Effects of the use of control systems

This research explored the moderating effects of subordinate participation in decision making and subordinate job difficulty on their responses to different uses of control systems by their superiors. In a sample of managers from a moderately large U.S. organization, both of these factors were found to moderate the ways subordinates responded to the perceptions that their superiors used control systems for goal setting, evaluation, problem solving, and contingent reward allocations.The results of the study indicated that the use of control systems for contingent reward allocation produced defensive subordinate responses under all conditions, but also produced the functional response of effort when subordinate participation was low and job difficulty high. The use for goal setting appeared to result in functional responses when subordinate participation was high, and in dysfunctional responses when participation was low. The use for evaluation and the use for problem solving both seemed to be aspects of a collaborative developmental use of the control systems. This use pattern appeared to have primarily functional effects, although the results were more functional when the subordinate jobs were not difficult, and when they participated in decision making. Based on the results several propositions are formulated for future testing.     

Dysfunctional Effects of League Tables: A Comparison Between English and Scottish Primary Schools

League tables based on Key Performance Indicators (KPIs) have become an important part of the management of the UK's education system. While the performance measured by KPIs has apparently improved, concerns have been raised that they may have unintended or dysfunctional effects. This article compares English with Scottish schools. The authors found that English primary schools perceive their KPI systems (with league tables), as being significantly more dysfunctional than those of their Scottish counterparts (without tables). The article provides empirical evidence to support the many arguments that high-stakes single proxy indicators can have significant dysfunctional effects.     

Paying People to Lie: the Truth about the Budgeting Process

This paper analyzes the counterproductive effects associated with using budgets or targets in an organisation's performance measurement and compensation systems. Paying people on the basis of how their performance relates to a budget or target causes people to game the system and in doing so to destroy value in two main ways: (a) both superiors and subordinates lie in the formulation of budgets and, therefore, gut the budgeting process of the critical unbiased information that is required to coordinate the activities of disparate parts of an organisation, and (b) they game the realisation of the budgets or targets and in doing so destroy value for their organisations. Although most managers and analysts understand that budget gaming is widespread, few understand the huge costs it imposes on organisations and how to lower them. My purpose in this paper is to explain exactly how this happens and how managers and firms can stop this counter‐productive cycle. The key lies not in destroying the budgeting systems, but in changing the way organisations pay people. In particular to stop this highly counter‐productive behaviour we must stop using budgets or targets in the compensation formulas and promotion systems for employees and managers. This means taking all kinks, discontinuities and non‐linearities out of the pay‐for‐performance profile of each employee and manager. Such purely linear compensation formulas provide no incentives to lie, or to withhold and distort information, or to game the system. While the evidence on the costs of these systems is not extensive, I believe that solving the problems could easily result in large productivity and value increases – sometimes as much as 50–100% improvements in productivity. I believe the less intensive reliance on such budget/target systems is an important cause of the increased productivity of entrepreneurial and LBO firms. Moreover, eliminating budget/target‐induced gaming from the management system will eliminate one of the major forces leading to the general loss of integrity in organisations. People are taught to lie in these pervasive budgeting systems because if they tell the truth they often get punished and if they lie they get rewarded. Once taught to lie in this system people generally cannot help but extend that behaviour to all sorts of other relationships in the organisation.     

Managing hybrid marketing systems

As competition increases and costs become critical, companies that once went to market only one way are adding new channels and using new methods - creating hybrid marketing systems. These hybrid marketing systems hold the promise of greater coverage and reduced costs. But they are also hard to manage; they inevitably raise questions of conflict and control: conflict because marketing units compete for customers; control because new indirect channels are less subject to management authority. Hard as they are to manage, however, hybrid marketing systems promise to become the dominant design, replacing the "purebred" channel strategy in all kinds of businesses. The trick to managing the hybrid is to analyze tasks and channels within and across a marketing system. A map - the hybrid grid - can help managers make sense of their hybrid system. What the chart reveals is that channels are not the basic building blocks of a marketing system; marketing tasks are. The hybrid grid forces managers to consider various combinations of channels and tasks that will optimize both cost and coverage. Managing conflict is also an important element of a successful hybrid system. Managers should first acknowledge the inevitability of conflict. Then they should move to bound it by creating guidelines that spell out which customers to serve through which methods. Finally, a marketing and sales productivity (MSP) system, consisting of a central marketing database, can act as the central nervous system of a hybrid marketing system, helping managers create customized channels and service for specific customer segments.     

The Modern Industrial Revolution,Exit, and the Failure of Internal Control Systems

Since 1973 technological, political, regulatory, and economic forces have been changing the worldwide economy in a fashion comparable to the changes experienced during the nineteenth century Industrial Revolution. As in the nineteenth century, we are experiencing declining costs, increasing average (but decreasing marginal) productivity of labor, reduced growth rates of labor income, excess capacity, and the requirement for downsizing and exit. The last two decades indicate corporate internal control systems have failed to deal effectively with these changes, especially slow growth and the requirement for exit. The next several decades pose a major challenge for Western firms and political systems as these forces continue to work their way through the worldwide economy.     

Performance measurement and the use of league tables: some experimental evidence of dysfunctional consequences

The practice of organisations adopting performance measurement systems that utilise a range of key performance indicators linked to various aspects of corporate strategy has become widespread. At the same time, however, many organisations are developing reporting frameworks that summarise these indicators in the form of a league table, ranking sub-units according to their achievements. The use of such league tables has the capacity to create a form of dysfunctional behaviour as managers focus primarily on their league table positions—the notion of measure fixation. This paper describes a new experiment that seeks to explore this possibility. The results suggest that information concerning the change in league table position leads to an increase in risk-seeking behaviour, particularly where a project proposal creates an opportunity for the manager's sub-unit to move to the top of the league table. This is an unintended dysfunctional consequence of using league tables within performance measurement system design.     

PRODUCER TURNOVER AND PRODUCTIVITY GROWTH IN DEVELOPING COUNTRIES

The reallocation of resources, either across sectors or acrossproducers within a sector, can serve as a potential source ofproductivity growth. New research findings exploit comprehensivemicroeconomic data on the manufacturing sectors of Chile, Colombia,and Morocco to document resource shifts as producers enter,expand, contract, and exit operation. The micro-level adjustmentis substantial; between 25 and 30 percent of the total numberof manufacturing jobs turn over each year. In the short run,the productivity effects of this turnover are modest becausethe new plants that come on line are only slightly more productivethan the ones they replace—and both are typically small.In the longer term, however, the turnover generates more substantialincreases in productivity because the new firms that surviverecord substantial productivity gains in their early years.Moreover, firms that exit are typically on a downward productivityspiral and would probably have dragged down sectoral efficiencyfarther if they had continued in operation.      

Financial sector liberalization,bank privatization,and efficiency: Evidence from Pakistan

The Pakistani banking system has been transformed over the past 15 years through liberalization, the entry of private banks, the privatization of public-sector banks, and the tightening of prudential regulations. The effects of these changes on bank productivity and relative efficiency are investigated using various techniques. Bank productivity in terms of profits has increased, and new entrants have been efficient, but the dispersion of efficiency remains wide. The privatized banks improved their profit efficiency in the period immediately following their privatization, but in the subsequent years only one significantly improved its efficiency, whereas the other did not differentiate itself in terms of efficiency from the remaining state-owned banks. The new private domestic banks generally proved to be among the most efficient, and sometimes out-performed the foreign banks.     

The Role of Long-Term Finance: Theory and Evidence

Improving the supply of long-term credit to industrial firmsis considered a priority for growth in developing countries.A World Bank multicountry study looks at whether a long-termcredit shortage exists and, if so, whether it has had an impacton investment, productivity, and growth. The study finds thateven after controlling for the characteristics of individualfirms,businesses in developing countries use significantly less long-termdebt than their counterparts in industrial countries. Researchersare able to explain the difference in debt composition betweenindustrial and developing countries by firm characteristics;by macroeconomic factors; and, most importantly, by financialdevelopment, government subsidies, and legal and institutionalfactors. The analysis concludes that long-term finance tends to be associatedwith higher productivity. An active stock market and an abilityto enter into long-term contracts also allow firms to grow atfaster rates than they could attain by relying on internal sourcesof funads and short-term credit alone. Importantly, althoughgovernment-subsidized credit markets have increased the long-termindebtedness of firms, there is no evidence that these subsidiesare associated with the ability of firms to grow faster. Indeed,in some cases subsidies are associated with lower productivity.      

Management accounting and the challenge of strategic focus

The paper presents a case study of management accounting in a company that had been a highly diversified conglomerate but was implementing a new strategy of product market focus combined with a more multinational scope. Formerly subject to a simple but rigorous form of financial control, the new organizational identity of becoming a high-growth, high-technology company posed fresh challenges for its control style and, in particular, for the role of management accounting. The paper draws on self-referential systems theory in order to analyse the paradox that while an organization can become more focused on particular markets and technologies, its management accounting seems to become more diffuse and differentiated. As the company sought to develop a different corporate epistemology through the reproduction of a fresh identity, it established new forms of corporate communication through its quality and performance management systems. Autopoietic theory would acknowledge that management accounting should provide some system guidance but would warn against the possible danger that some forms of performance control may damage company self-production.     

ORGANISATIONAL CONTROL, DIFFERING PERSPECTIVES: THE MANAGEMENT OF UNIVERSITTES

Designing an accounting and information system (ACS) for a university is difficult, and whilst there is substantial evidence that formal systems can have dysfunctional effects, it is necessary to precede any design or critique of an ACS by clarifying the underlying managerial perspective that is being applied to the organisation. In this paper a number of managerial perspectives are developed and illustrated in relation to the management of universities. The approach is also contrasted with the management of health authorities. It is demonstrated that some authors provide a critique of the Jarratt proposals without illustrating the managerial perspective from which this is being done, and that whilst their organisational analysis may be insightful it does not add to the debate on how to manage universities or health authorities.     

The role of regulatory credibility in effective bank regulation

This paper develops a model of regulated Brownian motion with an endogenous profit term to analyze the role of regulatory credibility on the stability and productivity of the banking system. We show that when regulatory intervention is perfect and costless, the volatility of the system can be substantially reduced with no loss of productivity. In fact, perfect credibility can actually reduce the volatility of intrinsically risky banking systems below the volatility of intrinsically less risky systems as banks anticipate intervention and mitigate their investment behaviour accordingly. However, when the credibility of the regime is weakened because of increased uncertainty stemming from regulation, such as random costs or imperfect timing of regulatory intervention, both the stability and productivity of the financial system are impaired. Importantly, we find that in the presence of regulatory costs and imperfect credibility, there is no universal optimal intervention policy rule. The optimal regulatory system depends on the regulator’s level of absolute risk aversion.     

What Does 25 Years of Experience Tell Us About the State of Performance Measurement in Public Policy and Management?

Performance measurement in public management is a contested issue. Performance indicators (PIs) have diverse functions for different stakeholders over the life-cycle of a public policy, and the search for better PIs is an ongoing effort. However, instead of seeing the running down, proliferation and strategic use of performance information as dysfunctional, these effects are probably the unavoidable outcomes of functional and effective performance measurement systems in open societies and competitive democracies. PIs may effectively create 'creative destruction' of the present political or managerial status quo. Thus, PIs in political competition may be as important as prices in market competition.     

The effects of decision aid structural restrictiveness on cognitive load,perceived usefulness,and reuse intentions

As accounting environments become increasingly automated through information technology support systems, the underlying systems are increasingly restrictive in an effort to direct user behavior and decision making. However, consistent with the theory of technology dominance, restrictive systems have been found to dominate users' decision processes and to have a detrimental effect when decisions require knowledge from outside the system's capability. This study expands upon this research through an examination of users' preferences for more (less) restrictive systems based on their own level of domain knowledge. Incorporating theory on task technology fit, we theorize that users with less knowledge will prefer to be dominated by the system, while users with greater levels of knowledge will prefer a system that provides the user with a level of control over the decision process rather than submitting entirely to the decision aid's control. These theorizations are empirically tested through an experimental design that varies the level of systems restrictiveness across groups of novice and experienced participants. The results confirm that novice (experienced) participants find a highly restrictive system substantially (minimally) reduces cognitive load, increases (decreases) usefulness of the decision aid, and strengthens (weakens) the intention to reuse the system in the future. The results add an important piece to understanding the effect of restrictive systems in that the users that are most susceptible to dominance by decision aids are the users most willing to adopt a restrictive system that reduces the effort they must put forth and in turn reduces the knowledge they accrue from using the system.     

The promise--and peril--of integrated cost systems

Recent advances in managerial accounting have helped executives get the information they need to make good strategic decisions. But today's enterprise resource planning systems promise even greater benefits--the chance to integrate activity-based costing, operational-control, and financial reporting systems. But managers need to approach integration very thoughtfully, or they could end up with a system that drives decision making in the wrong direction. Operational-control and ABC systems have fundamentally different purposes. Their requirements for accuracy, timeliness, and aggregation are so different that no single, fully integrated approach can be adequate for both purposes. If an integrated system used real-time cost data instead of standard rates in its ABC subsystem, for example, the result would be dangerously distorted messages about individual product profitability--and that's precisely the problem ABC systems were originally designed to address. Proper linkage and feedback between the two systems is possible, however. Through activity-based budgeting, the ABC system is linked directly to operations control: managers can determine the supply and practical capacity of resources in forthcoming periods. Linking operational control to ABC is also possible. The activity-based portion of an operational control system collects information that, while it mustn't be fed directly into the activity-based strategic cost system, can be extremely useful once it's been properly analyzed. Finally, ABC and operational control can be linked to financial reporting to generate cost of goods sold and inventory valuations--but again, with precautions.     

Performance measurement systems in higher education: How levers of control reveal the ambiguities of reforms

This paper focuses on the introduction of new performance measurement system (PMS) for measuring teaching performance in Universities. The adoption of such PMS should prompt significant changes in existing control processes, but the goals of reform do not automatically translate into the desired organisational responses. Given the impact of PMS on management controls, the nature of such ambiguities may be better investigated using a framework that allows management control systems (MCS) to be taken in account. This paper investigates key actors' perceptions regarding the introduction of PMS through the lens of the levers of control (Simons, 1995, 2000). A qualitative analysis is conducted on interviews held with Italian university teaching managers and heads of programmes to examine the ambiguities arising from the implementation of a PMS.Several ambiguities emerge, both within and between the levers analysed, suggesting some reasons for the (partial) ineffectiveness of PMS reforms. In particular, the belief systems lever is crucial in making reforms acceptable, bureaucratic procedures are important in the diagnostic control systems lever, and performance indicators operate as a boundary system lever. Our findings show that administrative and academic actors perceive the interactive control capacity of PMS differently.     

The middle manager as innovator

If there's one thing that most U.S. executives agree on, it's the need for higher productivity in American workplaces. So far most efforts at raising performance have concentrated on factory and office employees-partly, one assumes, because their output is easily measured. However, the increases in productivity at the shop or office level will mean nothing in the long run, if, for instance, new products aren't designed, new structures aren't put in place to accommodate change, or new equipment isn't conceived to improve product quality. In other words, a company's productivity depends to a great degree on how innovative its middle managers are. In this article, the author describes a study she conducted of 165 middle managers in five companies to determine what managers contribute to innovation and what factors the most innovative companies have in common. She found that, among other things, innovative managers tend to be visionary, comfortable with change, and persistent. Innovation flourishes in companies where territories overlap and people have contact across functions; information flows freely; numbers of people have excesses in their budgets; many managers are in open-ended positions, and reward systems look to the future, not the past.     

Insurance and Incentive Effects of Transfers among Regions: Equity and Efficiency

When productivity shocks across regions are less-than-perfectlycorrelated, there are gains from federation, even if the regionsare identical ex ante. For the federation to provide insurancefor these productivity shocks, it must introduce some sort ofequalizing transfer programme among regions. But any suchtransfer programme induces a form of moral hazard as well, ifregions still have some control over their own policies. Oneof the implications of this moral hazard is that the progressivityof the overall (regional together with federal) tax system willbe increased when the federal transfer programme is expanded.     

ERP in action — Challenges and benefits for management control in SME context

ERP systems have fundamentally re-shaped the way business data is collected, stored, disseminated and used throughout the world. However, the existing research in accounting has provided only relatively few empirical findings on the implications for management control when companies implement ERP systems as the technological platform. Especially scarce are the findings concerning the production phase, after implementation, when the information processes, related work practices and the new information contents can be seen as established. In this paper we explored and theorized the benefits, challenges and problems for management control when an ERP system is in use, four years after the implementation. Our findings also illustrate why and under what circumstances these challenges and benefits may exist. For a holistic view of the organization our findings, based on a qualitative case study, are constructed from the viewpoints of people at different levels and functions of the organization. Top management expected a new strategic control system, but due to the many challenges it ended up with merely financial accounting based control. At the operational level, serious challenges lead to inadequate usage of the ERP system. Management control produces the financial basic data and must contend with many practical problems caused by ERP implementation.