Management Control Systems in Service Companies


Service companies can be described as people-oriented organizations that seek to develop symbiotic relationships with their clients (Selden & Sowa 2011), and are guided by unique characteristics of intangibility of services, inseparability of production from consumption, perishability of services, heterogeneity in service products, and human participation in the production process (Gustafsson 2003).

Management control systems (MCS) comprise all mechanisms employed by an organization not only to achieve effectiveness and efficiency but also to influence its members’ behavior and actions with the view to enhance performance and the realization of the organization’s fundamental objectives (Triantafylli & Ballas 2010).

Role of External Environment

The successful design and implementation of MCS are contingent on a multiplicity of contextual variables found within the external environment. Organizations must adjust their strategies to the turbulences experienced in the external environment if they expect to achieve and maintain competitive advantage (Lapierre & Skelling 2005).

In such a scenario, therefore, it is expected that the relationships between employees and management characteristics and the control mechanism will be affected and/or influenced by the environment in which the organization operates due to its uncertain and turbulent nature.

In the design and implementation of MCS, the external environment therefore serves as a reminder of the firm’s inability to accurately predict future events, and of its need to come up with control mechanisms that will assist it to rapidly adjust to changing environment or else die (Sisaye 2005). Consequently, an effective MCS must emphasize the logic underlying a firm’s interactions with the external environment. Organizations operating in more hostile and turbulent environments must therefore be ready to adopt and implement more formal and externally focused MCS.

MCS as Packages

The importance of using MCS as packages within the organizational context has long been established in the literature. Elbashir et al (2011) argue that although MCS assist firms to enhance the prospect that employees will make decisions and take actions which are in the firm’s best interest, it is important to design and implement the mechanisms as packages as different control elements provide different information in varying formats for synthesis.

In the case of Atlanta Home Loan (AHL), it is evident that the company failed to align its action controls (e.g., withholding authority to write checks) with its cultural controls (e.g., background checks and trust), thereby providing fertile ground for Wilbur to evade some controls to his benefit (Merchant & Van der Stede 2007). Wilbur would have been unable to open a new corporate account if AHL had implemented MCS as packages because personnel/cultural controls would have demanded that he works for the best interests of the company.

The second importance of using MCS as packages derives from the fact that MCS does not operate in isolation but indeed relate to and affect each other (Triantafylli & Ballas 2010). Cultural-based controls such as social norms and values may indeed influence the way administrative or planning controls operate, thus the need to use MCS as holistic packages.

In AHL, it is clear that the set of action controls was incomplete and each system of control worked independently of each other, leading to the collapse of the company. It is also clear that results controls, such as pay for performance and performance evaluations, were independent of other personnel/cultural control mechanisms that could have helped Al Fiorini to know the behavior of his employees through proper background checks.

To extend on the above perspective, firms find it increasingly hard to study and understand specific elements of MCS in isolation from other organizational systems, not mentioning that such an attempt exposes the firm to “…the potential for serious under-specification” (Chenhall 2003, p. 131).

In the case, Al Fiorini never took interest in evaluating how the trust he proffered to employees could be pooled together with action controls such as centralization of major decisions to suit the specific circumstances of the company. This oversight enabled Wilbur to evade some results control and claim bonuses that he was not entitled.

Fourth, studying MCS as packages enable management to identify and control the links between the various control elements or systems (Malmi & Brown 2008), and to identify the strength and coherence of the links between various MCS to avoid making erroneous conclusions (Elbashir et al 2011). If AHL had implemented MCS as packages it would have been able to centralize its decision-making process and ensure that some control elements were not abused by senior staff without feeling concerned about the ramifications of their actions.

Fifth, considerable amount of time has been spent by accounting scholars in an attempt to study innovative systems in practice, such as activity-based costing/management (ABC/M), with the view to understand their development, implementation, utilization and consequences (Malmi & Brown 2008). From the case, it is clear that failure to study and understand control mechanisms as packages affected Al Fiorini’s conclusions about the people he was trusting to run the company.

Lastly, it is generally felt that gaining a wider comprehension of MCS as packages may aid in the development and actualization of a better theory which could be used by management professionals to design and implement a range of control mechanisms intended to sustain organizational objectives, control actions and behavior, as well as drive performance (Malmi & Brown 2008).

Al Fiorini could have designed an MCS package with the capacity to streamline the operations of AHL and facilitate the achievement of the company’s objectives had he taken time to gain a broader understanding of how to use MCS as packages.

Difficulties in Implementation of MCS in Service Companies

First, it is difficult to implement MCS in service organizations which will have the capacity to measure and value work in progress and finished goods inventory due to the simultaneity of production and consumption, as well as the consequent absence of inventories (Sharma 2002). In a hotel, for example, food is produced and simultaneously consumed, thus it becomes exceedingly difficult to value the work that went into preparing the food or generate a finished goods inventory for the food for financial statement and tax purposes.

Second, some characteristics of service organizations, such as intangibility and lack of standardization of services, trigger additional difficulties in measurement as it becomes exceedingly difficult to assign objective measures of quantity and quality to the offerings (Desai 2010).

Third, it is difficult to control employee behavior and actions in service settings using MCS applications as the customer becomes a co-producer of the service experience, implying that it may be unfair to hold an employee responsible for actions or behavior that may have been precipitated by the customer (Modell 1996). The relative unpredictability of customers’ behavior coupled with their availability as co-producers in the service conversion process generates considerable uncertainty which contributes to the challenges associated with employing accounting information for planning and individual evaluation purposes (Chenhall 2003).

Lastly, it is challenging to implement a control mechanism that will ensure the standardization of norms and values among employees so that they may act and behave in accordance to the set organizational objectives because there exist no standards to evaluate the customers they interact with on daily basis, and who form a critical component of the service experience (Modell 1996).

Reference List

Chenhall, R.H 2003, ‘Management control systems design with its organizational context: Findings from contingency-based research and directions for the future’, Accounting, Organizations & Society, vol. 28 no. 2/3, pp. 127-168.

Desai, R 2010, ‘Understanding management control systems in call centers’, International Journal of Productivity and Performance Management, vol. 59 no. 8, pp. 792-810.

Elbashir, M.Z, Collier, P.A & Sulton, S.G 2011, ‘The role of organizational absorptive capacity in strategic use of business intelligence to support integrated management control systems’, The Accounting Review, vol. 86 no. 1, pp. 155-184.

Lapierre, J & Skelling, J 2005, ‘Salesforce control system in high-tech contexts: Do environment and industry matter’, Journal of Business & Industrial Marketing, vol. 20 no. 6, pp. 297-306.

Malmi, T & Brown, D.A 2008, ‘Management control systems as a package – Opportunities, challenges and research directions’, Management Accounting Research, vol. 19 no. 4, pp. 287-300.

Merchant, K & Van der Stede, W 2007, Management control systems: Performance measurement, evaluation and incentives, 2nd ed, Essex: Prentice Hall.

Modell, S 1996, ‘Management accounting and control in services: Structural and behavioural perspectives’, International Journal of Service Industry Management, vol. 7 no. 2, pp. 57-80.

Selden, S., & Sowa, J.E 2011, ‘performance management and appraisal in human service organizations: Management and staff perspectives’, Public Personnel Management, vol. 40 no. 3, pp. 251-264.

Sharma, D.S 2002, ‘The differential effect of environmental dimensionality, size, and structure on budget system characteristics in hotels’, Management Accounting Research, vol. 13 no. 1, pp. 101-130.

Sisaye, S 2005, ‘Management control systems and organizational development: New directions for managing work teams’, Leadership and Organization Development Journal, vol. 26 no. 1, pp. 51-61.

Triantafylli, A.A & Ballas, A.A 2010, ‘Management control systems and performance: Evidence from the Greek shipping industry’, International Journal of Productivity & Performance Management, vol. 37 no. 6, pp. 625-660.

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