1billion naira. These objectives provide specific guidelines and resources are deployed to ensure that the company meets the targets.

Knowledge of what is desirable is only useful if it can be translated into knowledge of the specific demand on the roles of employees in the organization. Role demands can be specified by determining the actions or the results that determine success or failure in that role.

In setting up a management control system on what is desired, we need to determine the action that must be put in place to achieve the desired results. To determine the actions to take is a daunting task because of the variability of services provided, the competence of the employees and quality of the employees. It is relatively easy to draw up a shortlist of key actions for lower level personnel like production- line or factory workers because their work is highly routinized and largely mechanical; but for a professional service firm, the key actions may be the hiring decision, determining the type of employees you would like to have and assessing the ability of every applicant you are thinking of hiring.

Most key actions for higher level managers are not well understood. They may include problem solving, personnel development, team building and investment decision making. When assessing the ability of higher level managers, it may be difficult to determine the competence except by similar professionals with similar or greater professional qualifications and experience.

Another way to understand the role of demand is in terms of key results. Key results are those results that are critical to achieve In order for the business to achieve its objectives. Key results may be stable in that they are regularly expected to be achieved or they may be unstable and adjusted based on changing business environmental conditions or a strategy change.

 

What is likely to happen: Managers are needed to investigate the potentials for each of the control problems, lack of direction, motivational problems or personal limitations. They should dig deep by interviewing employees, finding out if the employees understand their tasks (key actions) or what they are to accomplish (key results). Whether there is proper motivation and whether they are able to fulfill their desired role.

If what is desired and what is likely to happen are in sync, or not greatly different, then the organization has an effective management control system. If they are different, then the organization has to address the basic management control system design questions which are: What controls should be used? And how tightly should each be applied.

DECISIONS TO BE TAKEN IN DESIGNING A MANAGEMENT CONTROL SYSTEM

• Choice of Controls: The specific set of management control mechanisms to be selected from among the feasible alternatives should be those that the benefits would exceed the costs. They can be ranked, and it is advisable that the proposed management control system with the highest net benefit be chosen.  The benefits of a management control system are derived from the increased probability of success; but since management controls are usually costly to implement and operate, then the costs must be subtracted from the benefits provided.

• Choice of Control Tightness: In any organization, tight control is most beneficial over the area’s most critical to the organization’s success. The decisions as to whether controls should be tight or loose depends on three factors which are:

1. The potential benefit(s) of the tight control
2. What the cost would be
3. Harmful side effects if any

 

1. Tight control may be restrictive to employees and may impede their ability to be innovative and work with freedom to deliver expected results. So in choosing a tight control, the benefits have to outweigh the costs. Costs that may be incurred when implementing tight control includes research costs on determining benchmarks or performance standards, and also they might require new integrated systems.   In a situation where the business environment is unpredictable and the need for creativity is high tight control would likely cause behavioral displacement and stifle creativity.

 

Recommended Reading

Kenneth Merchant., and Wim Van der stede, Management Control Systems (Performance measurement, Evaluation and Incentives)