Management Control Systems essay
In today highly competitive business environment it is extremely important to keep a hand on the pulse of the time and to be responsive to the advance of managerial strategies. It goes without saying that success in the market is essentially dependent on what you offer, that is to say the kind of a good and naturally its quality; then, it does matter what your reputation and authority is, that is your brand and client base; and, of course, it does matter why you can be better than your competitors. But all of that are examples of outer conditions. Today more and more attention is paid to the inner affairs of an organization, so the efforts of many progressive managers are turned towards the organizational development and performance management. At the same time performance management is a complex system which is not so easy to master. To become a good performance manager, each supervisor needs to acquire keen knowledge of what performance management is like, why it is so important in our days and what strategies and systems can be applied to get success and profit for the organization. What is more, a good skill and ability to combine traditional and innovative techniques is required. This is just what the following research will be focused on. Besides, the attention will be paid to the application of management accounting control systems both theoretically and empirically, and the difficulties faced in performance management will be discussed and analyzed in order to make constructive conclusions and to work out valuable recommendations on the matter.
The specific character of performance management
What do we mean when we talk about performance management? In general, these are various strategies and techniques used to provide the consistent meeting of the organizational goals and objectives, let it be the level of the entire organization or separate department or even one employee. This term was actually introduced by Dr. Aubrey Daniels in 1970s. Performance was initially understood as correlation between behavior and outcomes. In fact, this term can be used not only in the business sphere. Whenever there is interaction between people and any results of interaction are expected, performance management is applicable. Different scholars made a stress on different sides of the definition. Brethower and Smalley (1998, p. 88), for instance, understood performance management as “strategic and integrated approach to increasing the effectiveness of companies by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors.” This is how productivity and profitability of an organization are to be achieved through reconciling personal goals of employees with the organizational goals. In many studies performance is described as the so-called self-propelled performance process (Cokins 2009, p. 201).
On the one hand, performance management is targeted to use the experience of the past by evaluating and documenting the quality of the employees’ performance and outcomes. On the other hand, it is targeted to planning the future and forecasting the results. The task is to do both properly and in time.
System approach to understanding performance management
There is a certain structure of performance management that can be proposed for effective interaction between employer and employees. These are two main stages, commitment analysis and work analysis. The first stage includes the definition of the job mission statement. It means that for each employee there should be a detailed instruction of what he is obliged to do, for what purpose, for what product and what kind of customers, and how his role will be evaluated in the system of other employees and departments. Through the definition of these main points the continuous key objectives are seen and performance standards are determined. It goes without saying that when there are articulated standards, it is easier to meet expectations and to evaluate the outcomes. Thus, the second stage is intended to analyze the particular job in terms of reporting the structure and job description.
Within the system of organizational development, performance is scrutinized as a balance of actual results and desired results. A gap between these two categories is understood is performance improvement zone – a zone where something should be improved. The three elements of this system are performance planning, performance coaching and performance appraisal. At the first stage goals and objectives are established. At the second, feedback is expected and performance is adjusted. The third stage includes formal documentation and delivery of feedback. Any discrepancy between Desired Results and Actual Results is called performance problem. Any effort taken to overcome the gap is called performance improvement. The more detailed plan of actions consists of five crucial steps. After the work is planned and expectations are standardized, the performance of work is controlled and monitored. Then, the ability of the staff to perform is developed and enhanced, after what the ultimate performance is evaluated and summarized. Finally, the best performance is rewarded.
Advantages of performance management introduction
To make the report sound more persuasive, it seems rational to concentrate on the benefits of performance management. On the whole, effective delivery of strategic and operational goals is facilitated, as Mawhinney, Redmon and Johnson (2001, p. 112) stress.
Progressive performance management doesn’t mean simple conversation between the different levels of management. Special programs and software have been developed for that purpose and can provide an increased return on investment due to the better direct and indirect sales, improved operational efficiency, and, what is even more essential here, the latent potential of the employees unlocked. The matter is, each employee has abilities or potential which is not used directly at the position he is engaged in, but they can be attracted in different processes if discovered in time. The time spoiled is another argument for more control and revision, as much time during the working day is used ineffectively by employees. The main reason is they are not motivated to do more or they are not stimulated to be more efficient (McSween 1995, p. 44).
Apart from that, there are direct financial gains experienced through effective performance management. The sales are increased, the costs are reduced, the overruns in projects are stopped, the goals of CEOs are aligned with the goals of the organization, and the time needed for communicating changes is saved. Next, the workforce becomes more motivated. Incentive plans are optimized; the employee engagement is improved while they see in what way they are contributing to the high level goals of the organization. Transparency is created and high confidence is left in bonus payment process. As for the management control itself, it becomes more flexible and responsive. Data relationships are displayed, and legislative requirements are complied with. Scenario planning is simplified, and the process of documentation is improved too.
Limitations of performance management and precautions for supervisors
In spite of all the benefits of performance management, when it is applied improperly it can even do harm to both the employees and employers. In some organizations there are a lot of complaints for misleading and inadequate feedback from supervisors. Dr. Goodale, for instance, criticizes the program known as “360-degree.” The matter is, this kind of programs provides not enough discussing and fails to help when used annually only. The application of annual report cards overwhelms the employees with scores. The solution is to discuss and plan actions as often as possible. These discussions may be not obligatory formal, they may be informal or semiformal. Caring supervisors review the work of their employees in progress, not waiting for the end of deadline or any extreme situation. “One secret to effective performance management, therefore, is to conduct informal and semi-informal discussions as often as necessary—no forms and no scores,” Goodale (1997, p. 280) advises.
Another problem is that conventional evaluation forms focus on personal traits of employees (including personality, attitude, initiative, dependability) and competencies (including job knowledge, interpersonal skill, and organizational skill). Answering such questions the employees often get defensive and do not answer sincerely. Besides, these tests lead to a kind of discrimination. Goodale suggests discussing the information in process and to focus on behavioral, not personal traits, and specific competencies instead of general which should be clearly job related and directly observable. “For example, employees may manage time poorly, communicate well, object to changes in procedures and argue with team members” (Goodale 1997, p. 281).
Next problem is that there is too much tension directed top-down, due to which supervisors engaged in performance management feel like there are punitive parents in judgment. Therefore, it is significant to listen to employees and to hear them in order to identify the areas of improvement. One more secret from Goodale (1997, p. 281) is “to draw out the employee’s views of his or her performance and plans for improvement by asking questions.” He believes that people are usually aware of what they are good at and where they fail, which can be supportive in exercising upward communication. Finally, it is reported that when people are asked whether they could improve in the area they are already good at, 80% of them are able to make specific suggestions.
Management accounting control systems in performance management
One of the most popular tools applied in organizational development and performance management is management accounting control systems (MACS). Through this technique information is gathered from different departments and used to evaluate the performance of various resources, including human, tangible and financial resources. Management control can be determines as “the process by which managers influence other members of the organization to implement the organization’s strategies” (Anthony 2007, p. 69) in order to steer the organization to its strategic goals and competitive advantage. The three main subdivisions of management accounting are full cost accounting.
Further, management control system is defined as “an integrated technique for collecting and using information to motivate employee behavior and to evaluate performance” (Horngren et al. 2005, p. 75) or as “the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities” (Chenhall 2003, p. 129). Coordination, resource allocation, motivation, and performance measurement are the main components of management control, according to Maciariello et al. (1994, p. 100). One more definition is proposed by the Chartered Institute of Management Accountants; in their official terminology MACS is “the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities” (Clinton and Van der Merwe 2005, p. 117).
Consequently, managerial accounting systems make the business players better equipped in their management and control functions. The main characteristics of management accounting control systems are: focus on future instead of the past; abstraction in decision making instead of case background; application within organization, not for shareholders or public regulators; confidentiality and privacy of information (Otley 1994, p. 290). Apart from performance management, MACS are tightly connected with strategic management and risk management.
Decent management information
Whatever strategy or technology is applied within performance management, it is impossible to do without proper information flow. At the moment information has become one of the most valuable goods in the world market. The information is sold and bought, faked and stolen, protected and verified. One who owns information is the owner of the world, Paul A. Sharman (2003, p. 2) underlines. Therefore, now there is a separate category of management – information management, or information development. It is obviously important to gain control over information, because much results of performance depend on how information is created, spread and evaluated. If the information processing is poor, the goals of the organization will be hard to hit. “Without decent management information, you cannot operate effectively,” Friedl et al. (2005, p. 57) state.
Information relationships are not easy either. When you are expecting to receive decent information from the employees, you should remember about the natural fear because of the tendency of shooting the messenger. What is more, information is often distorted, sometimes on purpose, sometimes involuntarily. Concurrently, much responsibility is thus put on the information technologies department. The IT specialists become the competitors to the top managers for the power they receive due to their knowledge, skills and opportunities. Therefore it is also recommended to provide IT cost transparency in the organization (Austin and Carr 2000, p. 299). In any case, a lot of efforts are to be taken to set a decent information interchange within a contemporary organization.
Conclusions
Globalized community affects all spheres of our life, and production relationships are especially responsive to those changes. That is why any contemporary organization that is trying to succeed in today highly competitive business environment should be aware of the necessity of performance management application. The experience of the world business leaders should be learnt and monitored for working out effective strategies and for successful application of modern technologies, including management accounting control systems and information management. Simultaneously, it is crucial to remember about the drawbacks of each innovation and to take preventive measures not to make matters worse while denying traditional approaches.
