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June, 2006

Making Scorecards Actionable Newsletter # 21 (2006)

Content of Making Scorecards Actionable Newsletter # 21 (2006)

» New book edited by Olve and Petri
» The implications of Management Control on Customer Orientation
» Japanese edition of Making Scorecards Actionable



NEW BOOK EDITED BY OLVE AND PETRI

During the fall of 2005 and spring of 2006 Professor Nils-Göran Olve and Dr. Carl-Johan Petri gave a course for PhD candidates at Linköping University. The course was build around literature seminars where the PhD candidates discussed various academic articles on different perspectives on Non-financial management. The literature was chosen to reflect a variety of attitudes towards non-financial performance indicators. Some scholars oppose to non-financial performance indicators, arguing that it creates a too narrow inspection on what the employees in the organisation are doing, and others advocate the need for additional leading performance indicator to capture what is typically not described in the financial performance reports.

A PhD course is a fantastic test bed for ideas concerning various approaches to management control. Typically, the students enrolling for such a class come from different backgrounds with totally different opinions regarding what “good” management control is.

The final assignment in the course was, for each PhD candidate, to write a paper based on the texts that had been discussed during the seminars and relate this to their own research projects. Thus, the course resulted in six very interesting papers on various aspects of non-financial management control, discussed from different perspectives and applied to different domains. The papers were so good, that they have been compiled in a book called “Non-financial management control – six PhD students’ perspectives” (In Swedish: Icke-Monetär Styrning – Sex doktoranders perspektiv).

In the first chapter Olve and Petri position the concept Non-financial management control and argue that the management control system should be designed based on a contingency approach, i.e. that the control system in a given organisation must be aligned with the strategy that that organisation is pursuing. Hence, there is not one single design of a management control system that will satisfy all organisations. On the contrary. Based on the organisation’s goals, strategies, past history and so on, the control system must be designed with all this in mind. Finally, Olve and Petri propose how the six different chapters fit into the bigger picture.

In the second chapter Johan Henningsson focuses on Intellectual Capital reporting and argues that there seems to be a Scandinavian school of thought on how assets that are typically not described in the balance sheet could be reported externally. Heningsson also draws from own experience and tries to explain why the interest in IC reporting has decreased over time.

In the third chapter Carl Hökfelt proposes an interesting idea on what the management control system actually should be aligned with. In mainstream contingency theory, the control system should be aligned with the business (or corporate) strategy. The wider economy (at large) is perceived as something that might influence the strategy – but not directly the control system. Hökfelt therefore poses the question “Should the economy at large influence the organisation’s control system?”(in Swedish). Rather than a definite answer, Hökfelt introduces the idea that it might be more rewarding for an organisation to design its control system based on the current economic situation than on its strategy. When the economy is booming one set of behaviours might be desired, where as a totally different set of behavioural patterns may be important in economic decline.

Annette Anjou discusses incentive programs in the forth chapter and argues, based on several empirically grounded articles, that the incentive systems should not only be based on financial results. Also performance that will eventually lead to financial results should be included in the compensation packages. Anjou for example refers to a study where a hotel chain has shifted its focus in the incentive system from only rewarding financial results, to including customer satisfaction, cross referencing and utilisation of the central booking function, which has led to better financial performance.

In the fifth chapter, Åsa Horzella describes some case study data from a study she has done on the effects of IT in the grocery industry – over a period of 30 years. One important finding in this study is of course that the effects of IT are not always possible to express in financial indicators, but even more important, that the effects of operational IT systems will also be found remote from the core processes, all over the organisation. Identifying benefits (ex ante) should hence not be limited to the effects in the processes closest to the system.

Chapter six (in English) focuses on the relationship between a producing company and its suppliers. Drawing from the outsourcing- and contract literature, Daniel Nordigården, argues that the relationship between producer and subcontractor can be more elaborated, in more extended Service Level Agreements, where other contributions to the producer is discussed and evaluated. Such contributions could for example be the subcontractor’s participation in the producing company’s marketing campaigns, in after market support or even in product development and innovation. Literature on strategic partnerships often talks about such collaboration, but it is rare that these ambitions are systematically evaluated ex post.

In the final chapter (also in English) Andreas Backlund takes one step back to challenge our common wisdom and interpretation of management control. Typically, we consider the control system as a feed-back system that will intervene in the operation to assure that the organisational attention is focused on those behaviours that is believed to generate the expected results. The control system is hence a mechanism designed by management to make sure that the rest of the organisation behaves correctly. Andreas challenges this idea and argues that the control system is rather a pseudo behaviour that management is occupied with in order to manage their own anxiety. Managers create control systems in order to feel that they “are in control” and “have the grip”, even though the effects of the control systems in the rest of the organisation are questionable. According to Andreas, management control systems are not designed to control the organisation, but are in fact implemented to ease management’s personal fear of uncertainty.

The book is an excellent compilation of various perspectives on management control, and on non-financial management control in particular. Unfortunately, only three of the chapters are written in English, but they are still reason enough to order the book. If you want to view a short video introduction to the book, please log on to: http://www.youtube.com/watch?v=T9n-al3xlL0, and if you want to order a copy of the book send an e-mail to carl-johan.petri@makingscorecardsactionable.com.



THE IMPLICATIONS OF MANAGEMENT CONTROL ON CUSTOMER ORIENTATION

In collaboration with Mikael Häussling Löwgren, Carl-Johan Petri has written an article on the management control system’s effects on customer intimacy efforts (in Swedish). In the article Häussling Löwgren and Petri suggest a classification system to distinguish different sales strategies and relate these to the business strategy. Depending on which sales strategy is chosen, different aspects in the management control system will become important.

Before aligning the management control system and the sales strategy, however, the organisation must make sure that the sales strategy is aligned with the business strategy. A company focusing customer intimacy, always trying to supply a premium product tailored to the specific client’s preferences will need to design a sales process that is totally different from a company that is selling a standardised product to all clients, competing solely based on a lower price than their competitors.

When the company has decided which sales strategy to follow the management control system must be designed to support these aspirations in the strategy. Typically, incentive systems are used in most sales organisations, hence there is an immediate need to secure that the incentives do not encourage other behaviours than those proposed in the sales strategy.

Even though incentive systems are frequent in many sales organisations, it is interesting to notice that Häussling Löwgren and Petri only suggest that individual incentives should be used in one of the three generic sales strategies. The three proposed generic sales strategies are: order desk strategy, dedicated sales strategy and integrated sales strategy; and it is only companies who pursue a dedicated sales strategy that should make use of individualized bonuses. In the order desk it is questioned whether there is at all a need for bonus systems and in the integrated sales strategy it is argued that successful selling depends on contribution from numerous and different contributors (sales representatives, key account managers, management team members, technicians, and even customers). Thus, rewarding individuals for sales volumes will definitely only reward a fraction of individuals who have contributed, and therefore risk to create a tension between them receiving incentives and those who are not. Instead, these reward mechanisms should be based on the organization’s collective achievements, to reflect that all different actors in the organisation contribute to the organisation’s results.

The article is written in Swedish and is published in Bonnier Publishing’s management series Bonnier Ledarskapshandböcker/Affärsutveckling. For more information see: http://www.bonnierledarskap.se/template/t04.php?menuId=78&artsetId=5&articleId=135&fakeId=82


JAPANESE EDITION OF MAKING SCORECARDS ACTIONABLE

Making Scorecards Actionable – Balancing Strategy and Control has been translated into yet another language. The Japanese edition of the book can be bought from Amazon’s Japanese web site at the following address: http://www.amazon.co.jp/exec/obidos/ASIN/482011784X/hatena-m-22/ref=nosim






MAKING SCORECARDS ACTIONABLE NEWSLETTER is a bi-monthly update on our experiences and opinions on how scorecards and strategy maps can be made actionable – to help organisations realise their intended business strategies. The newsletter is compiled and distributed for free by the authors of the book “Making Scorecards Actionable – Balancing Strategy and Control”. Also make sure to check out www.makingscorecardsactionable.com to get up to date information about our seminars, to evaluate your organisation’s BSC skills according to our computerised BSC Analyser and to download presentations from the document archive.
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