Management Control System – Definition, Characteristics and More
If you’d have to name a single function in the organization that can make or break it, you might mention management. The control of the operations and the people behind them is what management is about and it can be a tougher task than many imagine.
So, what could make it easier and guarantee results that are more effective? According to a number of proponents, management control systems can help provide plenty of benefits to organizations of all shapes and sizes.
What are these management control systems? Let’s examine the definition, the function, the characteristics and the benefits of it. We’ll also venture a little into the implementation process and the factors that can help or hinder when applying the system to your organization.
DEFINING MANAGEMENT, SYSTEMS AND CONTROL
One of the best ways to understand management control systems or MCS is by examining the different components that make it. The concept is built on three distinct elements: management, systems and control.
As you know, management is about organizing people and processes in a manner that helps the organization achieve specific objectives. The management process wants to ensure different parts work together to attain these goals.
How can this be done? Well, this in most instances means dealing with different resources and allocating them to correct roles and purposes. Management includes guidance and monitoring of these resources as well. You are essentially managing how other people perform a specific role and use resources, instead of doing it yourself. As a manager, you are essentially a facilitator – if A needs to be done, you find B to do it and provide him the strategy and the resources to do it.
OK, so that explains the core concept, but what about the functions of management? You need to identify and understand the key components of management as well. The first component is the different functions of management. The definitions can be different depending on the situation, but generally, five functions are identified as the core functions of management. These are planning, organizing, staffing, leading, and controlling. You can watch the YouTube clip below to learn more about the functions and the specific processes they entail.
The other key part of management is the resource types it entails. The most common forms of resourcing include: human resources, financial resources, technological resources and natural resources. You could use the above functions to allocate, control and monitor the different forms of resources. In essence, you are combining the functions you have at hand – planning, staffing and so on – with the resources, such as financial resources. The clearest example is having the function of staffing and using the human resource funding to hire in new staff.
The definition of management in the context of MCS is important because of how organizations can be viewed. Think of an organization as a system. Now the role of management is therefore facilitating the production of beneficial outcomes from the system. If you want the system, i.e. the organization, to produce a result A, you use management to gather the resources, i.e. the human and other resources, to guarantee A gets done. You are essentially the engine, which gathers the other parts together to move the car forward.
What about systems? As mentioned above, you can view organizations as systems. The Business Dictionary gives two definitions to systems, which are both good to understand in the context of MCS. Systems are:
“a set of detailed methods, procedures and routines created to carry out a specific activity, perform a duty, or solve a problem”
or you could view them as:
“an organized, purposeful structure that consists of interrelated and interdependent elements”
The key to systems, especially in the case of MSCs, is the structure of which they are formed and often perform. Every system comes with input, output and feedback mechanism. The system is able to maintain itself even when the surroundings are changing and it has a specific set of boundaries within which is operates. The picture here illustrates the idea of a system in a business context perfectly.
You have an input, the business system and the output. You also have the feedback mechanism. The business system would be the strategy the business uses to create a specific output. If the output is to provide cheap shoes, the business strategy is manufacturing of the shoes with the specific elements this entails.
The input, therefore, is the resources (materials, labor, equipment) you need to achieve the output. So, you take the resources, you implement them with your chosen strategy and you get the results. The results then provide feedback to inputs on the performance of the system. Perhaps you didn’t receive as many shoes as you wanted and so, you can increase input. For example, buy more materials, hire more people and so on.
Source: Based on SlideShare presentation by Paul Turner
The objective of the system is to achieve a pre-determined result each time it is executed.
In a business environment, the sale process can be viewed as an example of the process. The organization has a set of policies and processes in place to guarantee the sale effort would always lead to a same result (i.e. the sale). As mentioned in the above section, management would be one of the methods used to guarantee the result occurs in the system each time.
In the case of the example above, your pre-determined result might be to have 1,000 good quality shoes with an individual shoe costing $50 to make. The feedback might show you that occasionally the cost of shoes rises to $70 and you know you need to tweak the input or the processes you use, as you’ve deviated from the wanted results.
Finally, you have the concept of control. As stated above, control is one of the functions of management. In this context, it refers to the process of analysis and corrective action. When controlling, you are essentially monitoring whether you are receiving an expected result of a process (or during it) or if the outcome deviates from the expectation.
If there is a deviation, you take corrective action to ensure the expected results occur. Previously, the concept of control was mainly focused on correction after an error had occurred. In the example of the shoe production, you would notice there was a deviation when you count the shoes and instead of getting 1,000, you’ve made 999.
But with the rise of modern technology, control can be used to foreseeing an error. This has changed the function and made it increasingly important part of the management process. For example, your shoe production facility might have monitoring systems that help you realize the shoes are not being finalized as quickly as they should in order to make 1,000 pairs. You are essentially able to see that you would encounter a problem; instead of just realizing a problem has occurred.
If you consider the process in the forms of steps, control in relation to management would look like this:
- Setting a goal and establishing desired objectives.– “I want to create 1,000 pairs of shoes in a month.”
- Measuring the achievements of goals and objectives.– “I’ve made 999 pairs of shoes in a month.”
- Comparing the achieved goals and objectives with the original goals and objectives. – “I wanted 1,000 and I got 999. I wanted to do it in a month and I’ve spent a month.”
- Analyzing variances and reporting on them. Determining the underlying causes for the variations.– “I’m one pair of shoes short, but I’ve met the deadline. I did not have enough materials on day two and I got behind in my goals.”
- Taking corrective action to eliminate the variations.– “I’ve recalculated the requirements for fabrics and I’ve ordered enough for next month.”
- Following up and repeating the process.– “I’ve now created the right amount of shoes every month.”
WHAT IS A MANAGEMENT CONTROL SYSTEM?
The above has hopefully started your mind to process the concept of MCS, as you are aware of the special meaning and interconnectedness of the specific concepts that make it. But let’s look a bit closer to what MCSs are and how they are defined in the modern context.
One of the first definitions of MCSs is from 1972 when Ernest Anthony Lowe, professor at the University of Sheffield, published an article called On the Idea of a Management Control System. According to Anthony Lowe, an organization would need to establish a specific system to control and plan the different operations it is going through. He identified four reasons for the necessity of the systematic management control:
- All organisations have definable organisational objectives.
- Management has hierarchy, with managers being in sub-units. Each manager has to define personal goals, which are aligned with the organisation’s objectives.
- Organisational situations, together with human behaviour, create an uncertain situation and this uncertainty is present in internal and external circumstances.
- Objectives must be economised and the human endeavour must be a variable in these objectives.
Anthony Lowe also described in his book how management control systems are the processes “by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives“. Nonetheless, he felt the MCS to be different from strategic planning or the operational control businesses conduct.
In essence, while strategic planning is about giving your organization the direction in which it should go, and operational control provides the management the authority to perform the strategic functions, MCS is about ensuring the above two happen in the first place. Without proper MCS in place, you don’t know if the business can achieve its goals and if the strategies you’ve chosen will work according to plan. You might notice a pattern here: the management control system is about providing the check and balances to the system.
Other theorists began building on top of Anthony Lowe’s writings. Horngreen, Datar and Foster have defined MSCs “as means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization and to guide the behavior of its managers and employees”.
Essentially what they are saying is that a management control system is a tool businesses can use to measure its performance and to compare its desired objectives against its actual objectives. By establishing a management control system, the business makes it easier to align individual decision making with the larger organizational objectives. The system is rather comprehensive, creating a framework in which not only are the internal aspects controlled and monitored, but the external behaviors and environments are also looked after.
An example of both would be the control of internal actors such as accounting and human resources as an internal factor, with external changes represented by industry developments like new regulations for products. At this point it must be said that theorist don’t always agree on the definitive definition of MCSs. If you are looking for a quick, few sentences, you probably won’t have much luck. While the concept in the broader sense is clearly outlined, the finer definitions can be muddled.
So, what can you actually do with such as system? It essentially allows you to perform the following functions:
- Document operational objectives – You are able to outline what the organization wants to achieve in terms of short- and long-term goals. This could be directly related to financial performance, but it could also entail social objectives such as waste reduction, for example.
- Document the operational strategies and policies – Of course, you also need to ensure you are aware of the how. How will you achieve the above? You will need to document the policies in place in the organization, the different equipment and resources needed, and the strategies you implement. This could deal with things like employee management (salary, working hours, etc.)
- Assess the performance of organizational processes – You then need the tools to assess the performance of what you are trying to achieve and how. This includes gathering information from different sources, whether financial or non-financial. We’ll look at these more in the next section. At this point you are looking closer to the organization and checking what it is doing and how. You are detailing and outlining what the result of your policies and strategies are.
- Compare performance in relation to the objectives and policies – Finally, you compare the actual performance to the objectives you set at the start. You can clearly notice this is the essence of the business system. You have the structures in place, you add the resources, and you see what the result is, after which you can check what you got in comparison to what you wanted to get. Another great analogy would be cooking food with an oven. Consider you want to make a crispy baked potato. You take the input (the potatoes) and you use the strategies (oiling the potato, adding salt, putting it into the oven for a set amount of time). You take out the baked potato and you check if you have the right result (is it crispy?).
THE CHARACTERISTICS OF MANAGEMENT CONTROL SYSTEMS
So, you now can understand the functions of MCS and the purpose of the system, but what about the characteristics? What makes something a management control system?
As the above showed, MCSs generally describe the design, installation and operation of different planning and control frameworks within management. But there are two distinct control systems within the concept. While these are different from each other, they are also interrelated and sometimes hard to separate from each other.
First, the MCS refers to the structure, either organizational or the relationship of different components, of the different responsibility structures within the company. It further outlines the performance measures and how the information moves within and between the different responsibility structures. For example, in a complex and large organization, such as a production facility for creating different car parts, the responsibility would be divided into multiple units. The management would therefore be in charge of different aspects of the organization, and there would be a number of sub-units. On the other hand, a small business, like a family bakery, is unlikely to have many responsibility centers. MCSs core characteristic is the organizing and planning of the relationship between these different structures and centers of responsibility.
The other core characteristic, on the other hand, is about the processes or set of activities the organization takes in order to achieve its objectives. This part of the system refers to the steps the organization, and especially its management, needs to perform in order to set objectives, allocate resources to achieving these objectives, and to achieve the objective. The different processes that MCS performs and monitors is essentially looking at these phases and creating the right ways of going about the processes. This could involve things like monitoring the budgeting, measuring the performance of subordinates and so on.
Essentially, the first characteristic is about the structure of the MCS and the second characteristic refers to the processes. To understand it, you can consider it like this:
- The system’s design is about the structure of your management control system.
- The system’s performance is an indicator of the process of your management control system.
The other key thing to realize about the characteristics of MCSs is about two separate natures the system has. MCS essentially has an informal and a formal control system. Let’s examine them in detail:
|Formal control system||Informal control system|
|The organization has clear procedures, rules and guidelines in place to explain the different managerial requirements.|
These guide, motivate and direct the management, as well as the subordinates, to perform their tasks in a manner that helps achieve the operational goals. They are also used to co-ordinate behaviors of superiors and subordinates.
|The organization will also have informal and unwritten processes in place for management control.|
These are aimed to provide higher motivation amongst the employees and ensure organizational goals and strategies are appropriately implemented.
Informal control systems also boost goal congruence.
|An example of a formal system would be the rules and guidelines used by the human resource department in terms of functions such as hiring and developing staff.||An example of informal control system would be the good behavior expected from managers and subordinates, such as loyalty towards the organization and respect of the organizational culture.|
Finally, you should notice the distinction between financial-based functions and non-financial functions. Most of MCSs are actually use accounting and other financial metrics as the key evaluation metric. This means you have an emphasis on financial measures, such as how many sales were made or what it cost to hire a new person.
The reason for using these as the basis is rather obvious. Measuring performance with a real data set, such as a financial metric, is easy and straightforward. The management can tell a lot about performance by understanding the underlying financial factors of a specific behavior. If you were to sell 1,000 pairs of shoes, while your other peers sold only 400, the manager would want to focus on your specific behaviors to boost overall performance.
But there are certain essential non-financial factors at play as well. These can be measured with surveys and other feedback forms, and they include things such as customer satisfaction and product quality. The management can learn more, improve planning, and enhance control with information they receive directly from the customers. What makes them happy? What has disappointed them in the past?
Knowing, for instance, how customers continuously complain about waiting times will help the management direct the organization’s resources much better. The other example of these non-financial functions of MCS would be product quality. This can be an important tool for managers, as it reveals how well certain development strategies are working. If your products are constantly breaking down, you can take corrective action and find out where in the production line the quality is compromised.
CORE ELEMENTS OF IMPLEMENTING MANAGEMENT CONTROL SYSTEMS
Now if you were to implement an MCS at your organization, you would, just as with most systems and strategies, need to focus on certain essential factors to guarantee efficiency. For MCS, three core elements can determine the success and the effectiveness of this framework. They should be at the heart of your strategy from the start. The three are:
- The MCS is aligned with the organization’s strategies and goals. Before the implementation of the system, you need to understand and outline the current strategies in use, as well as define the objectives the organization wants to fulfill. These need to be the overall operational goals and not simply the aims you have for the MCS. It’s crucial to ensure the framework you choose to implement is in harmony with these existing processes and objectives. If the processes are not aligned, then your MCS will end up being ineffective or insufficient for your needs. It’s important to understand that the implementation of the system does not require the organization to change its core policies or redirect its objectives, but that the system can be made to fit within the current system.MCS is not there to transform the organization, but ensure it operates with maximum efficiency!
- Designed to fit the organizational structure. Furthermore, the MCS must consider the current organizational structure carefully. You want the management control system to fit the how the company operates and how it has structured these operations, especially in terms of its management. The key part of this is the understanding of the decision-making structures currently in place. It’s essential to create a management control system, which understands these decision-making structures and enhances them, instead of turning them around or hindering them. This can easily be done through the study of management structures and aligning the new model by dividing the responsibilities according to these structures. The control shouldn’t shift from the current models; it just will become more focused under the new system.
- Motivate people through different reward systems. The final key element of the implementation should be focused on the reward structures you will use as part of MCS. The idea of the system is about motivating the managers, as well as the subordinates, to work towards attaining the organizational goals in place. The effectiveness of the motivation can be improved by tying a variety of rewards to the achievement of these goals. The rewards themselves can change and include a variety of different types, depending on the task achieved or the performance the person displays. They can be purely monetary rewards, such as bonuses or increases in salary, or have a more material benefit, such as access to gyms or health clubs or updates on tools and other equipment. Furthermore, you should also have clear promotional structures in place to reward and motivate those people that show the highest productivity and creativity.
Later in the article, we’ll discuss some of the other factors that influence the implementation of MCS. But the above are the elements you need to focus on when applying the system within your organizations and the key factors, which can guarantee a successful implementation. If you focus on the above factors during the implementation process, you can start enjoying some of the benefits management control systems provide for organizations.
THE BENEFITS OF MANAGEMENT CONTROL SYSTEMS
So what about the benefits? What are the tangible reasons for using MCSs? The benefits of implementing the framework focus largely on different ways operational efficiency is enhanced and improved.
First, implementation of an MCS can reduce risks. The organization will remove non-conformity by ensuring the actual performance and results relate to the main objectives of the organization. The organization doesn’t just set goals and then pursue them blindly, but has systems in place to ensure the processes are moving the organization towards the objectives.
Since you are aware of the effectiveness of your systems, you can notice problems quicker. You reduce risk as you notice problems before they turn into a disaster. Consider you are aiming to boost sales to increase the organization’s bottom line. Due to having an Management Control System in place, you’ll be alerted if the cost of production goes up and the targets become harder to obtain.
In even simpler turns, imagine you are driving down the road. Now if your car just stops suddenly because it ran out of fuel, you are in trouble and you didn’t have a warning system in place. On the other hand, if you have a system in place monitoring your fuel levels, you can have an alarm notify you when you are running low on fuel. This allows you to take corrective action (find a gas station), before you are stuck on the side of the road.
The framework also improves your organization’s ability to plan future actions. The information flows faster under the MCS system, as each part of the organization’s process is being monitored and analyzed. The enhanced information flow makes it easier to plan and organize future processes and ensure objectives are set properly.
Without the kind of information MSC provides, you would find long-term planning difficult, as you wouldn’t have the right facts or the control to guarantee you are aware of the current situation and on top of future predictions. In the car example, knowing how much fuel you have in each moment and the distance you need to travel, will make it easier to plan when you need to stop to refuel.
Organizational efficiency also improves in the form of better facilitation of co-ordination. For any business to succeed, a good communication between the management and other parts of the business is the key. With MSC in place, the workers, their tasks and objectives are aligned with the management’s tasks and objectives.
The control systems in place create a middleman between the management and the employees and feeds information to both directions. As you, the manager, become more aware that sales numbers are increasing due to a specific result, you can use the information to tweak and perfect the system further. On the other hand, this also improves employee motivation and gives them feedback on the things they are doing right.
MSC naturally provides benefits in a pure managerial point of view. The first is how managerial problems are much easier to notice. Each organization will face problems related to the other managerial functions of planning, staffing and organizing, but with a proper control system in place, the impact of these can be limited. You gain more information, you receive early notifications when the management is not working to its standard, and you are able to remedy the situation before it gets worse.
Furthermore, supervision becomes much easier under the systematic control system, since the deviations are easier to spot. The data and information you receive as a manager will make it easier to notice the issues, instead of having to monitor each employee constantly. Supervision is smoother and more focused on spotting the actual problems and deviations in the system.
Finally, MCS supports organizational decentralization, without the loss of control. The system creates an environment of knowledge and understanding of the objectives. A key part of the framework is the proper communication of the goals and policies in place to subordinates. Since the subordinates and lower level managers are on top of the current situation and are fully aware of the expectations, they can have more confidence in doing the right things.
Since the framework doesn’t require constant monitoring by the manager, the subordinates are able to make decisions and solve problems on their own. The motivation and the belief to know you can do it is much deeper under the system, since you know the MSC will pick up any key deviations and help you correct them.
ELEMENTS INFLUENCING MANAGEMENT CONTROL SYSTEMS
So, we talked about the key factors to focus when implementing the system, but it’s also a good idea to figure out the elements that have an impact on the implementation. These are essentially the elements that make MCS work for your organization’s benefit and smoothen the process. You want to focus on these factors, as they can impact the cost of implementation and the effectiveness of it. There are four key factors to look out for:
- The size, the reach and the structure of the organization. Larger enterprises are naturally different to smaller organizations in terms of operations. The nature of control and the content specifics of the MCS. The larger the enterprise, the more complex the MCS will be. Each organization also has its own statutes and conventions, which need to be taken into account when implementing the system. The management philosophy of McDonald’s will be different to that of Apple. The difference might also be even steeped when you have a small family business or a large international corporation. The organization will also have its unique delegation and decentralization strategies in place, which must be considered as an influence on the MCS.
- The nature of the operations and their divisibility. Management is influenced by the nature of the operations it is supposed to manage and this will impact the implementation of MCS. Part of the nature of operations deals with their divisibility into sub-sections. Depending on the industry, you might not have a lot of division. For example, if you are working on a single product industry, such as oil, sub-units are relatively unimportant. The management of the production and the product cannot, therefore, be divided into a variety of sub-sections. The less divisibility there is, the different the MCS process will be.
- The variety of responsibilities within the organization. MCS is also driven by the different responsibility centres an organization might have. The more responsibilities, the more different control systems are needed to keep operations flowing. Control of different responsibilities in terms of results can vary. You might measure the success by expenses, profitability or return on investment. MCS need to be implemented with the specific criteria of performance in mind and therefore, the variety of these responsibilities will be a key determining factor.
- The people of the organization and their perceptions. The final factor influencing the implementation of MCS deals with the people within the organization. People’s perceptions of the MCS need to be taken into account and considered before you implement the framework. Different people might have a varying view in terms of the effect the system has on their work, job satisfaction and security, and the general well-being and motivation to perform tasks. The perceptions might change from department to department, but understanding them will help ensure the system has the right impact. When you are designing MCS and implementing the system, consideration of these perceptions can help you monitor performance, implement the right type of system, and ensure people’s perceptions are either fulfilled, if positive, or changed around, if negative.
In broader terms, effective control systems have a broad variety of factors that are required for successful implementation. When you are implementing a management control system, you should also keep those in mind. The below video clip is a good summary of the essentials of functional and effective control systems.
To recap the above, management control systems are designed to gather information and to use this information in order to help the organization to reach its objectives. The system focuses on the performance of the different organizational elements from human performance to financial performance.
The informal and formal MCSs will ensure the organization’s resources perform as efficiently as possible. Whether it’s about finding ways to cut down production cost through performance or ensuring your employees don’t suffer from burnout, an MCS will help direct resources into the right places and monitor performance level.
The system can provide real benefits to organizational efficiency – you are more able to notice problems, plan your strategies and ensure better co-ordination amongst the different departments and units. Not to mention it can make the world of management easier.
We all know how hard it can be to be a manager, but with an MCS, your workload is reduced, you’ll become better at communicating and controlling the different functions, and you can ensure other people take responsibility to get things done. Management control systems smoothening out the process of being a manager and anything that boosts performance is a good thing!
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