The basics of management control and characteristics of a good management control system.

Management and control is a critical function in organizations, lax management control systems in the past have resulted into losses on the part of investors, business failure and theft of important business information. Today, we are taking a look at causes of management problems and characteristics of good management control. Before we begin, let us start with what management control is.

Management control can be defined as a systematic effort by business management to compare performance to predetermined standards, plans or objectives in order to determine whether performance is in line with these standards and presumably in order to take any remedial action required to see that human and other corporate resources are being used in the most effective way possible in achieving corporate objectives (Definition by Robert J Mockler). Now let us take a look at some processes in management and how they influence management control or management systems.

Processes in management include objective setting, strategy formulation and management control. To get a good picture of what management control is and how it relates to management we must distinguish the concept from the other two (objective setting and strategy formulation). Let’s start off with objective setting.

Objective setting:

A clear knowledge of an organization’s objectives is tantamount to the success of its management control system and any other purposeful activity. Objectives can be anything which creates something to strife towards. It may be financial or non-financial. Example of a financial objective is: An objective to increase net profit margin by 30%, while a non-financial objective (by an investment management firm for example) may be to increase investment education, communication and awareness in their country of operation.

Objectives of an organization should be clearly stated, and employees must have some understanding of what the organization is trying to accomplish. There might be conflict of interest by some parties of the organization; this may occur in a situation whereby a party or an individual places their own objectives above that of the organization. It is left to the organization to develop compromise mechanisms to resolve conflicts among stakeholders and reach some level of agreement about the objectives they will pursue.

Strategy Formulation:

Strategy defines how organization should use their resources to meet their objectives. Strategy formulation details what the objectives of an organization is, and how the organization can use its resources in achieving these objectives. Many organizations develop formal strategies through systematic, relatively open, often elaborate planning process. Others do not have formal written strategies, instead they practice a bespoke strategy formulation whereby they develop strategies as opportunities present themselves. Bespoke strategies may be formed by a series of interactions between management, employees and the environment; from experimentation, and from decisions made spontaneously. Spontaneous decision making conflicts directly with the organization’s formal strategic statement. It might be as a result of the formal strategic statement becoming obsolete, or because the formal strategic statement is inappropriate in the current situation. It is good to develop formal strategic statements, but the organization should be flexible enough to change in situations where adopting formal strategic statement would be at the detriment of the organization. The point is that not even the most elaborate strategic visions and statements are complete to the point where they detail every desired action and contemplate every possible contingency.

For the purpose of designing a management control system, it is best to have strategies as detailed as possible in order to make it easier for management to identify the feasible management control alternatives, and to implement them effectively. Management controls can be targeted at the organization’s critical success factors such as developing new products, increasing market share and sales; rather than aiming more generally at improving corporate profitability.

Types of control

They are two basic types of control. They are strategic control and management control. Strategic control involves managers addressing the question: is our strategy valid?  In changing environment, they ask: Is our strategy still valid, and if not how should it be changed?

Management control on the other hand asks the question: Are our employees likely to behave appropriately? Four follow up questions are then asked. They are:

• Do our employees understand what we expect of them?
• Will they work consistently hard and try to do what is expected of them?
• Do they have the ability to carry out the job effectively?
• If the answer to any of the above questions is no, then we ask: What can be done to solve the management control problems?

Strategic control takes into consideration more of the external factors, while management control takes into consideration more of the internal factors.  Strategic control thinks about the organization, its competitors and the environment. They think about the organization with its particular combination of strengths, weaknesses, opportunities and limitations. Management control on the other hand thinks of how management can influence employee’s behaviors in desired ways.
Causes of management control problems
In this phase, we ask the question: “What creates the need to implement a management control system?” We look at it from the employee’s perspective. The causes for the needs for management control can be classified in three which are:

• Lack of direction
• Motivational problems
• Personal limitations

Let us explain further.

• Lack of direction: Employees may be lost, not knowing what is required of them and how to achieve it. This is as a result of lack of direction. The lack of direction problem can come into being when information as regards what the employee is to do and how he is to go about it is not clearly communicated to said employee.

• Motivational problems: In some situations, the role of the employee in achieving the company’s objectives is clearly understood, so also does he know exactly how to go about achieving it, but the problem is that he is not motivated to pursue this interest. This may be as a result of the individual and organizational objectives not naturally coinciding. In this case, individuals are self-interested. It is believed that employees sometimes act in their own personal interest. Even Frederick Taylor the father of Scientific Management once wrote: “Hardly a competent worker can be found who does not devote a considerable amount of time studying just how slow he can work and still convince his employer that he is going at a good pace.” The argument is valid because many times employees might be caught surfing the internet instead of working, an activity which has an estimated cost of $63 billion to US employers. Other counterproductive activities often practiced by employees include: use of sick leave when not sick, long lunches and use of drugs on the job. Managers may also practice creative accounting or distortion of figures to make their performance look good and earn undeserved bonus at the expense of the shareholders. Employee fraud and theft are the most extreme examples of motivational problems. In an organization, all these things would be possible due to the lack of an effective management control system.

• Personal Limitations: The final behavioural problem a management control system should address is limitation problem. Limitation problem occurs when employees who know what is expected of them, and are highly motivated to perform well are unable to do a good job because of certain personal limitations. These limitations are personal in nature and vary from employee to employee. They may be caused by a lack of requisite intelligence training, experience or knowledge. Sometimes training can be used to reduce the severity of these limitations. Management control system should be able to put in checks that would efficiently match jobs to employees based on the employee’s technical ability and grasp of the task ahead.

What is a good management control system

A good management control system is essential for the success of an organization Good control means that management can be reasonably confident that no major unpleasant surprises will occur. Other terms used to describe a management control system are ‘out of control’ and a ‘perfect control’.

Out of control means when a management control system is in place, but there is still a high probability of poor performance, either overall or in a specific performance area despite having a reasonable strategy in place. A perfect control occurs where there is complete assurance that all the controls put in place by management are flawless, and all the individuals whom the organization must rely always act in the best possible way.

A perfect control is unrealistic because no matter how perfect we strive to be, we are only humans, and they may be some unknown flaw inherent in the system. So we strive for the next best; a good management control system. This is because a good management control still allows for some probability of failure.

Characteristics of a good management control system

Characteristics of a good management control system include:

1. It must be future oriented
2. It must be objective driven

The first characteristic sounds especially impossible. This is because the adequacy of management control must be measured against a future that may be very hard to predict; but no matter how arduous it is, a good management control system must be set up because an organization’s success largely depends on it.

Control problem avoidance

Avoidance of control problems should be taken by management so as to limit exposure to certain types of problems, and to reduce the maximum potential loss If the problem occurs; this is because a management control system, no matter how good it is can never avoid all control problems.

Now, let us look at some ways to avoid some control problems without even disturbing the management control system. Some ways to avoid control problems include:

• Risk sharing: This involves sharing risks with outside entities so as to spread losses in case it arises. A good way to share risk is by purchasing insurance to protect against certain types of large, potential losses the organization might not be able to afford.

• Activity Elimination: Another way of avoiding control problem is by activity elimination. Managers can outsource some activities to third parties, and by so doing, they turnover potential risks to these third parties. Some ways they can outsource activities include: subcontracting, franchising, license agreements or divestment.

• Automation: Automation is the creation and application of technology to monitor and control the production and delivery of products and services (according to the International Society of Automation). In an organization, there may be some processes that require little to no human intervention. Managers can adopt the use of computers, machines, expert systems, robots etc to reduce the organization’s exposure to behavioural control problems.

• Centralization: Centralization of decision making is also an avoidance possibility. Centralization reduces the behavioural problem discussed earlier because decision making is vested in the hands of a few. Extreme forms of centralization in which all the key decisions are made at the top management levels is common in small businesses that are run by strong leaders. In most organizations, due to the diversity of activities, it is difficult to centralize these activities. Other management control systems then become a necessity.

Recommended Reading

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