01 Oct Management Control Systems
Management Control Systems (MCS) are vital to maximizing organizational performance, yet they are probably the aspect of operations to which organizations devote the least time.
Management Control Systems (MCS) generally make employees in organizations think of two things: meetings and report. A lot of meetings. A lot of reports. While meetings and reports feature prominently in an MCS, they form part of the formal MCS, i.e., the part that is documented. Just as important, and frequently overlooked, is the informal part of an MCS, mainly related to behaviors and the psychological contract between an organization and its employees.
Sounds complicated and philosophical – do organizations really need this? Well, there are a lot of benefits in having an up-to-date fit-for-purpose MCS, but at the same time, a poorly designed and / or executed MCS can lead to efficiency reduction.
Benefits include:
Risk reduction – ensuring strategies are followed and corrected when required, detecting non-conformance in processes and systems as early as possible
Assigns clear accountabilities – building on the organization design, the MCS clearly identifies and applies accountabilities for Key Performance Indicators (KMI), driving goal congruence through the organization
Facilitates performance management – allows performance to be reviewed at regular, timely intervals
Facilitates coordination between stakeholders – ensures stakeholders from different business areas interact on issues for which responsibilities are shared, and do so in a timely manner
Supports de-centralization without loss of control – creates a results-oriented culture based on understanding of organizational objectives and knowledge, facilitated by technology to work across geographies
Things to watch for include:
Too many meetings and reports – meetings and reports require preparation and follow-up, so too many meetings will result in the MCS becoming a transactional activity with poor preparation and follow-up, leading to a shift of focus away from business objectives
Poor behaviors – passive and active resistance, bullying and people / teams not being held accountable, render even the best MCS ineffective
Organic growth in complexity – MCS elements need regular review, as it is common for the number of meetings and reports to grow over time, as well as the number of participants in meetings and the amount of information in reports, stifling the organization
So, what is a management control system?
There is a wide range of definitions for management control systems, from very basic descriptions citing only tangible elements such as meetings and reports to highly philosophical definitions considering organizational psychology.
Before arriving at a working definition, consider the Plan-Do-Check-Act loop (also referred to as the PDCA-loop or the Deming circle). It has a range of application for projects and problem solving where there is a defined end point to the project, program, or problem-solving sessions, but if one thinks about it, a business basically consists of several PDCA-loops (think at least one PDCA loop per business function), not necessarily with a finite end point, subject to regular updates and review. The number and complexity of PDCA-loops in an organization increases with the complexity of an organization’s business processes or activities. The individual PDCA-loops may influence or be influenced by other such loops.
It makes sense therefore to consider a management control system as a system that manages an organizations’ PDCA-loops, and the following definition is used going forward:
“the collection of tangible and intangible elements required to effectively and efficiently manage an organization’s business processes”
The MCS journey
Anything from major organizational change such as acquisitions or spin-offs to re-engineering of a core business process, internal re-organization or a shift in the competitive environment could be triggers to review the existing management system. Another reason is when the administrative burden of attending meetings and reporting becomes overwhelming and key people become demotivated. Senior managers need to be aware of the organization’s management system and to understand when it generates too much administration.
When embarking on an MCS improvement project, the first step should be to ‘map’ the as-is system considering three tangible elements:
- Governing documents – for this purpose, mainly strategies and plans are considered, but policies and guidelines may also play a role
- Meetings – not just the meeting itself, but also the documentation that goes with it, as a minimum an agenda, a Terms of Reference (ToR), pre-read and an action log / decision log
- Reports – the following definition will be used going forward “a document or digital visual that presents information in an organized format for a specific audience and purpose, produced at a regular time interval”
Maps can take many formats; the schematic below shows the approach taken by the Productivity Lab. Meetings are mapped in a matrix based on the time interval at which they are held, and the main function of the meeting as being either strategy, plan (Plan in the PDCA loop) or execute (Do, Check, Action in the PDCA loop).
Reports are mapped based on the time interval at which they are produced, and the context they support.
The system elements and the MCS itself in its entirety is now reviewed by stakeholders – bear in mind that this process can become personal with employees ‘defending’ their own meetings / reports, so an external facilitator is recommended. There are two main types of review:
- Workshop – selected participants are gathered and review the MCS together. Several workshops could be held with different groups. This method typically works best for middle- and lower-level technical areas where the strategy element is not overly influential, e.g., production, maintenance etc.
- Delphi – not a true Delphi method, but this entails individual reviews, facilitated by external facilitator, with the group of individuals being presented the aggregated results in a workshop format. There may be more than round of reviews. This method works best when there are several senior managers involved and / or the business has a significant strategic component.
The final step is to re-design the MCS based on the review, and start implementation, ensuring automation of reports where possible.
Sustainability
Recalling the 3 ‘things to watch’ mentioned earlier, it is crucial that the required behaviors within the MCS are also developed, and not just the administrative parts, and this aspect can determine whether the implementation will be successful.
Coaching of meeting owners, and leadership development programs frequently accompany MCS implementations, and this can be done by internal teams or by external coaches / change agents. If done by internal resources, these need to be empowered to give frank and honest feedback to business leaders, and the business leaders need to take the feedback received to heat, and act upon it.
On a final note, the more automated the reporting can become (think digital dashboards rather than slides), the more efficiency gains will be realized.
How we can help
Whether your organization needs a complete MCS reviewed and improved, or just needs assistance with improving the MCS in an individual business area, the Productivity Lab can help!
Alan Aastorp has built capabilities and delivered performance improvements for over 20 years, including engagements with some of the world’s largest companies, as well having professional qualifications in Supply Chain Management, Finance and HR. Alan can be reached at aastorp@productivity-lab.com.
References
Belyh, A. (2018). Management Control System – Definition, Characteristics and More. [online] Cleverism. Available at: https://www.cleverism.com/management-control-system-guide/.
https://en.wikipedia.org/wiki/Report