Implementation Processes of Management Control Systems - Example

Challenges that top management face during the designation and implementation processes of management control systems By Foundation Course- Finance and Accounting Professor: [University’ Name] [Department] 2 December 2014 Word count (1486) Table of Contents Challenges that top management face during the designation and implementation processes of management control systems 2 1.0 Management Control Systems 2 3.0 Motivation strategies 3 4.0 Organisational structure 4 4.1 Organisation structure as a control systems 5 5.0 Budgeting 6 5.1 Challenges that managers face in designing and implementing the budget 6 6.0 Performance measurement as a management control system 7 6.1 Balanced scorecards 7 7.0 Conclusion 8 Challenges that top management face during the designation and implementation processes of management control systems 1.0 Management Control Systems These are the systems, practises, rules, values and all activities used by organisation’s management to direct and control employees’ behaviour (Sinha 2008; Ghosh 2005. They are the process through which managers ensure that organisation’s resources are used efficiently in order to meet its objectives (Langfield-Smith 1997). The system collects and uses information to evaluate the performance of resources in an organisation. This eventually influences the actions taken by the organisation to implement the set strategies. Typically, a management control system comprises of three main components; performance measurement, motivation and the organisational structure (Flamholtz 1996). The paper will discuss the four major control components and the challenges that top managers face in designing and implementing these mechanisms. The four components are motivation strategies, organisational structure, performance measurements and budgeting (Malmi & Brown 2008; Hitt, Ireland & Hoskisson 2013). 2.0 Challenges faced by top managers during designation and implementation of management control systems 3.0 Motivation strategies This management control system method involves treatment of employees as individuals, providing an effective reward system, empowering employees, redesigning jobs and creating a flexible working environment (Griffin & Moorhead 2012; Kreitner & Cassidy 2011). Management empowers employees through giving them room to accomplish their work independently and this is achieved by having trust in them and giving them some form of authority. This allows the employees to pursue and promote new ideas. Managers can also formulate an effective reward system to reinforce employee behaviour. The rewards should be distributed fairly and equitably and should be competitive as per the industry level. Typically, rewards and compensation are used to motivate employees while also creating a congruence between the objectives of an organisation and those of the individual (Bonner & Sprinkle 2002). Rewards can be monetary or non-monetary and are categorised as either positive or negative. Positive rewards include salaries, promotions and job security among others. Conversely, negative rewards include loss of job, public humiliation or lack of promotion opportunities (Daft & Lane 2008; Lauby 2005). Another motivational strategy involves redesigning employees’ jobs to reduce monotony and consequently lower productivity. Managers should look at both job depth and job scope when redesigning the jobs. This process can be achieved by activities such as job rotation or enlargement. Creating job flexibility is another key method of motivating employees. Due to the increased value of personal time by employees, the traditional working hours may not work for many people today. Managers should, therefore, come up with ideas on ways that allow more time for their employees while also ensuring their organisation is not deprived off its required services. This can be achieved through various arrangements such as job sharing, telecommuting or compressed work week. 3.1 challenges that managers encounter in creating and implementing the motivation strategies include: Lack of necessary skills to formulate a reward system. Lack of enough workforce that allows for arrangements such as compressed workforce or job sharing. Limited financial resources to provide rewards that are competitive enough as per the industry’s standards. 4.0 Organisational structure Managers choose specific structures that can be used to enhance various types of relationships and contacts (Abernethy & Chua 1996; Alvesson & Karreman 2004). Organisational structures can be modified by managers to promote control and functional specialisation through minimising the variance in employees’ behaviour and thus increase predictability. This requires designation and implementation of the structure to be used for control purpose. During designation stage, specific control measures are determined, and the tightness or looseness of the required control outlined. The choice of the degree of tightness of control is determined on the basis of cost-benefit analysis. Costs can include harmful behavioural side-effects, consumption of available resources and development of negative attitudes in employees. 4.1 Organisation structure as a control systems There are four different types of organisation structures: centralised functional structure, decentralised divisional structure, hybrid structure and network structure. During the design of a control system, the control system should link well with the organisational structure. This, therefore, makes it important for the management to make considerations before adopting a certain structure. There are factors to consider before making the choice, and they include: Economics of scale Efficiency and effectiveness Conflict and cooperation Assignment and profit responsibility 4.2 Challenges faced by the management in designing and implementing an organisational structure as the form of management control system Lack of expertise on how to integrate people and other resources in the critical activities of the organisation. Inability to properly communicate the structure to the employees, thus leading to conflicts caused by miscommunications. This should be corrected through ensuring that there is a smooth chain of communication between departments and other sections of the organisation. Lack of a well-defined hierarchy to follow leads can lead to confusion and conflicts within an organisation. Every member, especially, managers and supervisors in an organisation should understand what kind of responsibility their position capacitates. Poor delegating skills can also lead to lower productivity and confusion among workers. A good organisational structure should provide clear guidelines to define the tasks that managers can delegate to their subordinates. High cost of creating a new organisational structure is another challenge to formulating an effective management control system. The company’s productivity can be quite affected during this time, and this ranges from the planning time to the implementation of the structure. 5.0 Budgeting Budgets are considered crucial tools to any management control system. Typically, the process of budget making runs all-round the year and companies formulate their budgets on an annual basis (Hansen, Otley & Van der Stede 2003). As a control tool, budget provides an action plan which ensures that the actual activities in which an organisation participates do not digress from the pre-arranged activities. Budgets give an outline of the organisation and its operations (Bunce, Fraser & Woodcock 1995). During their designation, budgets should consider the organisation’s strategic requirements of all the functions involved. The designation process involves several stages: creation of a budget department/appointment of a budget controller, formulating guidelines for budget preparation, developing a proposal for the budget, formulating a budget for the whole organisation, determining the key factors of the budget and the duration, benchmarking, reviewing and approval of the budget, monitoring and if needed, revising the budget. 5.1 Challenges that managers face in designing and implementing the budget The varying cultures in an organisation may interfere with the method of communicating the budget across various subsidiaries or an organisation. Also, when Zero-Based Budgeting method of budget making is adopted, management may find it challenging since numerous documentation are involved thereby making the process slow (Davis & Davis 2011). 6.0 Performance measurement as a management control system The focus on performance measurement models as a system of control is meant to provide outcomes and results that can be useful to decision-makers in an organisation. One of the commonly used models of measuring performance is the Kaplan-Norton model. This model utilises tools such as the balanced scorecards that provides a top-down approach to measurement and control. 6.1 Balanced scorecards This is an important model used for controlling and measuring the performance of an organisation and was first introduced in 1992 as a strategy implementation model (Kaplan & Norton 1992). The model assesses performance from four different perspectives: the learning pespective, growth pespective, financial perspective and internal business perspective. By integrating the four perspectives, managers can better understand the firm from within. Managers may find it challenging to collect and report non-financial data when using a balanced scorecard. The system is also prone to manipulation and thus may not guarantee reliability. Balanced scorecard also require some adjustments so as to fit in the culture of various organisation (Malina & Selto 2001). Due to the complexity of use, managers may find balanced scoreboards difficult to operate especially due to factors such as lack of proper training, resistance to change and lack of coordination among others (Fernandes, Raja & Whalley 2006). 6.2 Challenges that face managers when using performance measurement tools as control systems Typically, the models used are poor in incorporating value creation in their system and metrics. This makes them unreliable due to their unpredictability in giving results. Most of the performance measurement tools do not clearly define linkages with other measurement options such as key performance indicators (KPIs) and critical success factors (CSFs). This makes them inefficient for use in creating information for use in management control (Itner & Lacker 1998). 7.0 Conclusion Management control systems are constantly evolving in the designs and their reliance on information for organisational control. 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