CHAPTER 6 DESIGNING AND EVALUATING MANAGEMENT CONTROL SYSTEM

The process of designing and improving MCSs requires addressing two basic questions:

What is desired? and What is likely to happen? If what is likely is different from what is desired, then
managers must subsequently address the following two MCS-design questions: What controls should be
used? and How tightly should each be applied? The following sections in this chapter describe how to
address each of these questions. The chapter concludes with some observations about common
management control issues faced when designing or improving MCSs.

WHAT IS DESIRED AND WHAT IS LIKELY

Organizations must determine what is desired, but they also need to try to assess what is likely to
happen. This essentially amounts to assessing the likelihood that each of the control problems are
present or will occur: lack of direction, motivational problems, or personal limitations. In other words,
organizations should ask whether their employees understand what they are expected to do (key
actions) or to accomplish (key results), whether they are properly motivated, and whether they are able
to fulfill their required roles.

If the likely actions or results diff er from the desired actions or results, more or diff erent MCSs might be
called for, depending on the severity of the problems and the costs of the MCSs that could be used to
solve the problems. In this situation, managers should then address the questions about what MCSs to
use and how tightly to apply them.

CHOICE OF CONTROLS

The different types of management controls are not equally effective at addressing each of the
management control problems. Table 6.1 provides a summary of the control problems each of the types
of management controls addresses.

The benefits of a MCS are derived from the increased probability of success or obtaining the desired
outcomes. Since management controls are not costless to implement and operate, these costs must be
put against the expected benefits of improved control.

1. Personnel/cultural controls as an initial consideration

In deciding among the many management control alternatives, managers should start by considering
how adequate personnel or cultural controls will be, or can be made to be. Personnel/ cultural controls
are worthy of first consideration because they have relatively few harmful side effects and relatively low
out-of-pocket costs. In some cases, such as in small organizations, personnel/cultural controls may
provide effective management control by themselves even though they are unlikely to be sufficient.

2. Advantages and disadvantages of action controls

Perhaps the most significant advantage of action controls is that they are the most direct form of
control. If it is absolutely essential that an action be performed properly the first time (e.g. a significant
investment decision), perhaps because the decision is not easily reversible, action controls usually
provide the best control because the control-action link is direct. Further, if controls over the actions
themselves are judged to be adequate, there is no need to monitor results.

Action controls also provide several other advantages. Action controls tend to lead to documentation of
the accumulation of knowledge as to what works best. Action controls, particularly in the form of
policies and procedures, also are an efficient way to aid organizational coordination.

But action controls have a number of disadvantages. First, there is a severe feasibility limitation. As we
discussed earlier, excellent knowledge of what actions are desirable exists only for highly routinized
jobs. Second, most action controls also often discourage adaptation, innovation, and creativity (of the
right kind, unlike the creative “gaming” in the example above). Employees often react to action controls
by becoming passive. Third, action accountability, in particular, can cause sloppiness. Employees who
are accustomed to operating with a stable set of work rules are prone to cut corners.

3. Advantages and disadvantages of results controls

Results controls also have several advantages and disadvantages. One common advantage is feasibility.
Results controls can provide effective control even where knowledge as to what actions are desirable is
lacking. This situation is typical of many (even most) of the important roles in many organizations.

Another advantage of results controls is that employee behaviors can be influenced even while the
employees are allowed significant autonomy. This is particularly desirable when creativity is required
because autonomy allows room for new and innovative ways of thinking. But even where creativity is
not important, allowing autonomy has some advantages. It usually yields greater employee commitment
and motivation because higher-level personal needs (such as the need for self-accomplishment) are
brought into play. Results controls can also provide on-the-job training. Employees learn by doing and by
making mistakes. It also allows room for idiosyncratic styles of behavior (such as a unique sales
approach, or a personal touch when dealing with employees), which can provide better results than
standardization of one approach. A final advantage of results controls is that, as compared to some
forms of action control, they are often relatively inexpensive.

Results controls, however, have some disadvantages or limitations. First, congruence or alignment
problems may arise due to imperfect knowledge of desirable results. Second, when results are affected
by anything other than the employee’s own skills and efforts, as they almost always are, results controls
impose risk on the employees. Third, it is usually impossible to optimize the performance targets set as
part of results control systems (such as budget targets). The targets are often asked to fulfill multiple
important, but competing, control functions.

CHOICE OF CONTROL TIGHTNESS

In any organization, tight control is most beneficial over the areas most critical to the organization’s
success. The critical success factors vary widely across organizations. Tight inventory control can be
implemented by focusing on key results if employees can be trusted to determine how to keep
inventory near the required service levels, or key actions that involve detailed inventory procedures and
decision rules. In airlines, seat capacity utilization is one of the critical success factors. The potential
benefits of tight controls also tend to be higher when performance is poor.

Tight results controls might require extensive studies to gather useful performance standards, or they
might require sophisticated information systems to collect and analyze all the required performance
data. Tight results controls would likely cause problems in selecting the right results measures and
setting adequately challenging targets, both of which are difficult in rapidly changing, knowledge-
intensive and/or highly innovative settings.

1. Simultaneous tight-loose controls

It may be possible to approach a similar type of simultaneous tight-loose control even where a strong
culture does not exist. This can be accomplished by using tight controls over the few key actions or
results that have the greatest potential impact on the success of the organization. More control should
be exercised over strategically important areas than over minor areas, regardless of how easy it is to
control the latter. None of the controls that might be substituted for culture can be assumed to be free
of harmful side effects, but selective use of tight controls may limit these effects. Most individuals can
tolerate a few restrictions if they are allowed some autonomy in other areas. In the context of a results-
control example mentioned earlier, an organization probably does not need 400 measures if 15 will
suffice, and even that may be too many in most situations.

ADAPTING TO CHANGE

Most organizations emphasize one form of management control at a given point in time, but they often
change their emphasis from one form to another as their needs, capabilities, and environments change.
Small companies can often be controlled adequately through the supervisory abilities of founding
leaders who develop a staff of loyal employees, centralize most key decisions, and involve themselves
personally in detailed reviews of budgets and expenditures. As organizations grow, however, these
forms of personnel/cultural and action control may have to be replaced, or supplemented, with other
forms of control. As a consequence, organizational growth typically pushes management controls in the
direction of increased formalization of procedures for action-accountability purposes and/or
development of more elaborate information systems for results-control purposes.

KEEPING A BEHAVIORAL FOCUS

What makes the analysis of management controls so difficult is that their benefits and side effects are
dependent on how employees will react to the controls that are being considered. Predicting these
behaviors is far from an exact science. Significant behavioral differences exist among people in different
countries, in different parts of a single country, in different organizations, and in different areas of the
same organization. Managers must be aware of such differences because the effectiveness of the
management controls used will vary depending on the reactions of the employees involved.
These differences make the implementation of MCSs particularly challenging, and it is crucial to
emphasize that no one form of control is optimal in all circumstances.

MAINTAINING GOOD CONTROL

Another cause is management’s inclination to subjugate the implementation of management controls to