WHAT IS A MANAGEMENT CONTROL SYSTEM – The 21st Century Rewire
Busting the myths and bringing fresh perspectives to the question of management systems, KPI’s and how to apply the theory in practice
In the beginning, back in 2015 when Alluxi was first born, one of the first blogs I posted clarified “What is a Management Control System” and how it should work. That blog has been the most visited over the years.
As business evolves, theories and terminologies move forward, and advances in technology constantly change our information landscape, the now dated blog doesn’t necessarily bring the best advice or value in today’s commercial arena.
So I’m bringing some fresh perspectives to the table for SME business owners needing to evolve their business DNA with firm foundations for greater control over their organisations. Solid management control systems will allow you, the business owner, to step back from the detailed day to day operations, and into a more strategic orbit – your Escape Velocity!
Why should you be considering your management control systems?
A management control system is a means by which to increase the economic efficiency of companies by streamlining existing processes into monitored documented procedures.
This article is designed to give you, the SME business owner, a comprehensive overview of management control systems so that you may deploy processes within your company that give you confidence in your workplace productivity
Ernest Anthony Lowe was a Professor of Accounting & Financial Management at the University of Sheffield, way back in 1971. He planted the seeds of academia in the study of management control systems, advocating the need for planning and control systems for 4 key reasons:
The need for a planning and control system within a business organisation flows from certain general characteristics of the nature of business enterprises, the chief of which are as follows:
- firstly, the enterprise has (by definition) organizational objectives, as distinct from the separable and individual ones of the members constituting the ‘managerial coalition’;
- Secondly, the managers of the sub-units of the enterprise must necessarily be ambivalent in view of their own personal goals, as well as have a good deal of discretion in deciding how they should behave and in formulating their part of any overall plan to achieve organizational objectives;
- thirdly, business situations (and people’s behaviour) are full of uncertainty, internally as well as externally to the business enterprise.
- fourthly, there is a necessity to economize, in human endeavours we are invariably concerned with an allocation of effort and resources so as to achieve a given set of objectives.
These ideas were further developed by Maciariello (et al) in 1994 who started to hone down the ideal contents of a purposeful management system, with three key components that should be designed into the system.
My mantra is If you Can’t Measure it, You Can’t Manage it
The management control system needs to incorporate some form of resource requirement planning to make sure you’re not overspending on resource, and eroding your profits.
Communication & Motivation
For me, this is at the heart of the whole system, as I’ll describe in more detail further on.
These academics developed the theory in the area of management accounting and accounting systems, but that’s quite a dry area. One of the first experts a business owner will hire in is a decent FD or Management Accountant to deal with the numbers for them.
I can hear the yawns and groans from the audience, and admittedly it’s all a bit reminiscent of the lengthy lectures I attended during my MBA course nearly 20 years after Lowe defined his 4 reasons. So let’s get some zest into this and give you some meaningful tools to apply in your business.
Definition of a Management Control System
When I speak about management control systems my audience often jump to the conclusion I’m referring to computer or IT systems. The word System doesn’t necessarily mean that IT is involved (unless it says IT System on the tin). System comes from the Greek word Systema translating into “Organised Whole”. Digging deeper Synistanai is “to place together, organize, form in order”. Wouldn’t we all love to feel more organised, together and orderly in our businesses.
So, whilst an IT system is providing the INFORMATION for two of Maciariello’s key components (the Measurement and Resource data, critical to building a robust management control system), the hardware and software doesn’t provide the third key dimension of Communication & Motivation. That one key component is a behavioural requirement from the people using the system.
This is becoming increasingly arguable however, with the exponential evolution of Artificial Intelligence. One day, in the not too distant future, we may be taking instructions from, rather than giving them to our artificial friends HAL (for the over 50’s amongst us), Alexa & Siri.
Principles of a Management Control System
Building on the definition of the system above, when designing a management control system for a business, there are fundamental principles the system needs to incorporate to be useful in achieving the organisation’s objectives ie. achieve the target profitability for the owner and shareholders, whilst keeping everyone involved happy too!
The system needs to provide a positive feedback loop – write the plan, do the work to achieve a specific goal, report back on how well or badly people carrying out the work did, review what went well or wrong, change things to improve and then start the cycle over again. This is the fundamental principal of continuous improvement, and it’s not going to change with technology.
The key benefits that a business will immediately realise when introducing a well designed control system are the following principles:
1. Remove the need for people to rely on perception or gut feel
A company run on gut feel and perception is not going to deliver the best results, nor can it be scaled up successfully. A strong system will provide the leadership team with the right information to take informed decisions and achieve an objective, fair and factual management culture.
2. Limit the influence of culture within the business
Culture can be a dangerous thing. Blame cultures are common in businesses where roles and responsibilities are unclear, not communicated or ignored. Your business control systems needs to limit the influence of workplace culture on processes with a structured and pragmatic approach that empowers workers to take ownership of well-defined responsibilities and accountability.
3. Drive Performance
If the fundamental business objectives are clearly communicated throughout the company, and the right information points are readily accessible and used on a regular basis to drive productivity and performance, then everyone in the business will be so much happier and understand the role they have to play in driving performance.
4. Lead to improved information flow and visibility across the organisation for informed decision making
Getting the right data into the reporting mechanisms is critical. The information used for determining how we’re doing must be Current (not 6 weeks out of date), Correct (check the source) and Consistent (don’t keep moving the goalposts).
5. Create a Dedicated Forums to Review
Ensure that critical data, information and activities have a dedicated forum for planning, reviewing, refining and follow-up of the performance and output. Key Performance Indicators (KPI’s) for each job role will determine the content, but every individual team member should have the opportunity to review their own work with their manager at least weekly.
In an ideal world, there would be no need for annual performance reviews, as the whole team would know exactly how they’re performing through the system. With a meeting structure in place with structured and standardised agendas in place, the time spent in meetings overall should be reduced, and the efficiency of the meetings will be hugely improved as objectives, expected outputs and clear action plans are defined and recorded.
6. Structure the way people work, leading to behaviour change
Without stifling creativity, the system will lead to improved workflows, the processes being continuously reviewed and improved and the work environment will become more positive and focussed as problems gradually melt away. Endeavouring to pinpoint and reduce bottlenecks, backlogs, downtime or quality issues becomes part of the culture, where improvements are rewarded.
The system brings this about by design, rather than slow and random “mutation” or sticking plaster solutions that only bury the problems deeper, instead of getting them out in the open and resolving the root causes.
7. Lead to better RESULTS
By it’s nature, designing and implementing a tailored management system is to support a culture of continuous improvement, empowering every team member to contribute towards identifying areas for improvement. That will be rewarded with better results, optimising productivity and maximising profitability for the business.
Components of a Management Control System
There are just 5 simple components to creating a management control system that will get everyone synchronised and working in tune with each other.
You might call it your Budget, company Objectives or Goals etc, but whatever it’s referred to in your business, this is your starting point. Defining WHAT you want to achieve. There are many areas that your WHAT may cover: profit, turnover, quality, employee engagement – these are all different KPI’s which we’ll come onto, but critically the Forecast must be tangible, measurable and explained/communicated to everyone in the organisation, to set a common goal from the start (remember the SMART goals).
The plan must get into the detail of HOW you’re going to achieve your WHAT. If you’re forecasting £20m profit, then that needs to be translated into operating indicators eg. how many sales does that represent at what average order value, how many clients do you need to onboard (if you know your historical conversion rates), how many people do you need in operations to produce the goods, deliver the service to the required quality, how much administration is needed in the background or outsourced, to ensure the employees are paid, invoices are sent out, IT systems are working optimally.
The plan has to clearly set out the OUTPUT expectations, and the budgeted resources you need to INPUT to achieve the desired profit margins. These are the basic measures of PRODUCTIVITY.
Monitor & Control
This is the HOW ARE WE DOING moment, a critical point in the process to prevent going completely off plan, and costing you precious time, materials and money.
The terminology may sound somewhat draconian, but the principle is that each supervisor, manager or leader will have a regular review point built into their management system, to check on the progress of work frequently enough to make sure progress does not get so far off schedule it can’t be rectified, but not so often it feels like you’re micro-managing.
Regular check-ins with staff to review their individual progress against a defined plan is a systemic behavioural requirement, and the manager’s opportunity to help their team to SUCCEED. The mindset around managing should be one of collaborating to achieve the overall company goals, not a culture of cracking the whip or treating people like robots. The skills and competencies of all levels of management and leaders in the company has to be invested in. Promoting the best performer to be a manager is not necessarily a good strategy.
Reports simply provide data or information. How that information is used is the main problem in many businesses. The important principle here is that each individual should be responsible for reporting on their job role’s KPI’s and knowing how they are performing against the plan.
So many company’s I consult to have a disconnect between the information management are using to run the business, and the people actually performing the work not having a clue how they’re doing. The reports are essential to monitor historical trends, and offer snapshot views of how the work is progressing at any particular point in time. The reporting should be the key focus of the final element in the cycle – ACTION.
Action & Commitment
This is the big heart at the centre of the cycle, for a very deliberate reason. If the information from forecast to reporting are not used by management and their teams to drive action towards continuous improvement, you might as well stop wasting your time producing the data.
The management system requires at its heart, regular review points – meetings – to trigger active dialogue and discussion between managers and staff, in meaningful conversations driven by useful, focussed data. I believe every employee deserves, and will thrive from, an individual review with their manager at LEAST once a week (or more frequently depending on how quickly the work can go off schedule).
Part of the design process of management systems is a meeting plan, with clearly defined agendas. Training is also required to coach everyone involved how to use the system and reporting, bringing the data into review meetings, identifying where problems exist and work to find solutions to improve next time round.
Putting Theory into Practice
The 5 component cycle above, is a simplified explanation, but building a business control system into your organisation has to take into consideration the different levels and departments, each having their own system tailored to their deliverables. The basic behavioural process is the same – the information and frequencies are tailored to the operations of the teams or departments.
This top-down, bottom-up approach shows how the business control cycle needs to be integrated at every level of the organisation. The forecasting and planning includes goals and targets which simplify the annual budgets – normally in the form of financial indicators (Turnover, Costs, Expenses & Profit) into more meaningful Operational indicators in each department.
The cycle then feeds from the bottom-up through the monitoring and reporting mechanisms, driven by the review meetings and action points, to feed the actual results back up to the Board. The beauty of the cycle is that each element is repeated at each level, but if any one part of the system breaks down, it will be highlighted above or below, so no-one can drop out inadvertently.
Example of a Management Control System
Clearly not all companies have a four-level hierarchy as used in this example. Your system needs to be tailored to your own circumstances. Here’s another perspective of how this may look in practice. The clouds represent the meeting/review points, ideally with an Action Log (pink), and fed by the Plan vs Actual reporting documents (blue).
You also have to visualise this in 3D, or two or three of these layered over each other, as a Managing Director may have anywhere from 2-6 managers reporting to them, and each manager may be responsible for more than one supervisor from various departments. This doesn’t necessarily mean a report will be generated for each manager or supervisor.
The information flow is a completely different design process, and this is the point where your software and IT systems will play a big part. The idea is not to create excessive amounts of admin in creating the reports.
Recent advances in artificial intelligence means repetitive reports and spreadsheets can be created automatically – the important point is that each manager, supervisor or employee takes OWNERSHIP of their reports, and are held accountable for the results. Getting the results into a readable and usable format is the important technical exercise.
Take Care of the KPI’s and the £’s take care of themselves
Do you remember the old saying “Take care of the pennies and the pounds take care of themselves”? One of the most concerning issues I’ve come across in many SME’s is the lack of information to determine how the business is doing against its annual forecast. Most business owners rely solely on the management accounts at best on a monthly basis, and even then having to wait 2 or 3 weeks after month end to see their results.
This is too late to then go back and take corrective action to improve the results if the profit margins weren’t achieved in the previous month. Hence why the management system needs to translate the annual financial forecasts and budgets into operating indicators that can be measured more frequently, say daily or weekly, to ensure the activity of the business will eventually translate into a profit when the management accounts are published 2 months after the work has been done. That means defining KPI’s that relate back to the financial objectives.
For example, if the annual budget forecasts a £120,000 turnover for the year, in a non-seasonal business, that would mean £10,000 per month. If we know the average order value is roughly £100 per order, then the sales team needs to be generating 100 orders per month, or roughly 25 a week. If we have 5 people on the team, then they would each be targeted to achieve 5 orders of at least £100 a week each . That’s two KPI’s to start with
We can take this one step further if the company knows it’s historical conversion rate. If we take an example conversion rate of 20%, then each salesperson would have to receive or make 25 phone calls a week to convert 5 orders, which would be another indicator the manager can use to monitor and supervise the team’s performance.
So just in this simple example, we have 3 KPI’s that the sales team can report back on each day or week:
- of calls made
- No of orders
- £ Value of Order
At the end of each day, or week, the manager has an objective and tangible point of reference to review each sales person’s performance and progress against the planned 25 calls, and 5 orders at £100 average order value.
In addition, as part of the Managers role to train and coach the team in improving their skills, maybe grow the conversion rates, or manage their time to make more calls or deal with more enquiries, the manager could be joining a call or monitor how the salesperson deals with a client or enquiry and make suggestions to improve their techniques, or handle objections.
As the salesperson improves their skills the results begin to bear fruit. After a few months you might then find you can increase the targets to maybe 30 calls converting to 10 orders – improving the conversion rate to 33% – at an average of £125 per order, pushing the turnover up by 25%. This is continuous improvement, and it doesn’t have to be a threatening or pressurised process over the employee.
The important point here is that, instead of waiting until 3 weeks after month end to find out from accounts that sales are down, and profit margin reduced, the business stands a much better chance of succeeding if the operating indicators show where small changes, training or corrective action is needed in shorter time frames to achieve as close to the plan as possible – or exceed it! This is Proactive Management and leads to better results. You take care of the KPI’s on a day to day or week by week basis, and the £’s on the bottom line will take care of themselves.
So having shaped up HOW the system needs to flow, we need to focus on WHAT the key information is that the leaders and managers require, to determine whether their team is having a good or bad day/week without waiting for the financial reports.
The KPI’s should be determined when designing the job roles, and included in the job descriptions when recruiting staff so they understand exactly what is expected of them, and how their performance will be measured.
Don’t worry if you haven’t done this already – job descriptions can be evolved to include these, without necessarily changing the terms and conditions of the job (which you may need to check with your trusted employment lawyer).
There are four key criteria when developing the KPI’s, which should include at the very least indicators of performance in:
Quantity – what is the volume of work expected within a defined time frame
Quality – how are you defining the quality and where can this be measured
Cost – what budgets does the staff member have to work within if they have authority to spend
Time – how much of your resources valuable time is needed to achieve the planned amount of work
Using KPI’s to Manage Resource Allocation
The beauty of translating the budget or forecast into KPI’s is it allows you to determine how much resource you’ll need to achieve your overarching business objectives. I spent much of my management consulting career working in corporate organisations making a high percentage of their workforce redundant as they’d grown too large, out of control, resulting in profit margins being eroded, putting the whole business (and all it’s employees) at risk.
The KPI’s allow you to build a robust Resource Requirement Plan (RRP), providing you with a measurable framework of how much resource you need to pay for, to achieve the work required to reach your profit goals. You can then recruit the right number of people, allowing for a reasonable standard rate of work – not treating them like robots – and ensuring your salary costs are within budget.
What often happens, however, is the business owner tries to do too much of the work themselves, to save money. As the business grows they begin to feel the pressure and rather than sitting down and calmly planning what work needs to be done and how much time would be required, they panic and recruit (or outsource) more staff whose work invariably ends up sorting out the problems rather than adding value to the business.
Instead of designing an efficient process or system, the work piles up, more problems arise and more people are recruited in a knee jerk, gut feel reaction, without resolving the problems. The business starts to suffer financially and inevitably will fail because of the lack of strategic thinking, financial and resource planning from the outset.
A solid RRP will list all the activities carried out in any part of the business, a rough time guide of how long each activity takes so you can total up how many hours of resource you’d need to recruit for that job role and hire accordingly. That way, you can build in a more accurate cost forecast for your products and services to make sure your prices definitely cover your costs. Then add on your profit margin and you should see the positive results in your bottom line.
Employee Engagement Levels will Soar
One of the exercises I run with delegates as part of Alluxi’s Leadership Development Programme, is called “System/No System”. It involves 3 teams competing against each other to achieve the best performance of a simple task in 30 seconds, over 3 runs. In just a short half hour interactive game it clearly demonstrates how the results of an organisation can only be influenced by a behaviour change in the way people do things, which in turn can be positively influenced through a balanced, two pronged approach of systems and training.
The task is identical for each team, but one group is given the task with a system and training to improve their performance; the second group receives the system, a little bit of training, but then the system is removed from them in the last run; and the 3rd group receive no system or training at all and just have to manage as best they can with the resources they have.
Before starting the exercise I produce a sealed envelope with my guess as to which team is will achieve the best results. I’ve never failed yet. The group who receive the system, and training in how to use it to maximise their performance, ALWAYS achieve results 30%-50% better than the other two teams.
Not only do they perform better, but in the short time it takes to run the exercise that high performing team become more animated, motivated and engaged with each other to continually get better results in each run.
The team who receive no system or training, however, become increasingly perplexed during the exercise as to why their results are so significantly lower than the other two teams. By the third run, they are visibly deflated and starting to get frustrated with each other.
Their motivation is declining and the team “culture” deteriorates. The team who have the system taken away from them in the last run have, by that stage, worked out how to complete the task effectively, but the human brain only has so much capacity to memorise large amounts of data and cannot sustain the performance levels without the system.
The overall conclusion in the argument for systems and training are that:
With no system or training
A Group will improve somewhat through practice & experience
BUT – Opportunity for better results will never be known
Practice & experience goes out the door when staff leave
Introduce a system and training
Results improve significantly
BUT – Performance deteriorates if the system is removed
Significant & Sustainable results can be achieved
With a robust system designed to improve results
Reinforced with training to ensure the users make best use of the system
New Starters attain desired performance levels much sooner
Low staff engagement can be a hidden, intangible cost to the business. The effects of a positive feedback management control system on employees should be a hugely rewarding environment to work in. A few of the benefits you can expect, once it’s implemented and running smoothly are:
- Clear roles & responsibilities across all functions
- Each employee controls and manages their own area of responsibility instead of being controlled by his/her manager, driving autonomy and accountability from the board room to the front line.
- Managers and supervisors act as coaches and facilitators towards their subordinates, rather than authoritative commanders
- Flexibility to shift focus when there are changes in key areas
- Rapid reporting of operational problems, and their impact quantified to determine which are serious and which can be managed, and root causes investigated rather than just sticking plasters over the cracks
- Holistic continuous improvement across the whole organisation driven by operational plans and constructive challenge
- Common focus that drive goals across all the roles and functions
- Standardisation of best practice – eliminate the negative, perpetuate the positive
- Fewer, shorter and more effective meetings
- Fact based, informed decisions
Despite the paradigm that people perceive having a system is going to make the work feel mechanical and too controlling, the opposite is true. So long as the leaders and managers in the company are given the skills and competencies to coach and facilitate their staff to succeed in their roles, the system will be the guide that keeps everyone on the right tracks.
The management control system acts like the conductor of an orchestra. Every player is a master of their respective instrument, but there has to be a guiding force that keeps the beat, creating the beautiful music – that’s what the system does. Alluxi acts as the conductor of an orchestra – working with you in your business to design and implement bespoke productivity evolution initiatives bringing our global productivity expertise to your own operations.
Bringing Management Control Systems into the 21st Century
Understandably, many business leaders fear that a management control system will consume time and energy putting together forecasts and plans, getting reports built and implemented and expecting staff to fill in spreadsheets on top of their workload.
With the advancements in technology, especially artificial intelligence, and the software available today for project management, task setting and time managing, the actual collation and reporting mechanisms can be fully automated, leaving the team and management to focus on the important stuff that’s going to bring value to the business, but now having the tools and information to achieve greater results.
The important point to make is that, however the data is collected and whoever has responsibility for getting the information into report format and distributing it to the people who need it, the RESPONSIBILITY for the information and results remains firmly on the shoulders of each employee, and this in turn will bring greater employee engagement to your company culture.
YOUR NEXT STEPS TO GREATER PRODUCTIVITY
Alluxi is here to offer you support through these times of change, bringing a facts and figures approach to evolve your business and realise your goals.
As a first step towards identifying your current business challenges and evaluating where your future opportunities exist within your business, we invite you to complete the in-depth Alluxi Business Success Scorecard delving into the 10 key critical success areas.
Take 15 minutes to respond to the scorecard and get your results within minutes. You’ll be invited to book a follow-up Productivity to Profit Breakthrough Session to find out how you can implement rapid and measurable improvements.
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