Management Control Systems

Chapter 5:
Direct & Indirect Control Costs

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Cost of control ...

Benefit of controls
A higher probability that people will both work hard and direct
their energies to serve the organizations interests.

Costs of controls
Direct out-of-pocket costs
Easy to quantify: cost of cash bonuses, internal audit staffs, etc.;
Difficult to quantify: time spend on planning and budgeting activities,
on pre-action reviews, etc.

Harmful side-effects
Behavioral displacement
Gamesmanship
Operating delays
Negative attitudes.
Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Behavioral displacement ...

Behavioral displacement occurs when the control system

produces / encourages behaviors that are not consistent
with the organizations objectives.

With results controls, it occurs when the results measures are

incongruent with the organizations true objectives; because
Poor understanding of the desired results:
unwillingness to adapt production schedules to profitable
rush orders
sales volumes instead of profits, etc.
Over-quantification: focus solely on quantifiable measures
Intangibles are often overlooked.

With action controls, it comes in the form of ...

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

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Gamesmanship ...

Refers to the actions managers take to improve their performance indicators

without producing any positive economic effects. Two main alternatives
Creation of slack resources

Consumption of assets in excess of what is required;

Slack can reduce manager tension and stimulate innovation;
However, it causes inefficient resource allocation;
Depends on information asymmetry, measurement precision, and
degree of subordinate participation in setting performance targets.

Data manipulation

Trying to look good by fudging the control indicators;

Falsification, i.e., reporting erroneous data;
Data management, i.e., any action to change the reported result:
Through accounting methods (e.g., reserves, write-offs)
Through operating methods (e.g., delaying expenses).

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Operating delays ...

Mostly associated with action controls,

notably, delays caused by:
Pre-action reviews;
Behavioral constraints.
Bureaucratic organizations.

When fast action is important, operational

delays can be quite costly.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Negative attitudes ...

Job tension, conflict, frustration, resistance, etc.

Are often coincident with many harmful behaviors, such
as, gaming, lack of effort, absenteeism, turnover, etc.

Action controls often annoy professionals, but

also lower-level personnel
Sometimes difficult to avoid: e.g., it is difficult for people to enjoy
following a strict set of procedures for a long period of time ...

Results controls ...

Lack of employee commitment to the performance targets;
targets are too difficult, not meaningful, not controllable.
Performance evaluations are perceived as being unfair;
The controls are implemented in a people-insensitive, nonsupportive way.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Keep a behavioral focus ...

There is no one best form of control ...

What works best in one company (or area within
a company), may not work in another ...
e.g., accounting personnel vs. design engineers.

Therefore, it is important to keep the focus on

the people involved, because
It is their responses that will determine the success
or failure of the control system !

The benefits of controls are derived only from

their impacts on behaviors !

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003