Digital Garden of Paul

Diving into the different views of management control

(Anthony and Govindarajan, 2007)

Management control is the process where managers influence other members of the organisation to execute the strategy. A management control systems is a set of activities that is defined to achieve a desired management goal. Examples of a management control system are planning, budgeting, performance measurement and rewards.

Internal and external factors influence the level of achieving Goal Congruence. Informal factors are inherit to an organisation, but not formally defined. It could be the culture of the organisation or the way of communication.

External factors can be formal or informal. Informal external factors are things that define expected behaviour without being formalised in laws or policies. For example regional expectations on lunch times and duration. A lunch meeting in the Netherlands is short and concise, where a lunch in Barcelona takes way longer.

Formal systems play a role in the planning and control cycle of an organisation. These formal systems can be categorised in management control systems. For example budget and balanced score card.

The management trilogy (Schepers and Franssen, 2010)

Central to the view of these authors is the instrumental approach. Putting the planning & control cycle at the core of its trilogy. As such it is much a single-dimensional view of management control.

This view strongly overlaps with the view of Anthony and Govindarajan. Both are centred around an instrumental approach to management control. The three pillars need to form a balanced whole with each other to perform well.

Schematic overview of the management trilogy

This trilogy overlaps in many ways with the view of Anthony and Govindarajan:

  • The soft controls are comparable with the informal factors of Anthony and Govindarajan.
  • The elements of this trilogy strongly overlap with the formal control elements of Anthony and Govindarajan, but are categorised differently.

Using this trilogy can be valuable to discover a baseline of management control at the organisation. Four questions are important for discovering this baseline:

  1. Are the three pillars in balance?
  2. Is the planning & control cycle adequate?
  3. Are the methods & techniques adequately developed?
  4. Is the organisation able to implement a control system?

A multi-dimensional view (Merchant & van der Stede, 2012)

In this view the authors see management control to have a focus on execution. The question of strategy formulation and validation (strategic control) is out-of-scope. The general question with regards to management control that the authors pose is:

Are our employees to behave appropriately?

They break down this question into several parts:

  • Do employees understand what is expected of them?
  • Will they work consistently hard and do what is expected of them?
  • Are they capable of doing a good job?
  • In case of a negative answer on any of these questions, what can we do to solve it?

Related to the problem of Goal Congruence, this view focusses on the job of managers to ensure that employees do what's best for the organisation. As such it is highly oriented around behaviour.

A couple of causes to management control problems are:

  • Lack of direction
    • As employees do not know what is expected of them, they simply can't perform well
  • Motivational problems
    • Employees sometimes act in their own interest at the expense of that of the organisation. Putting the self-interest before that of the organisation.
    • The authors relate this to a Taylorism view, in which Taylor states that employees do anything they can to go as slow as possible, while convincing the employer he is going at a good pace.
  • Personal limitations
    • While employees might understand what is expected and be highly-motivated they might simply be unable to do so. This could be due to lack of training, experience or aptitude.

Any of these three problems are addressed by an effective management control system. Which is almost inevitable in any complex organisation. Good control is described by the authors as:

management can be reasonably confident that no major unpleasant surprises will occur.

Important characteristic of good control is that it is future-oriented. It's about prevent unpleasantness in the future. Next to that it has to be objective-driven. As objectives describe the objectives the organisation wants to achieve.

The authors recognise four controls as essential part of management control:

  1. Results controls
  2. Action controls
  3. Personnel controls
  4. Cultural controls

Results controls

Results controls are an indirect form of control. These controls do not directly target the actions or decisions of the employee. The goal is to influence the employee to work towards the desired results, which is being rewarded. Pay-for-performance is an example of a results control. Promotion or recognition being other, non-monetary examples. Results controls support in creating meritocracies, an organisation where rewards are given to the most talented and hardest working employees.

In order to foster and organise decentralised forms of organisation, results control yield large success. By focussing on desired results. the autonomy and local decision-making how to get to the result could be made by the decentralised function, whilst senior management was in control of results and performance.

Results controls require four steps for implementation:

  1. Defining performance dimensions
  2. Measuring performance
  3. Setting performance targets
  4. Providing rewards for reaching the target, encouraging the behaviours that will lead to the desired result

Not in every situation results controls are effective. The authors defined when all of the following conditions are present, results controls work best:

  1. Organisations can determine what results are desired in the areas being controlled
  2. The employees whose behaviours are being controlled have significant influence on the results for which they are being held accountable
  3. Organisations can measure the results effectively

Effectiveness of results is judged by the ability of evoking the desired behaviours. To do so a measure has to be:

  • Congruent with the desired results area
  • Controllable
  • Precise
    • Under similar conditions, a measure shows the same results. Precise measures ensure consistent measures.
  • Objective
    • A measure that is unbiased and free from personal feelings.
  • Timely
    • The lag between the performance of the employee and the measurement of results should be as short as possible. This has to do with motivational and value of any interventions when required.
  • Understandable
    • The employee who is being monitored needs to understand what it is the person is being accountable for. Also, they need to understand what they must do to influence the measure.
  • Cost efficient

Action controls

Action controls ensures that employee perform actions that are beneficial for the organisation. Of course, action controls can also be about preventing actions that could harm the organisation. For example, preventing access to websites that are known to install malware on the visitors computer.

Action controls can be of one of four different forms:

  • Behavioural constraints
    • They make it impossible, or more difficult to perform things that should not be done. This can be physically (locks on desks) or administratively (separation of duties)
  • Pre-action reviews
    • Reviewing and potentially request changes before execution. For example a review of a project initiation document.
  • Action accountability
    • Holding employees accountable for the actions they take. This requires:
      • Defining what actions are acceptable or unacceptable
      • Communicating those definitions
      • Observing or tracking what happens
      • Rewarding good actions or punishing those actions that are not
  • Redundancy
    • Assigning more employees or equipment then necessarily required.

All action controls have the purpose to prevent any future problems. Only the accountability controls also have a detection function. For example in the case of compliance audits.

In order to make action controls effective, the following conditions have to be present:

  1. organisations can determine what actions are desired or undesired
  2. organisations are able to ensure that these actions occur or do not occur when desired

Personnel controls

Personnel controls extent the normal behaviour of humans to control or motivate themselves. These form of controls serves three purposes:

  1. Clarify expectations
  2. Ensure that each employees can do a good job
  3. Increase the likelihood that one engage in self-monitoring

Implementation of these controls can be achieved via:

  • selection and placement
    • Finding the right people to do a particular job
  • training
  • job design and resourcing
    • Providing a good work environment and necessary resources to do that job

Cultural controls

Cultural controls are designed to encourage mutual monitoring. These form of control is most effective where members of a group have social or emotional ties to each other. Organisational cultures can be shaped in many ways. The authors mention the following methods:

  • Codes of conduct
    • Formal written documents that provide broad, general statements of organisational values, commitments to stakeholders and ways management would like the organisation to function.
  • Group rewards
    • Create a culture of ownership and engagement to control each other in terms of behaviour and results
  • Intra-organisational transfers
    • Transmit culture by rotating employees throughout the organisation
  • Physical and social arrangements
    • Design of the office, or the language used at the company help to shape the culture.
  • Tone at the top
    • Statements and actions of the top should be consistent with the desired behaviour.

Control in an age of empowerment (Simons, 1995)

Simons describes four levers of control:

  • Diagnostic control
  • Belief systems
  • Boundary systems
  • Interactive control systems

Diagnostic control systems are like the dials in airplane cockpit. The display how systems and critical indicators are performing, allowing the pilot to make critical adjustments when required. This form of control is in great use at many organisations. It is being used to monitor goals and allow to generate feedback to adjust where required. Although these systems are great to indicate performance, they are not effective control measures. They can create pressure on the ones responsible for the goals and cause control failures.

Belief systems display the key tenets of the business, how the organisation creates value. They are inspirational and concise. Examples are "best customer service of the world" or "pursuit of excellence". It takes everyone involved to actually live the values. Actions of senior management and employees need to be aligned with the belief system and deeply rooted. Formal belief systems help the employees to understand the core values and place of the business, especially in large, decentralised organisations. Belief systems can inspire employees to discover new ways of creating value.

Boundary systems based on a management principle of "the power of negative thinking", boundary systems describe what employees should not be doing. In favour of telling employees what to do managers should tell them what not to do, and allow creativity to thrive for the things they should be doing. Allowing for innovation, but within clearly defined limits. An example of a boundary systems is a list of projects a construction company should stay away from as they learned it are not profitable projects.

Interactive control systems are like weather-tracking systems. It's about collecting and analysing information from a multitude of sources. It is a way for managers to involve themselves in decisions made by subordinates. Four characteristics describe interactive control systems:

  1. Focus on constantly changing information
  2. Significant enough information to warrant frequent and regular attention
  3. Generated data and interpretation are best discussed in face-to-face meetings of superiors, peers and subordinates
  4. The system is a catalyst for ongoing debate about underlying data, assumptions and action plans.

Collectively using these controls set in motion powerful forces that reinforce each other.

Performance measurement and management (Burns et. al)

In their book Management Accounting, Burns et. al. (2013), describe performance measurement as 'seeing' how an organisation is doing, in comparison to its aims and objectives. Normally multiple performance measurement systems can be found in an organisation. For example, a localised system in a factory to monitor the performance of its unit. Performance measurement is a role that traditionally take quite some time from a management accountant. Primarily by the tasks of:

  1. involving the measurement of financial (or financially related) performance
  2. comprising comparison of actual performance measures against historic targets
  3. performing a controlling and policing task

The last 20 years or so an increasing adoption of performance management is seen. Performance management not only involves the measurement of an organisations performance, but also the continuous redesigning, monitoring and acting upon such measures.

Performance measures

Traditionally the financial performance is predominantly measured, the 1980's sparkled a focus on non-financial elements of the organisation. Two main strands of arguments can be found in the rush of new publications:

  1. Calls for an increasing use of non-financial measures
  2. Using more modern financial measures.

Fitzgerald (2007) classified these arguments as the stakeholder and shareholder approach. The shareholder approach argues that financial performance management is the most important measure in an organisation. It assumes that measuring and rewarding the activities that will generate shareholder value will lead to an increase of shareholder value. In contrast the stakeholder approach argues that organisations should apply sufficient non-financial measures next to financial measures. These measures should be close linked to, or integrated in, the strategy of the organisation. Main belief in this approach that financial performance is not enough to have a competitive advantage over competitors.

The Balanced Scorecard is a popular example of a multidimensional performance measurement system. Fitzgerald (2007) notes the following common thread in multidimensional performance systems:

  1. Linking with an organisation's strategy, over time
  2. Incorporating both external and internal derived measures
  3. Built around both financial and non-financial measures
  4. Highlighting and making explicit any trade-off between respective measures of performance

The authors describe two main elements of a performance measurement system: a) responsibility and b) rewards and compensation.

Responsibilities formalises the duties that different organisational members or groups are expected to do. Describing who does what. Decentralised organisations have pushed down responsibilities and authority. Opposed to centralised organisations where all decision power and responsibility lies with the top. Measuring the performance of an unit by their managers towards the set performance is called responsibility accounting. Part of this process is the evaluation by peers on the performance of the organisation. Theory recognises four types of responsibility centres:

  • cost or expense centre
    • The manager has the responsibility over the costs of their unit. Typically the manager has the least responsibilities compared with the other centres.
    • Two types of cost centres exist:
      • standard cost center; outputs of production are known and can be measured in financial terms
      • discretionary cost center; where output cannot be measured in financial terms, and it is difficult determining the relation between input and output. Often these are internal services. HR and financial services are examples of this
  • revenue centre
    • Units where managers are accountable for the financial outputs that belong to generating sales revenue.
  • profit centre
    • Managers are responsible for both costs and revenue. The manager has a great deal of autonomy and responsibility about the centre.
  • investment centre
    • Like a profit centre the managers are responsible for both costs and revenue, but next to that are responsible for working capital and capital investments. For example, a manager is allowed to expand the size of operations without getting approval.

Rewards are meant to influence the behaviour of the organisation towards the desired outcome as measured by the performance system. It requires deliberate design to ensure that rewards lead to the best interest of the organisation. Three important attributes are defined by Fitzgerald (2007) for a reward system:

  • Clarity
    • Do impacted employees know and understand the performance targets and why this is so?
  • Motivation
    • Are the set targets generally accepted by the employees?
    • Does the reward systems provide advantages for the employees when going the extra mile?
  • Controllability
    • Are the employees in control for the the things have responsibility for?

The traditional approach of responsibilities and incentives has received it's share of criticism. It assists managers in their planning & control approach. However, it leads toward a narrow economically rationalised approach. Critics pointed out that this system would lead to individualisation effect. Leading to a system where colleagues are in competition with each other. The predominance of financial measures forms another angle of criticism, one that led to the rise of using more non-financial measures.

When choosing performance measures it is important to consider:

  • Fairness and achievability
  • Controllability
  • Alignment
    • Measures need to be set in a way that they motivate to pursue the best interests of the organisation as a whole
  • Groups
    • When measures are targeted at a group it should reflect the average effort and input of all members
  • Culture
    • Behaviour and reactions to a measure will differ per culture

Performance management

The practice of performance management is concerned with defining, controlling, managing both the achievement of outcomes or ends as well as the means used to achieve these results at a societal and organisational, rather than individual, level. Performance management is centred around three questions. Questions that relate to the strategic objectives of an organisation:

  • What dimensions of performance does the organisation seek to develop?
  • How will appropriate targets be set?
  • What rewards and/or penalties will be associated with achievement of performance standards?

Given the dimensions that an organisation wants to develop targets need to be set. Fitzgerald (2007) argues that establishing these targets require:

  • Ownership
  • Achievability
  • Equity
    • Targets should be equal for different units. Meaning, one target should not open up for unfair advantages for other units,

Otley developed a framework to design an performance management system based on 12 questions to ask. Performance Management Systems Framework.

About the consequences of performance measurement (Power, 2004)

Power recognises three fundamental areas concerning performance measurement systems:

  1. Reductionism, inherently part of measuring
  2. The relation how monitoring and control is designed
  3. Measurements of the first and second order, how they are used by experts, and their objectivity

Reductionism is inherently part of measuring in order to get to countable units. In order to count things the most common similarities need to be emphasised and less common ones ignored. For example: horses are not individual identical, but in order to count them we reduce them the classification as a horse. The acceptance of such a unit is defined by the day and age, and culture one is part of. With regards to organisations performances are measured without the presence of suitable instruments. This is a kind of an imperfect match between the available instruments and the precision of the thing one wants to measure.

Critics of accounting and other performance measurement systems argue that complex entities can't be rightfully measured due to reductionism. This are forced to be measured which are actually can't be measured. As a result it provides a feeling of reliability that should be called apparent reliability.

Relation between monitoring and control performance measurement systems imply that different actors with the same data and technology would yield the same performance. Called administrative replication. However, who applies the technology is important to legitimate a result.

First and second order of measurements. A first-order measurement relates to the classification that allows for the counting. A second-order measurement relates to the deep-dive of the first-order measurement and the definition of ratio's and indexes, based on statistical and algebraic calculations. Power argues that second-order measurements are increasingly being seen as the truth, while they are better are judged by an individual. A credit rating score is an example of second-order measurement. As an abstraction from original observations it is doubtful if it actually says something about the thing observed.

Although measurements offer a common language and framework for judgement, it also has downsides.

  • Only part of the complexity is being made visible.
  • Performance measures can lead to a fixation on targets and gaming the system (Goodhart's law).
  • Causes mediocrity and risk-avoidance as one focuses on the targets for this year, taking into account the targets for next year
  • Measuring becomes the target
  • Continuous effort to make measures more granular (From profit to balanced scorecard)
  • What is hard to measure moves to the background
  • Further refinement of contracts between parties
  • Measuring leads to the creation of new measurable subjects, e.g. risk groups in healthcare
  • Tension between the reliability of the measure and the relevance for decision-making. Historical costs are typically reliable to measure, but of little relevance for decision making

Dysfunctional effects of performance measurements (van Dooren, 2006)

Performance measurements allows for negative manipulation. This manipulation can be done in different ways as van Dooren (2006) displays.

Effects of the use of performance information

  • The first arrow shows a situation where the measurement is manipulated, but not the output
  • The other arrows shows the situations of dysfunctional effects of measurement.
    • Arrow two shows the situation of an imperfect measurement system
    • Arrow three has a solid measurement system

Manipulation of measurement can be done via:

  • Having a higher or lower value measured then reality.
  • Having more or less observation points
  • Having a imbalance between the number of indicators. Too many can give too much priority to the value.
  • Measurements can be distorted due to different definitions or concepts
  • Conscious manipulation of data
  • Wrongful interpretations as it is hard to be aware of all potential influences on a measurement

In the case of manipulation of output it could be that the measurement is perfect. but that the thing observed has changed. This could be caused by:

  • Measure fixation. Reaching the targets without influencing the desired effect,
    • Measuring an output could lead to a higher value of the output (hypertrophy)
    • Decrease of value can happen as well due to large quantitive measurements (atrophy)
  • Too much emphasis on the short-term, losing focus on the long-term (myopia)
    • e.g. solving crimes instead of preventing them
  • Just focussing on what is being measured
  • Local organisational goals could impact super-organisational goals
  • At intake organisations could cherry-pick measurements
  • Gaming the behaviour and output for strategic reasons.
    • Lower performance in year 1, so the targets will be lower in the following year.
  • Polarising effect on good and bad cases.
    • Rather a single bad one, then a lot cases that are just off to not influence the performance indicator

Contingency theory (Merchant & van der Stede, 2012)

Each management control systems is unique and tailored to specific needs. These specific needs are determined by situational factors that affect the effectiveness and/or cost of the various management controls. Merchant & van der Stede recognise three important situational factors.

  • Environmental uncertainty
    • The broad set of factors that make it difficult or impossible to predict the future in a given area. This could be in the area natural changes (weather), political and economic climate, or actions of competitors and customers.
  • Organisational strategy
    • Larger and complex organisations typically specify two levels of strategy:
      • Corporate strategy
        • The businesses the organisations chooses to be active in and division of resources. Does an org aim for a portfolio of related business, e.g. a number of washing detergent oriented businesses, or does it opt for a broad range of unrelated businesses. For example Philips that has an entertainment business line and a medical business line.
      • Business strategy
        • The way a business unit chooses to compete in its market. In what way does the organisation chooses to gain an sustainable advantage on their competitors.
  • Multi-nationality
    • The geography factor requires managers to be sensitive for local cultures that might perceive the management control differently. Three sets of factors have shown to affect management control systems choices or outcomes.
      • National culture
        • Norms and values differ across cultures leading to different behaviour and acceptance of management controls.
      • Local institutions
        • Laws and governance vary greatly across countries affecting the management controls.
      • Differences in local business environments
        • uncertainty; due to behaviour of governments and company growth patterns.
        • inflation; could allow for financial risk as financial assets could be devalued quickly
        • talent; lack of qualified personnel and cultural differences in personnel mobility

New public management (Merchant & van der Stede, 2012, de Bruijn, 2003)

Not-for-profit organisations distinguish themselves from for-profit organisations by its purpose. Non-for-profit organisations typically provide some kind of public service. This could be a library, university or hospital. Religious organisations and some charities serve private benefit purposes. Where for-profit organisations have outside equity interests, this typically does not hold up for not-for-profit organisations.

Not-for-profit organisations have characteristics on management control systems that can't be found on for-profit organisations:

  • Goal ambiguity and conflict
    • Typically constituents of an organisation have interest, but don't agree on elements as goal or its performance.
  • Difficulty in measuring performance
    • A single definition of performance as profit or revenue often doesn't exists for a not-for-profit organisation. For example what determines the success of a hospital? Death rates, cure rates for a specific decease or prevention rates?
  • Accounting differences
    • Form and content of financial statements can vary wildly due to lack of standardisation.
  • External scrutiny
    • Where for-profit organisations typically serve and answer a group of shareholders, the non-for-profit organisation is under scrutiny of a large set of constituents. For example donors, alumni, society and governmental entities.
  • Employee characteristics
    • Financially not-for-profit organisation have to offer different packages compared to for-profit. In contrast they often hire people that are highly-invested towards the purpose of the organisation. This high-motivation solves control problems as lack of direction.

Output steering in public organisations: product & process approach (de Bruijn, 2003)

de Bruijn dives into the performance management from the viewpoint of output and outcome. Output is targeted at the direct effects of the government interventions that can be measured directly. @@Outcome is centred around the long-term effects of the interventions.

Output measurement is primarily targeted on the product perspective. Regarding product management the author notices a number of positive and perverse effects.

positive effects:

  • Output measurement brings transparency
  • Incentive for production and thus enables control
  • Elegant form of calling an organisation to account

perverse effects:

  • Incentive for strategic behaviour
  • Leads to bureaucracy
  • Blocks innovation
  • Blocks ambition
  • Kills the professional attitude
  • Kills system responsibility

The perverse effects lead to a distorted view of the professional performance. The complexity is drastically reduces and leads to problematic judging. Three mechanisms are at play here:

  • Law of decreasing effectiveness
    • Professionals will start to behave accordingly to the incentives provided by the system
  • Law of resistance of output systems
    • Perverse effects will occur, but they can become overcome. There is a misbalance with the cost of the system being on the professional layer, but the benefits on the managerial side.
  • Law of policy accumulation: mushrooming
    • Expansion of the output performance system. The shortcomings of the system are remedied by carrying out repairs to the system.

An alternative is to look, and manage, the process rather then the product. The focus here is to look at the performance of the organisation, rather then the output it creates.

Just like product management perverse effects occur in process management. @@@Non-intervention principle occurs. The expectation of a professional that another professional does not interfere with its work

perverse effects:

  • Generation of defensive and advocative reasoning.
  • Possibilities to change or innovate are ignored (pigeonholing)

To overcome the perverse effects of the product and process management view the author suggests to use both perspectives and utilise the tension between the perspectives. Inspired by Competing Values Framework an organisations has to consciously balance the tensions. It requires moving between product and process and defining the relation between product and process.

As a result it reduces the incentives for perverse behaviour and mushrooming. Allowing room for out ome figures next to pure output features.

Effects on use of performance measurement systems in the public sector (Speklé & Verbeeten, 2014)


Burns, John, Martin Quinn, Liz Warren, and João Oliveira. Management Accounting. UK ed. edition. London: McGraw-Hill Education / Europe, Middle East & Africa, 2013.

Merchant, Kenneth A., and Wim A. Van der Stede. Management Control Systems: Performance Measurement, Evaluation and Incentives. Pearson Education, 2012.

Power, Michael. “Counting, Control and Calculation: Reflections on Measuring and Management.” Human Relations 57, no. 6 (2004): 765–83.

Van Dooren, Wouter. “Performance Measurement in the Flemish Public Sector: A Supply and Demand Approach,” 2006.

Diving into the different views of management control