Service organizations

Presented by Renji K Philip

 Over the years, the industrial landscape has changed drastically. Initially, the focus was mainly on the manufacturing sector but during the later half of the 20th century the focus shifted to the service sector. In the US only, growth of employment in the service sector during the 1980s, was twice as much as the growth of employment in the manufacturing sector.

Control in service organizations is different from control in manufacturing organizations due to the following reasons: Absence of inventory buffer Difficulty in controlling quality Multi Unit organization

 Manufacturing organizations maintain an inventory of goods in order to tackle sales fluctuations in future. This does not hold true for service organizations. They cannot store their services. For example, the aircraft seat, hotel room, or the service of professionals like lawyers, physicians cannot be stored.

 Moreover, many service organizations have a fixed cost in the short run which cannot be reduced. For example, a hotel cannot reduce its fixed costs by closing down some of its rooms. Thus, service organizations have to match their current capacity with demand. Organizations match their current capacity with demand in two ways. The first way is to stimulate demand in the off peak seasons by increasing marketing activities and decreasing prices. For example the airlines and hotels offer heavy discounts during the off-season to increase demand. Secondly, companies can also try to right-size their workforce according to the anticipated demand.

Professional Organizations
Organizations that provide specialized professional services are called professional organizations. They include law firms, consulting firms, engineering firms, sports organizations and so on. These organizations possess special characteristics like the following: Small size Labor intensiveness Different objectives and goals Difficulty in measuring output Different marketing strategies

Control Systems in Professional Organizations

The most important aspects of management control systems in professional organizations are: Pricing Strategic planning and budgeting Control of operations Performance measurement and appraisal

FINANCIAL SERVICE ORGANIZATIONS

Financial service companies are involved in the business of managing money. They may act as intermediaries-they may take money from depositors and lend it to individuals or companies, risk shifters (commercial banks)they may earn money in the form of premiums and invest it accept the risk such as damages to property or death (insurance companies) and traders i.e. buying and selling securities (securities firms)

Commercial Banks
Commercial banks receive cash deposits from people and pay them interest on the deposited amount. They also lend money in the form of loans and charge a rate of interest on these loans. The difference between the interest paid on deposits and the interest obtained on loans constitutes the banks revenue.

 Banks are exposed to three types of risks: Credit risk, i.e., the risk of loaned money not being repaid Interest rate risk, i.e., the fluctuations in interest rate that is spread between rates paid on deposits and rates earned on loans. Transaction risk, i.e., the risk of theft, embezzlement and numerical errors in the processing of transactions. This risk can be greatly minimized by an effective internal audit and control system.

Management Control Implications

Commercial banks establish a number of branches that function as individual profit centers. These branches need to be controlled. Some of the important control issues are: Interest rates Loan losses Transfer pricing Expenses Joint revenues

Insurance Companies
Insurance companies are of two types: life and casualty. A life insurance company collects premiums from policyholders, invests these premiums, and pays a specified amount to the beneficiary on the death of the policyholder. While term insurance offers a person insurance coverage for a limited number of years in the policy holders life; whole life insurance provides coverage for the insured person until his death. Usually, whole life insurance policies include an investment feature, that is, a part of the premium is devoted to building up the policys cash value. Cash is paid regularly over a specified period in the annuity version of such a policy.

 A casualty company collects premiums, invests them, and makes payments to policyholders for specified losses -- losses to property caused by fire, theft, accidents, or other causes, or losses to individuals caused by malpractice, negligence, illness, accidents, and so on. Casualty policies usually provide short- term coverage not exceeding three years. While some policies pay for claims made during this period, others pay for losses incurred during the period, even though the claims are made later.

Management control implications

A major problem in the management control system of insurance companies is that profits from current policy sales cannot be determined until the next few years. This is especially true in case of life insurance companies. Though premiums are determined on the basis of the best estimate of the inflows and outflows associated with the policy, they may turn out to have been wide off the mark. While profitability cannot be ascertained until the final payment has been made, it may not be possible for the management to wait that long in order to make control decisions, as it would require information immediately. Insurance managers pay considerable attention to the controlling of expenditure unlike investment bankers.

SECURITIES FIRMS
Firms that deal with shares or securities are called securities firms and include investment bankers, securities traders, securities brokers and dealers, fund managers (investment, mutual, and pension funds), and investment advisors. Best known examples of investment bankers are J.P.Morgan, Drexel and Company, and Kuhn Loeb and Company.

Management Control Implications

The characteristics of securities firms are different from those of other financial service organizations. These include: 1) The importance of customer relationships 2) Stars and team-work 3) The need of rapid information flow 4) Focus on short-term performance

HEALTH CARE ORGANISATIONS

It consists of hospitals , clinics and similar physicians organizations; health maintenance organizations ; retirement and nursing homes; home care organizations and medical laboratories, among others. Special characteristics Difficult social problem Change in mix of providers Third party payers Professionals Importance of quality control

NON PROFIT ORGANIZATIONS

A non profit organization, as defined by law, is an organization that cannot distribute assets or in come to, or for the benefit of, its members, officers or directors. A non profit organization needs to earn a modest profit, on average, to provide funds for working capital and for possible rainy days

Special characteristics Absence of the profit measure Contributed capital Fund accounting Governance

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