Management Control Systems

MCS
 Controlling a Car - Analogy

• Press the Accelerator, and your car goes faster.

• Rotate the steering wheel, and it changes direction.
• Press the brake pedal, and the car slows or stops.
• With ABC, we control SPEED and DIRECTION.
• If ABC or any of these is inoperative, the car does
not do what you want it to do.
• Simply, OUT OF CONTROL.
• Similarly, an organization must be controlled – Put
Devices in place to ensure that strategic intentions
are achieved.
 Elements of a Control System

• At least Four elements

• A Detector or Sensor – A device that measures what is
actually happening in the process being controlled.
• An Assessor – A device that determines the significance of
what is actually happening by comparing it with some
standard or expectation of what should happen.
• An Effector – A device (also called ‘feedback’) that alters
behaviour if the assessor indicates the need to do so.
• A Communications Network – Devices that transmit
information between the detector and the assessor and
between the assessor and the effector.

Source: Anthony, Robert N. and Vijay Govindarajan, MCS, Tata McGraw Hill Edition 2002 (p.1)
 Elements of the Control Process

ASSESSOR
Control device
Comparison with standard

EFFECTOR
DETECTOR
Behaviour alteration,
Information about what is happening
If needed

Entity being
Controlled
 Body Temperature - Analogy

• Most mammals are born with a built-in standard of desirable

body temperature.
• The sensory nerves (detectors) scattered throughout the body.
• The hypothalamus center in the brain (assessor) compares
information received from detectors with the standard.
• The muscles and organs (effectors) that reduce the
temperature when it exceeds the standard (via sweating,
opening of skin pores, etc.) and raise the temperature when it
falls below the standard (via shivering, closing the skin pores)
• The overall communications system of nerves.
 Management Control Process

• The process by which managers at all levels ensure that the

people they supervise implement their intended strategies.
• Detectors report what is happening throughout the
organization.
• Assessors compare this information with the desired state;
• Effectors take corrective action once a significant difference
between the actual state and the desired state has been
perceived;
• The communications systems tells managers what is
happening and how that compares to the desired state.

Source: Anthony, Robert N. and Vijay Govindarajan, MCS, Tata McGraw Hill Edition 2002 (p.4)
 MCS: Contrast with Simpler Control Processes

• The standard is not preset. Rather, it is a result of a

conscious planning process. (POSDCORB)
• Management Control is not automatic – Managers
detect important information with their own eyes,
ears, and other senses – Routine ways of comparing
certain reports – Manager has to personally perform
assessor function – Alteration of behaviour involve
human beings – Interaction
 MCS: Contrast with Simpler Control Processes

• Management control requires coordination – Many

separate parts and control to ensure that each part
works in harmony with the others.
• The connection from perceiving the need for action
to determining the action required to obtain the
desired result may not be clear.
• Black Box: An operation whose exact nature cannot
be observed. (MCS as a black box)
• Much Management control is self-control.
(External devices also exist in a number of cases)
(Speed breakers, traffic signs, traffic police, traffic
lights and legislative framework, among others)
 Systems and Management
• A system is a prescribed and usually repetitious way
of carrying out an activity or a set of activities.
• Systems Approach & Chester I. Bernard
• Many management actions are unsystematic
(Situations for which the rules are not well defined
and one has to use best judgement in deciding what
actions to take)
• If all systems ensured the correct action for all
situations, there would be no need for human
managers.
• Primarily focus of MCS is on the systematic, i.e.,
formal, aspects of the management control function.
 Systems and Management

• Difficult, except in general terms, to describe the

appropriate actions for managers encountering
situations not contemplated in the formal system.
• These depend, among other factors, on the skills and
personalities of the people involved, their
relationships with one another, and the environment
within which a particular problem arises.
• Important to recognize that the informal processes
are strongly affected by the way the organization’s
formal control systems are designed and operated.
 Boundaries of Management Control

Activity Nature of End Product

Strategy Formulation Goals, strategies, and policies

Management Control Implementation of strategies

Efficient and effective

Task Control performance of individual
tasks

N.B. Serious mistakes can be made if principles and generalizations

specific to one system are applied in another
Strategy Formulation – Management Control – Task Control

• Strategy formulation is the least systematic of the

three, task control is the most systematic; and
management control lies in between.
• Strategy formulation focus on the long run, task
control focus on short-run activities, and management
control is in between.
• Strategy formulation uses rough approximations of
the future, task control uses current accurate data,
and management control is in between.
• Each activity involves both planning and control;
but the emphasis varies with the type of activity.
Strategy Formulation – Management Control – Task Control

Activity Strategy Management Task Control

Formulation Control
Focus Area
Systematic Least In-between Most

Time Period Long run In-between Short-run

Future Rough In-between Current Accurate

Approximations Data

Planning and Planning process Equal Importance Control process

Control more important more important
 Management Control

• The process by which managers influence other members

of the organization to implement the organization’s
strategies.
• Management Control Activities: Planning, Coordinating,
Communicating, Evaluating, Deciding and Influencing
• Planning what the organization should do.
• Coordinating the activities of several parts of the organization.
• Communicating information.
• Evaluating information.
• Deciding what, if any, action should be taken.
• Influencing people to change their behaviour.
 Management Control

• It does not necessarily require that all actions correspond to

a previously determined plan, such as a budget.
• Plans based on circumstances believed to exist at the time
they were formulated.
• If circumstances have changed at the time of
implementation, the actions dictated by the plan may no
longer be appropriate.
• If a manager discovers a better approach – one more likely
than the predetermined plan to achieve the organization’s
goals – the MCS should not obstruct its implementation.
• Conforming to a budget is not necessarily good, and
departure from a budget is not necessarily bad.
 Wipro rushes to plug gap after $4-mn fraud

• A Wipro employee embezzled crores of rupees over the past

three years.
• “Controllership” division within the finance department.
• Stole password and transferred $4 mn.
• Transferred money to personal and family members’ account.
• Suresh C. Senapaty, CFO confirmed.
• The Company recovered half the money.
• Amount involved was not large but has upset people at the
helm of affairs. (Wipro always took pride in the sound work
ethics of its employees and in the strictness of its controls)
• Questions about “information security policies”.

Source: Ramsurya, MV & Pankaj Mishra, ET, Feb 17, 2010

 Wipro rushes to plug gap after $4-mn fraud

• Post-facto (versus Ex-facto)

• Interim report before management, board members and other
authorities concerned including disclosures and audit
committee.
• Informed all stakeholders
• Set up an internal investigation team
• Wipro has also taken help from external auditors and
investigation experts who will vet its processes and certify the
soundness of its controls.
• The company is already engaged with an external agency for
conducting assessment of the existing audit and other
processes in order to verify any potential loopholes.

Source: Ramsurya, MV & Pankaj Mishra, ET, Feb 17, 2010

 Post-facto (versus Ex-facto)

• Among other measures being considered by Wipro

• Employees working in sensitive functions within the
finance department may be rotated more frequently.
• Currently, employees in such functions spend around
three years before a transfer.
• Going forward, Wipro also plans to make it
mandatory for employees working in the finance
division and elsewhere, to sign an undertaking about
sharing of passwords and any unauthorised
transactions.

Source: Ramsurya, MV & Pankaj Mishra, ET, Feb 17, 2010

 How the fraud was detected?

• Wipro officials discovered the fraud after receiving

an alert about ‘overdraft’ transaction, even when the
company’s accounts had sufficient balance according
to the official records.

Source: Ramsurya, MV & Pankaj Mishra, ET, Feb 17, 2010

 Nick Leeson and Barings Bank

• In 1995, British Investment Banker, Barings Bank collapsed with

estimated losses $1.4 bn.
• Rogue trader made numerous risky moves on the Singapore International
Money Exchange (SIMEX), hiding his losses from the firm in a secret
account.
• By the time Barings discovered the ruse, it was too late.
• Jail term for more than six years in prison – Owned up to his wrongdoing in
two books about the scandal and its fallout.
Source: http://images.businessweek.com/ss/09/03/0311_madoff/10.htm
 Bernard Madoff (2008) – Losses ($65 Bn)

• Sentenced to 150 years in prison, after pleading guilty to federal charges that include fraud and
money laundering.
• He lured many high-profile investors by promising to beat the market through a slow and
steady investment strategy.
• But Madoff actually engaged in an elaborate Ponzi scheme.
• As the markets tumbled in 2008, alarmed investors asked to pull their money out.
• Madoff couldn’t come close to providing the $7 billion requested.

Source: http://images.businessweek.com/ss/09/03/0311_madoff/2.htm