OPINE GROUP  

 

  MANAGEMENT CONTROL SYSTEM 

OPINE GROUP 

Mr. Hemant Thakar

OPINE GROUP  

MANAGEMENT CONTROL SYSTEM IN SERVICE ORGANIZATION

What is a Service organization?

• Service organizations are specialized units carrying out business activities or assisting the business organizations.

• These units do not have tangible products

• They make value addition to the other unit’s products.

Manufacturing organization V/S service organizations:

• Inventory Building : o Unlike manufacturing organization’s , product of the service

organizations / business unit is “SERVICE”, it is intangible in nature one can not store it e.g. Lawyer’s hours, Doctor’s time, Hotel room etc

o Unlike physical products, it can not keep buffer stock of services. o Revenue of manufacturing organization can be earned from the

product manufactured in the past, but if not sold today, the resources are lost forever.

o The key performance issue in the service organization is how to minimize the unused capacity

• Resource Characteristic : o Service industry is normally labour intensive. It is not easy to adjust

the capacity of production and control the performance if the production factors due to the behavioural factors of labour

o Service industry heavily relies on special class of labour. They need special class of skilled personnel and high calibre of professionals, who seeks more autonomy in working. This makes MCS more difficult

• Quality of services: o Quality of services is always dependent on actual service provider o Service quality of a professional is depends on varied factors such as

resource availability, time, behavioural factors etc o Service quality of a professional can not be precisely controlled

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• Pricing of service o A usual manufactured product provides a standard base for its

costing and thereby it’s pricing. o But the costing of the service is influenced by many factors and which

is quite complex to arrive at. o Cost of services is a flexible nature and it depends on various factors

such as quality, time, efforts etc

• Multi-unit organization setup o Service organizations provide feasibility when implemented at many

places simultaneously such as a renowned surgeon practicing at many places or a chain of hotels,

o Such set up leads to generating similar kind of units but unlike manufacturing unit, the output is largely depend on quality, time, efforts of the professional involved and the setup facilities

• Very few tangible assets o Professional organization’s primary assets / investment is in qualified

and experienced professionals. o Rarely these organizations need heavy investment in tangible assets,

therefore tools such as ROI proves meaningless. o The utilization of assets takes back seat in service organizations

• Input and Output measurement is difficult o The input as well as output are non-quantifiable in nature e.g. a

surgeon rendering his service to a hospital o It is difficult to assess the effectiveness and efficiency of a professional

/ service organization

• Marketing of the services is usually informal o Like a manufacturing organization one can not differentiate the

production efforts from marketing efforts in service organization o Marketing is through word of mouth and can not segregate the sale

effort leading to particular sale. o The sale efforts in service organization is intangible in nature o This factor may lead to problem in arriving at marketing and sales

cost separately

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General considerations of MCS in service organization

• Pricing o Usually pricing of services are made on full cost basis o Its is generally related with the time spent by an expert on a client o It’s a subjective assessment of the input / cost

• Profit centres and Transfer pricing o Support units such as data processing, printing, maintenance, tele-

communication to its siblings as well as outsiders o They charge for their services on opportunity cost o Defining such service units as profit centres solves the problem of

pricing o A well establish transfer pricing policy takes care of opportunity cost

of the service being rendered.

• Strategic planning & budgeting o Normally service organizations do not follow a systematic strategic

planning except for the long term staffing plan o As the resource requirement is low, risk involved is low, uncertainties

are less hence the units follow informal measures of control rather than formal measures of control

• Control of operations o Billed time ratio provides better insight in to the professional’s

efficiency

Hours Billed

Billed Time Ratio

Professional hours Available

o Due to inherent difficulty in measurement of output and input, task performance standards can not be set perfectly

o Also working conditions and behavioural aspect influencing the task performance further add complexity to performance control

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Performance Measurement and Appraisal tool

• Any of the following or mix of the following tools can be used

• Recommendations of investment bankers v/s Market conditions

• Accuracy of Diagnosis – Actual findings

• Judgments made by seniors

• Use of numerical ratings

• Appraisal by peer professionals / self appraisal

• Client report

• Internal audit to control quality and quantity

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Different Service Sectors and Management Control Approach

Financial service organization and MCS:

• This sector includes the firms like banks, financial institutes, insurance firms and investment firms. They engaged in money management. The primary asset of these institutions is money.

• Time period for the transaction may range from hours (stock market), days (credit notes), years (FDs, long term securities). Therefore the performance assessment is quite complex in these organizations

• Risk & reward – Risk in pure financial transaction are more evident than a manufacturing organization. The actual risk assessment may be very complex in financial transactions

• Information Technology has changed the face of this sector. It has paved great improvement in the financial services sector however the threats are also increasing e.g. credit card business, online trading etc

Health services and MCS

• This includes hospitals, clinics, polyclinics, scanning centres, MRI, Lab etc.

• The major assets here are medical professionals, sophisticated equipment and infrastructure

• The cost structure of treatment, availability of technology health consciousness, shifting focus from charitable services to commercial services etc has made the control process more involved and complex.

• The health services are available today in many shapes and sizes. You demand it and it is available. What was yesterday available to few is now available to may, in house as well as outdoor

• Health services have been paid by third party such as government agencies, insurance companies, charitable organizations, trusts etc. This influence the control process. Quality control can be exercised through peer review or through outside review agency

• In health services, the professional loyalty exists more than the organizational loyalty. The autonomy of the professionals working plays important role in the efficient working of the health organization

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Not for profit organizations and MCS

• By law NPO are allowed to make profit but are restrained from distributing it to owners and management. Such organizations include religious, charitable and educational trusts.

• Prime goal of management control systems in such organization is enhancing the service spread first and if possible then cost control rather than operating efficiently

• Absence of profit leads to the problem of assessing the efficiency of the organization

• NPO employ contributed capital and assets. The organizations has to fund the activities from these contributions hence can not reap the interest on it keeping the principal amount intact

• Non profit basis makes performance evaluation quite impossible

Multinational’s subsidiary unit and MNC

• Multinational subsidiary follow separate organizational, management, financial, cultural, social set up

• MNC’s financial control may lie at corporate head quarters where as rest of the functions will be controlled at the subsidiary level

• Controllable and non controllable factors on subsidiaries performance make impact on devising the control measures

• Price response / expectations by host country and profit expectations by home country may lead to difference in performance and both may not be in line

• Organizations that can not be identified with ant specific country are called as transnational organizations. They are so mixed with the host country that they almost find themselves like host county units

• Cultural differences: its refers to shared values, assumptions, norms of behaviours. This influence control methods and procedures.

• Transfer pricing : In addition to normal transfer pricing methods and frameworks and issues MNC’s need to consider the factors such as taxation, government regulations, tariffs, foreign exchange controls et while setting the transfer price.

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Projects and MCS

• Project is usually a unique / single task having specific time limit and specified resources allotted for its completion.

• Project being normally unique in nature, perfect standards can not be developed for performance assessment

• Frequent changes, expectations are affect the performance / final output of the project.

• Most projects start on small note, build up to peak activity and then slow down as completion nears, unlike manufacturing activity which is a continuous and steady drill

• Project usually follows matrix type of organization structure where there is lot of interactions and interdependence among different functions leading to difficult control process.

Business Process Outsourcing and MCS

• Usually the companies outsource their non core activities to an outside firm. • The advantages it offers are cost savings, efficiency, improved quality of

services, savings management efforts, risk aversion, enhanced performance, scaling up the business with ease etc.

• Most organizations perceive the fear of losing control, while taking the outsourcing decision.

• Questions in the mind of outsourcing decision viz. o How to measure the contribution of BPO in the firm’s success? o Are we going to lose control on the business process? o How to manage the BPO’s association and integrate their functions in

the firms overall operations? o How to measure the performance of a BPO? o Whether the outsourcer will deliver successfully? o Outsourcer will diminish my importance?

• For many executives, the greatest challenge of BPO is not operational but managerial.

• Cultivate a broad view of control: The most successful executives go beyond direct, supervisory control mechanisms to help them achieve BPO objectives. Rather they simply policing the critical limits of acceptable results, they also use indirect and enabling controls that deliver high performance by motivating alignment and effort.

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Six types of additional controls executives tap.

• Strategic attention

• Senior team affiliation

• Financial upside

• Performance visibility

• Management of roadblocks

• Employee loyalty