Management Control and Uncertainty

M. Association, D. Otley, K. Soin

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137392121
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Management Control and Uncertainty recognizes that all control takes place under conditions of uncertainty: it does now, and it always has done. In this edited collection, the contributing authors examine different aspects of management control systems in the modern world whilst paying more explicit attention to the ubiquitous nature of uncertainty

1

Management Control and Uncertainty

David Otley and Kim Soin

Management control is about the process of steering organizations through the environments in which they operate, to achieve both short-term and longer-term goals. These goals will differ from organization to organization because their stakeholders are different and the compromises between different stakeholder demands will be resolved in different ways, in part dependent on the relative power of different stakeholder groups in each context, and also on the past history and trajectory of the organization. However, the longer-term goals will almost inevitably include the survival of the enterprise itself, as this generally is in the interests of most stakeholder groups, most of the time.

In addition, the environment in which organizations operate is itself constantly changing and may be very difficult to predict. Thus, the context within which the organization is being steered is highly uncertain and may change, sometimes quite quickly and radically. It is a moot point as to whether the rate of environmental change, or the degree of uncertainty which organizations now have to face, has increased in recent years. We certainly seem to perceive it as increasing, although this may be partly due to the future being less predictable than the past. It is always difficult to try to look back and envisage how previous situations we faced looked at the time, without having our perceptions coloured by the way events actually turned out, and the consequences for ourselves.

What is remarkable is the fact that the literature on management control has generally not explicitly acknowledged the nature of the environment in which organizations operate as being subject to high degrees of uncertainty. Indeed, management control systems (MCS) themselves have tended to be regarded as static and unchanging, rather than dynamic. This book is entitled “management control and uncertainty” to address this issue more cogently, but it needs to be recognized that all control takes place under conditions of uncertainty: it does now, and it always has done. In this book, we try to redress some of this balance by examining different aspects of management control systems in the modern world whilst paying more explicit attention to the ubiquitous nature of uncertainty.

The scope of management control has developed considerably since Robert Anthony defined the term in 1965. In its original form, management control was seen as an internal activity designed to coordinate the actions of managers within a single organization. It was also explicitly separated from the activities of both operational control and strategic planning. Despite attempts to broaden its scope to include behavioural considerations, its primary focus was on formal information systems and reporting, primarily those of management accounting. There has been considerable progress in the following 50 years, especially concerning the use of non-financial information, where Kaplan & Norton’s Balanced Scorecard marks a watershed. This can be seen as part of a wider trend to reintegrate strategic considerations as well as operational issues back into the scope of management control. In addition, attention was initially given to inter-organizational control arrangements, with specific reference to control along a supply chain. This was then extended to include wider collaborations and the area is well surveyed in Chapter 4 by Shannon Anderson and Henri Dekker. A complementary development has been the inclusion of a wider group of stakeholders, to include parties external to the organization in addition to suppliers and shareholders, particularly customers, national governments and regulators. Associated with this has been specific consideration of uncertainty in the development of risk management processes, and the use of these procedures has become a compulsory part of governance practices.

The way in which these developments have been mirrored in wider practices is well illustrated in Chapter 2, where Martine Cools reviews research in transfer pricing, with particular reference to the work of Clive Emmanuel. This chapter was not commissioned with this intent in mind, but it does show how transfer pricing practices first focussed on internal decision-making within a single organization, albeit one that was sub-divided into operating divisions. The procedures used were intended to promote better coordination of economic decisions, whilst allowing for divisional autonomy. In essence this reflected a common organizational design, at the time, of keeping as much of the value chain as possible within the ownership of a single over-arching organization in a divisional structure. As organizations became more global, attention switched to the tax consequences of the chosen transfer pricing practices and mechanisms. Given that companies had operations in several different countries, each with distinct taxation regimes, mechanisms for optimizing the overall tax cost to the company began to dominate. However, as might be expected, the taxation authorities in each individual country became concerned about the potential loss of tax revenue from these processes, and demanded a much more transparent and justifiable set of procedures to avoid taxable profits being exported. Eventually fiscal compliance and management control came back together as companies increasingly adopted the use of a single set of books for all purposes, perhaps driven by the potential consequences of being seen to have different accounting numbers for different purposes, even if that could be rationally justified.

The following chapters are loosely organized into a developmental order. Following the review of Clive Emmanuel’s work in Chapter 2, the subsequent three chapters draw on plenary sessions given at the ninth International Management Control conference held at Nyenrode University in The Netherlands during September 2013. These plenaries were intended to give an up-to-date overview of current thinking in management control research. In Chapter 3, Roland Speklé and Anne-Marie Kruis attempt to identify some trends, both from a review of recent literature and from papers presented at the conference. They note that research in this area has become concentrated mainly in Europe, perhaps perversely caused by the control and performance evaluation mechanisms used in US business schools! Shannon Anderson and Henri Dekker examine the move from supply chain management towards coordinating wider collaborations between organizations in Chapter 4, and focus on some of the issues surrounding management control in strategic alliances. They highlight the extent to which innovation in management controls has been central to the emergence, diversity and stability of hybrid organizational forms. Finally, in Chapter 5, Sally Widener considers the research methods used in management control research, and enters a plea for a return to the use of survey methods, albeit only when conducted in a proper manner, illustrating the value of this with examples from her own work.

There then follow a number of more conceptual chapters. In Chapter 6, David Otley argues that uncertainty is not an external phenomenon that can be objectively measured, but can only be understood as a subjective judgement dependent upon the predictive abilities of individuals and groups. Given that we understand the future only imperfectly, he suggests that a key issue in evaluating managerial performance is distinguishing between intended outcomes and luck. He includes some practical routines that may be useful in managing in uncertain situations. This is followed by Mike Bourne giving an overview in Chapter 7 of the use of different management controls that have changed over time. He details how management controls in practice have come to be viewed primarily as the implementation of strategy in a rapidly changing environment. He uses two case studies to illustrate two very different approaches by companies trying to cope with a dynamic and uncertain environment. In Chapter 8, Margaret Abernethy and Julia Mundy review the literature on the role of uncertainty on performance evaluation in general and on compensation systems in particular. They find that increasing uncertainty is associated with the development of a more diverse set of performance measures, in particular the increased use of non-financial measures. Moving on to the specific topic of innovation in Chapter 9, Jan Pfister examines the potential conflict between control and innovation, using two case studies to illustrate two very different approaches to managing this. He also identifies a trend to move from measures of financial outcomes towards a broader set of measures reflecting the whole activity of an organization. In Chapter 10, Sophie Tessier provides an overview of how control systems can themselves be managed and controlled. She argues that the need for such management is a consequence of change and uncertainty, and considers the different practices that are involved at different levels of monitoring, from that of the individual control through to overall corporate governance and risk management. Finally, Elaine Harris considers strategic investment decisions in Chapter 11, and discusses how these decisions can be made in an uncertain world. She complements the use of familiar quantitative appraisal techniques with the need for a more intuitive approach, whereby managers “feel the risk” as well as attempting to measure it.

Next, there are two chapters based on empirical studies. In Chapter 12, Kim Soin, Christian Huber and Sharon Wheatley examine the implementation of risk management processes in UK universities, where they have become a required part of the regulatory environment. They conclude that there is a delicate balance to be maintained between “box ticking” to demonstrate compliance and extracting real value from the activity. Failure to use risk management procedures proactively can result in decoupling, defensiveness and fear. Liz Warren then examines the effect of regulation and uncertainty in the UK electricity generation market in Chapter 13. This demonstrates how governments can themselves generate uncertainty rather than absorbing it, and spells out the consequences of this in the practices of firms operating in the electricity generation market. In particular, she outlines the idea that sustainability does not just concern environmental impacts, but also requires the maintenance of conditions necessary to maintain a stable provision of people’s basic needs, in this case those of having reliable power supplies.

The final part of the book moves on to consider the roles of management control research in enabling us to better understand how management control can (and should) work under conditions of uncertainty. In Chapter 14, Olivier Saulpic and Phillipe Zarlowski examine how management control research informs practice through the teaching academics engaged in various degree and training programmes. They argue that managers need to be educated about the contextualized character of management knowledge, and thus not expect “off the shelf” solutions to be available to every problem faced. This is followed by Philip Linsley and Alexander Linsley in Chapter 15 reviewing the development of the management accounting practices which support control through the lens of cultural theory. It sets the changes in the roles perceived to be undertaken by management accountants in the context of cultural changes in the UK and US, most notably the move from a hierarchical to an individualistic culture. Next, in Chapter 16, Alan Lowe and Ivo De Loo present a radical critique of management accounting and control practices, arguing that an excessive emphasis on excellence can itself prove threatening to organizational health. By regarding economic organizations as serving primarily instrumental purposes, popular performance measurement practices may fail to lead to desired outcomes. Avoiding this perverse outcome requires a radical change in some organizational cultures. Finally, Chapter 17 presents an overview of the Middle-Range Thinking approach by Jane Broadbent and Richard Laughlin. Given the preceding critiques, this approach tries to reconcile the possibilities inherent in over-arching theories with the contextual specificity that is required in practice. They conclude by arguing that the middle-range approach provides a basis for both a meaningful theoretical engagement with organizations, and the development of useful theory, which they demonstrate with practical examples from their own research.

The remainder of this introduction will identify some key themes that emerge from many of the chapters that follow. These include an overview of how uncertainty has been conceptualized, and where the consequences of different approaches seem to lead; the connection of uncertainty with ideas of late modernity; the increasing role of external regulation of organizations and the role of practices such as risk management in governance; and the responses of organizations to external as well as internal pressures.

Conceptions of uncertainty and their consequences

For obvious reasons, the major cross-cutting theme of the work in this book is the idea of uncertainty and its consequences. However, the conceptualizations of uncertainty vary significantly across chapters, ranging from it being seen as an objective, external factor which can be measured through to a view that it is a subjective perception which needs to be observed and reacted to. There are also a variety of views as to whether uncertainty has increased in the recent past, and varying ideas of how control systems may either help in dealing with it, or may themselves compound the problems that it brings.

The world has always been subject to considerable uncertainties, especially when understanding of how natural events were caused was less well developed. Until quite recently events such as disease, natural disasters and crop failures were generally regarded as inexplicable (or the work of a deity) and few actions could be taken either to prevent them, or to deal with their consequences. So it might be assumed that as scientific understanding has increased, the world has become more predictable, certainly in its physical aspects. As organizations became larger and more complex in the last 100 or so years, they were also seen as being able to act as buffers against uncertainty. Parts of an organization, most typically the production functions, could be buffered from external change and allowed to develop well-programmed routines that led to considerable operating efficiency. The impact of external events could be buffered by the overall organization to give a more predictable internal environment, well insulated from sudden external changes. The downside of such buffering was that the impact of external changes could be consolidated into a single internal shock, such as the closure of a whole plant. It is arguable that one purpose of a management control system was to allow the information about external circumstances to permeate the boundaries of the organization to allow gradual adaptation without the need to constantly adjust to circumstances that might only be transitory.

However, other features of the last century have operated in the opposite direction. As organizations have become more global and inter-connected, changes in one part of the overall economic system have begun to affect every other part, and the speed of transmission of such changes has increased enormously. The recent global financial crisis has demonstrated that we are not immune to events happening far away and in sectors other than our own. Organizations need to react to external changes, especially those caused by competitive pressures, increasingly quickly and this itself generates increased uncertainty. Indeed the actions taken by organizations to cope with uncertainty may themselves engender increased levels of future uncertainty rather than containing it. Thus, uncertainty is emerging from an increased number of sources, both external and internal.

In addition, there are social changes which seem to have generated an expectation that events should be both predictable and controllable, and that any impact of unexpected events is an unfortunate lapse of good management practice. Activities which used to be considered as fundamentally uncertain are now expected to be totally predictable. Travel is one example. Not so long ago, travel was regarded as both potentially dangerous and certainly unpredictable, whereas today even a slight disruption to long distance travel arrangements is regarded as a major failure. Aircraft and trains are expected to run to a highly accurate timetable and any disruption is seen as unacceptable. So, even if overall uncertainty may have reduced, the standard of what is seen as acceptable has risen. Organizations therefore seem pressured to promise highly predictable outcomes, and increasingly adopt systems designed to deliver these. For example, the requirement to produce annual, quarterly and even more frequent predictions of earnings is now regarded as almost mandatory. Organizations are subject to pressures of...

Table of contents

• Cover
• Title
• 1  Management Control and Uncertainty
• 2  Transfer Pricing: Insights from the Empirical Accounting Literature
• 3  Management Control Research: A Review of Current Developments
• 4  From Make-or-Buy to Coordinating Collaboration: Management Control in Strategic Alliances
• 5  Researching the Human Side of Management Control: Using Survey-Based Methods
• 6  Management Control under Uncertainty: Thinking about Uncertainty
• 7  Managing through Uncertainty
• 8  Uncertainty as a Determinant of Performance Measurement and Compensation Systems: A Review of the Literature
• 9  Controlling Creativity and Innovation: Paradox or Necessity?
• 10  Managing Management Controls
• 11  Feel the Risk: Strategic Investment Decisions in an Uncertain World
• 12  Management Control and Uncertainty: Risk Management in Universities
• 13  Management Control, Regulation and Investment Uncertainty in the UK Electricity Generation Market
• 14  Management Control Research and the Management of Uncertainty: Rethinking Knowledge in Management
• 15  Cultural Theory of Risk and the Notion of “Management Accountants as Strategists”
• 16  The Existential Perversity of Management Accounting and Control
• 17  Middle-Range Thinking and Management Control Systems
• Index