1 Amsterdam, 18 June 2016
Statement of Originality
This document is written by Maikel Degens (10366741) who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Abstract
This paper tried to gather new insights in the way PSF’s exercise control over their employees. More specifically, it looked at how these firms manage their employees when they face powerful clients. PSF’s are distinctive in their nature because of the central position of the employees in the process of value creation. Environmental uncertainty is a problem with large consequences for these organisations. In these situations, the client becomes more powerful and in order to sustain or obtain a competitive advantage, PSF’s have to commit themselves to innovation. However, in these firms the innovative capability is possessed by the employees providing the services. They have to be stimulated in the accomplishment of innovations. Since professionals are characterized by a strong preference for autonomy and aversion for authority, PSF’s encounter large problems relating to cat herding. Given the benefits of soft controls in challenging this problem, in hypothesis 1 is predicted that firms will rely more on soft controls when they face more powerful clients in order to stimulate the process of innovation. This is examined by performing a survey research. Results have shown that these firms indeed make more use of soft controls when clients become more powerful. There is also predicted that this relationship is mediated by innovation. For this prediction no evidence has been found.
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Table of Contents
Abstract ...2
List of Tables and Figures ...5
1
Introduction ...6
2
Professional Service Firms ...9
2.1 What are Professional Service Firms? ...9
2.1.1 Knowledge Intensive Firms ...9
2.1.2 Professional Service Firms ... 11
2.1.2.1 Knowledge Intensity ... 12
2.1.2.2 Low Capital Intensity ... 13
2.1.2.3 Professional Workforce ... 13
2.1.2.4 The Resulting Taxonomy ... 14
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Management Control Systems ... 17
3.1
What is Management Control? ... 17
3.2
Management Control Systems ... 18
3.2.1
Result Controls ... 18
3.2.2
Action Controls ... 19
3.2.3
Personnel Controls & Cultural Controls ... 20
3.2.4
Design ... 20
3.3
Soft and Hard Controls ... 20
4
Innovation and Client Power in PSF’s ... 22
4.1
Innovation in PSF’s... 22
4.2
Client Power and Hypothesis development ... 24
5
Methodology ... 27
5.1
Sample ... 27
4
5.3 Explanation of the variables and the reliability of measurement ... 29
5.3.1 Dependent Variable ... 29
5.3.2 Independent Variables ... 31
6 Results ... 36
6.1 Descriptive Statistics ... 37
6.2 Main Findings ... 40
6.2.1 Hypothesis Test H1 ... 40
6.3.2 Hypothesis Test H2 ... 43
6.3.3 Hypothesis Test H3 ... 45
7 Discussion & Conclusion ... 51
7.1 Discussion ... 51
7.2 Conclusion ... 53
References ... 54
5
List of Tables and Figures
Table 2.1: Taxonomy of PSF’s and their management implications………...15
Table 6.1: Predictions Test Results………...36
Table 6.2: Descriptive Statistics………..…38/39
Table 6.3.1: Summary of Model 1……….40
Table 6.3.2: ANOVA Table Model 1………..…41
Table 6.3.3: Multiple Regression Analysis Model 1………41
Table 6.4.1: Summary of Model 2……….…….43
Table 6.4.2: ANOVA Table Model 2……….……….43
Table 6.4.3: Multiple Regression Analysis Model 2………44
Table 6.5.1 Multiple Regression Analysis H3; Step 1……….46
Table 6.5.2 Multiple Regression Analysis H3; Step 3……….47
Table 6.6.1: Multiple Regression Analysis H3; Step 1 for Classic PSF’s…………..……….…...48
Table 6.6.2: Multiple Regression Analysis H3; Step 2 for Classic PSF’s……….…..48
Table 6.6.3: Multiple Regression Analysis H3; Step 3 for Classical PSF’s……….…...…48
Table 6.7.1: Multiple Regression Analysis H3; Step 1 for Non-Classic PSF’s……….…….…49
Table 6.7.1: Multiple Regression Analysis H3; Step 2 for Non-Classic PSF’s……….…….…49
Table 6.7.3: Multiple Regression Analysis H3; Step 3 for Non-Classic PSF’s……….……….…49
Figure 1.1: Relationship examined………..8
Figure 2.1: Types of KIF’s……….………10
Figure 4.1: Overview of Hypothesis 2………..…26
Figure 4.2: Overview of how innovation (M) is expected to influence the relation between X
and Y………..26
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1 Introduction
Professional service firms (PSF) are distinctive in their nature. One of the key characteristics which sets them apart as an organisational typology is the relative importance of the human element in the process of value creation (Hitt et al., 2001). Atlassian, an Australia-based software developer, is a great example of the importance of human capital. This firm became a role model for their strategy on innovation (Ditkoff, 2011). Especially in PSF’s, innovation is an important business activity since the service sector is subject to continuous changes. Firms have to commit to innovation in order to meet new client demands and sustain their competitive power (Lovelock, 1983). Altlassian introduced a yearly 24-hour innovation event what they call a “FedEx Day”. This event enables their employees to brainstorm, prototype and present their own ideas regarding innovations they consider to be important by giving them full autonomy. By doing this, employees become more engaged in the innovation process. A difference between traditional manufacturing firms and PSF’s is that the capability to innovate in PSF’s seems to rely more on the ability and willingness of the professionals to identify and fulfil the needs of their clients instead of on investments in a research and development (R&D) department (Greenwood e.a., 2005; Kanter, 1998; Blindenbach-Driessen & Van den Ende, 2014). Therefore, in these settings, professionals have to be stimulated to think in a creative manner about the services they deliver in order to discover opportunities for the company. The FedEx Day showed to be a helpful innovation tool since it resulted in many new clients and successful innovations which normally would not have been tackled and is currently being taken over by their peers (Ditkoff, 2011). Among Atlassian its clients we can find now Google, Skype, Nike and Coca-Cola.
The supply-side of the professional service sector is growing increasingly (CBS, 2015). When a firm does not have a specific distinctive character compared to their competitors, this could result in high pressure on the prices they can ask for their services. Furthermore, when a complete new solution by a competitor is offered, your “old” service can become outdated and less valuable, which can lead to significant drops in revenue. Hence, competition and income uncertainty can be considered as a problem with large consequences to PSF’s (Empson e.a., 2015). In the demand-side of the sector, the demand to specific services can become volatile. Especially when customers have a diversity of options to choose between. Therefore, the overall supply influences the firm-specific demand. Consequently, tender processes are no rare occasions in this sector. In these bidding processes, PSF’s explain to a potential client why the business should be given to them and they try to outbid their competitors by making an attractive bid in order to get the project assigned. PSF’s have to take a position in the market, identify specific needs and build long-term relationships in order to survive (Empson e.a.,
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2015). They are in a more vulnerable position, while the client has gained a more powerful position. Therefore, client power makes the importance of innovation even higher. As a result of these developments in the professional service sector, firms are confronted with new management dilemmas. According to Grant (1996), knowledge is the most important distinctive asset of organisations, while much of the knowledge is possessed by the human capital. In order to enhance firm performance, their human capital needs to be managed in an accurate and sufficient way. These human resources must be integrated and managed to identify and serve the demands of the clients in an efficient and effective manner.
Several authors of different management control frameworks describe that the behaviour of employees needs to be managed and that this can be achieved by the implementation of different control mechanisms (Merchant & Van der Stede, 2012; Simons, 1994; Ouchi, 1979). Firms can stimulate the process of innovation by either increasing their focus on soft controls or hard controls. Soft controls can be defined as the measures who aim to influence the intrinsic motivation, loyalty, integrity, inspiration and norms and values of employees (Soons, 2011). They can be sub-divided into the personnel controls and cultural controls implemented in an organisation. Personnel controls serve for maximizing goal congruence between employee and firm through training, job selection procedures etc., while cultural controls focus on employees having internalized the organisational objectives. In contrast, hard controls are results and action controls which define specific targets, procedures and routines (Merchant & Van der Stede, 2012). Soft Controls are increasing in importance since they can serve as a substitute and complement of hard controls (Budding & Poulisse, 2010; Aardema, 2007). More use of the latter can result in people feeling less connected to the organisation since autonomy and authority are restricted, which is the opposite effect of what is trying to be achieved in diminishing the chance on misalignments with client needs. Since soft controls can increase autonomy and bonding with the organisational goals, these may be more effective in PSF’s.
This research will focus on the degree of use of soft controls in relation to the power of clients as shown in Figure 1.1. This relation runs through the context of innovation. For example, in the situation where PSF’s experience more competition and income uncertainty in their industry, client-power is higher than in situations where the business environment is less intense. When the client is more powerful, PSF’s have to commit themselves more to innovation in order to sustain or gain a competitive advantage. Then, organisations can distinguish themselves by improving and investing in client-relationships (Lovelock, 1983). This enables them to identify the needs of clients and highlight their high quality service delivery. The role of professionals as first contact person of the clients
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requires PSF’s to stimulate them in doing this. This creates a management control issue. How should the professionals in the organisation be managed? A tension in the MCS arises between empowering and restricting the professionals. The unique nature of PSF’s requires individual autonomy and authority for the individuals working in the firm in order to serve each client most effectively and efficiently (Løwendahl, 2007). Soft controls are crucial here, since they built on an individual their mind-set and require individuals to identify these needs. However, it is also possible that management prefers a control framework with more structure and rules when it faces more client power.
The following research question will be examined:
Does the reliance on soft controls change in relation to the power of clients?
Figure 1.1: Relationship examined
Soft controls are important and it is interesting to see whether the importance of soft controls in relation to hard controls changes when firms face more environmental uncertainty. Therefore, the focus in this research will be on the management of professionals in a setting where innovation is required. At first, this study will contribute to the literature since there is a lack of research on the management control systems in PSF’s. Since this is a relatively unexplored area, it is important to develop new insights. Further, this paper considers heterogeneity within the professional service sector by looking for differences in the reliance on soft controls within the PSF-sector, while the current literary field mainly consists of articles focussing on the homogeneous characteristics of PSF’s. Third, I believe this is the first paper looking at the relationship between the use of soft controls and client power. In any event, the first who considers this in the context of innovation. These factors make the relevance and uniqueness of this research high. An answer will be given on the research question by performing a survey research. The collected surveys are part of a large survey research project initiated by the University of Amsterdam. By means of participation in this project, data from a huge amount of PSF’s will be gathered and can be used. The remainder of this paper is laid out as follows. The first chapters present the background and hypotheses. Section five the methodology. Section six presents the results and is followed by a discussion.
Client Power Soft Controls
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2 Professional Service Firms
In this chapter there will be delved deeper into the professional service firms. I will begin with providing a definition of this organisational typology and describing the general characteristics of PSF’s. More specifically, the characteristics that set these firms apart. After that, there will be elaborated on heterogeneity within the professional service sector.
2.1 What are Professional Service Firms?
What can be understood as a professional service? Which definition can be applied for PSF’s? It is crucial to answer these questions in order to be able to examine this topic. However, answering the last question is not that easy since in the literary field many inconsistencies exist regarding the definition of this concept. In the literature, two main streams of professional organisations can be identified, namely: professional service firms (PSF’s) and knowledge-intensive firms (KIF’s). Authors seem to use the term “PSF” also for the “KIF’s”. Because of this confusion, this paragraph is focused on defining PSF’s and to distinguish it from KIF’s.
2.1.1 Knowledge Intensive Firms
Knowledge intensive firms are professional organisations where a significant part of the job positions are filled in by “knowledge workers” (Newell et al., 2009). According to Weggeman (1992), knowledge workers are human beings who spend most of their job time doing work which requires them to think actively. These people do not perform routine and prescribed activities, but activities where innovation and creativity is required. In both articles, the definition of knowledge workers contains both professionals and non-professionals who depend on a specific knowledge base or certain skills and expertise. Alvesson (2000) agrees with this broad interpretation of the term “KIF”. He states that it is a concept which is: “broader and does not emphasize the features ascribed to a typical professional association” (p. 1101) and where having a strong knowledge base is the main characteristic. With “features” he refers to typical PSF characteristics, such as having a professional association, membership criteria, standardized education and a code of ethics. However, as we will see in the next paragraph, the concept of PSF’s seems to have widened in the last decades. Among the authors who affirm this discovery are Morrison and Empson (1998).
Based on the information above it should be straightforward to develop an idea about which organisations are a KIF. However, in the literary field it seems to be difficult to have uniform agreement and to identify the boundaries. In the literature no consistent set of characteristics or criteria can be
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found. This is the result of using the word “intensive” in the term KIF what contributed to a discussion about what can be understood under intensive. Nevertheless, Rylander & Peppard (2005) argue that the literature does not need one clear, updated definition of KIF’s. Many authors already unsuccessfully tried to do this. The field needs a better understanding about the classification systems and the underlying assumptions.
Figure 2.1: Types of KIF’s. Derived from Løwendahl, 2005.
Løwendahl (2005) provides a classification of organizational typologies and uses here the concept of KIF’s as an umbrella term . This can be seen in figure 2.1. She shows that KIF’s can be sub-divided into three organisational typologies, including PSF’s. Since KIF’s have the tendency to be service firms, this can clarify the use of both terms interchangeably in the literary field. Authors possibly omit by assuming its insignificance or forget the other types of KIF. Another provider of a classification, Alvesson (2000) , marks a difference between two types of KIF’s: R&D’s and PSF’s. This is in essence consistent with the typology of Løwendahl who makes a more specific distinguish.
Having provided an idea of what the concept of KIF’s entails and knowing the relationship with PSF’s, it is in the best interest of this research to leave the remaining questions about conceptualizing KIF’s for what it is. This paper does not have the intention to debate this term.
Knowledge-Intensive Firms Professional Services Non-Professional Services Products Labor-Intensive Firms Service Products Capital-Intensive Firms Service Products Example: Auditing Example: Teaching Institutions Example: Software Dev. Example: Fastfood Restaurant Example: Shoemaker Example: Airline Industry Example: Car-Manufacturer
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2.1.2 Professional Service Firms
The literature states that it is important to make a distinction between traditional manufacturing firms and intangible service firms. Management models derived from those traditional firms seem to provide relatively small insights into the more complex and interpersonal organisational landscape of PSF’s (Empson, 2015). Therefore, there must be something special about these service organisations. This paragraph will explain the concept of Professional Service Firms.
In order to clarify the term “Professional Service Firm”, at first an analysis needs to be done on the first two words. In PSF’s the delivery of a service is the primary underlying business activity. In the literature, several definitions of a service can be found. However, Cook et al. (1999) state that no definition is capable of containing all sorts of services and the attributes which surround them. Grönroos (1990) defined a service as “an activity or series of activities of more or less intangible nature that normally, but not necessarily, take place in interactions between the customer and service employees and/or physical resources and/or systems of the service provider, which are provided as solutions for customer problems”. Kotler (1994) tried it with: “any act or performance that one party can offer to another that is essentially intangible and does not result in the ownership of anything” and Gadrey et al. (1995) as: “to organise a solution to a problem (a treatment, an operation) which does not principally involve supplying a good. It is to place a bundle of capabilities and competences (human, technological, organisational) at the disposal of a client to organise a solution, which may be given to varying degrees of precision”.
In order to define PSF’s and capture difference between service organizations, De Jong et al. (2003) created a taxonomy of service delivery types. In this process, they identified three different service sectors:
1. Specialized Service Sector: The degree of innovation depends a lot on the knowledge base
and skills of the employees. Further, client-relationships are intense and require much client-specific judgement. Finally, these service firms mostly have relatively few clients but for longer contractual periods. Examples: auditing and consultancy.
2. Production-intensive Service Sector: Service organizations that spend most of their resources
into simplifying their service offering to become more efficient. Examples: banks, insurance and
telecommunication companies.
3. Supplier-Dominated Service Sector: Firms tend to have many customers and the transactions
have short client contact times and require not much client specific judgement. Examples:
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Following this categorization, the “Specialized Service Sector” is the sector where typically the professional services are located. The addition of the word “Firm” to Professional Service Firm implicates that non-profit services are not included in this typology.
Von Nordenflycht (2010) asserts that a large extent of the problems with defining PSF’s is the result from vagueness in the definition of “professionals”, who are described as the majority of the employees in professional organisations. Academics usually define a profession based on a taxonomy. According to Løwendahl (2005), professionals are members of a certified occupational association, are highly educated, put the emphasis on the application and improvement of their knowledge, follow professional norms of behaviour and show respect and loyalty to their colleagues.
In the literature several definitions of PSF’s exist, but in this thesis the definition of Von Nordenflycht (2010) will be followed. He also recognized the inconsistencies in the literature with defining PSF’s and tried to solve this problem by generating a taxonomy consisting out of four types of PSF’s. He created a dichotomous definition of PSF’s and stimulates thinking about PSF’s in terms of degree of professional service intensity based on three characteristics of which he believes are most distinctive for this typology. He sums up: knowledge intensity, low capital intensity and a professionalized
workforce. The following subparagraphs will elaborate on these characteristics and their management
implications.
2.1.2.1 Knowledge Intensity
“Knowledge intensity” can be considered as the main distinctive feature of PSF’s. This term suggests that the output, produced by the professionals, depends on a specific knowledge base. Hitt et al. (2001) also emphasize the relative importance of the human element in the process of value creation compared to other organisational typologies. Therefore there seems to be agreement in the field about the reliance on intellectually skilled employees.
Having a knowledge intensive workforce has two implications for the management of the employees. The first challenge is “cat herding”, which stands for keeping these individuals within the firm and directing them. Since the skills of employees are easy transferable and limited available, these individuals have a strong bargaining position. Further, research has shown that they strongly prefer autonomy and dislike direction. Both the preference for autonomy and having a better position for bargaining, make having authority challenging. The only measures firms can take are modifying the compensation mechanisms or giving more autonomy to the employees.
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The second challenge resulting from knowledge intensity is “opaque quality” which refers to the fact that the quality of the output produced by the professional is hard to evaluate for customers. A firm can fight this challenge by focussing on mechanisms which signal quality such as reputation, bonding, appearance and ethical codes (Von Nordenflycht, 2010).
2.1.2.2 Low Capital Intensity
This term represents the degree in which the output of a PSF relies on non-human capital, such as equipment, factories or intangible assets. A low capital intensity does not always have to apply for every firm with a high knowledge base. That is why this characteristic is reported separately. Some firms their output requires both individuals with a certain knowledge base and a high degree of non-human capital. An example of this could be a hospital. Since Von Nordenflycht still recognises these firms as being a PSF, he created a taxonomy where firms are categorized based on the different use of all the three characteristics.
This specific characteristic (“Low Capital Intensity”) also has two consequences for management. The first is a further increase in bargaining power for the individuals working in the company. The less a firm relies on non-human capital, how more important their human capital becomes. The second consequence is the arising of an opportunity to better address the cat herding problem and incentivize employees. Since the firm does not have the need for raising certain amounts of capital to invest in equipment, this money can be invested in the human capital within the building and the firm possible can use a less centralized organizational structure.
2.1.2.3 Professional Workforce
The last characteristic defined by Von Nordenflycht is “Professionalized Workforce”. Based on a paper of Torres (1991), he identifies three commonly accepted characteristics of a profession: (1) knowledge base, (2) self-regulation, and (3) ideology. Since he already incorporated “knowledge base” in the first characteristic, he refers with professional workforce only to the last two features.
Self-regulation stands for a profession that has a monopoly on using specific knowledge and regulates it itself. Besides the advantage of excluding non-professionals in the use of the knowledge, this regulation also restricts competition between professionals. The latter is called muted competition. This because less firms can enter the industry and competition between the firms already active in the industry is seen a threat of the quality of the services delivered. Potential consequences of muted
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competition are slack in performance and inefficiencies since the low level of competition does not require full efficiency of the professionals. Muted competition possibly enables firms to find the causes of cat herding in ways that would not be possible in a more competitive environment. A firm for example would be easier willing to give autonomy to its employees.
Ideology has to do with the professional codes of ethics. This refers to both the explicit as implicit behavioural norms. The preference for autonomy may be the most outstanding norm. Having a professional workforce next to a high knowledge intensity increases the need for autonomy even more. The trusteeship norm refers to the responsibility of professionals to protect the interests of all stakeholders. Management can influence the compliance of this norm through choosing specific organizational structures.
2.1.2.4 The Resulting Taxonomy
How higher a firm scores on these three characteristics, how higher the degree of professional service intensity. The resulting taxonomy looks as follows:
1) Classic PSF’s: These are characterized by a high knowledge intensity, a professional workforce
and a low capital intensity.
For example, law and accountancy firms.
2) Professional Campuses: These are characterized by a high knowledge intensity, a professional
workforce and a high capital intensity.
For example, hospitals.
3) Neo-PSF’s: These are characterized by a high knowledge intensity and a low capital intensity.
No professional workforce is required.
For example, advertency agencies and consulting firms.
4) Technology Developers: These are characterized by a high knowledge intensity and high
capital intensity.
For example, biotechnology.
In the following table a clear oversight is given of the categories, characteristics and challenges for management.
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Based on this taxonomy a choice has to be made about which PSF-categories to include in this research. When we would look to the definition in a narrow way, only organizations where the majority of the revenue-generating employees are members of a recognized profession would be considered to be a PSF. This concept includes accounting, engineering and law firms, but also medical practices. Would we consider the definition in a too broad sense, then a wide range of knowledge-intensive professions are also included, among others consulting and advertising firms but also investment banks, although these banks actually are not (Empson e.a., 2015). No existing restrictions for the definition makes it impossible to test existing theories, since we have no idea to which organisations a specific theory should be related.
The current literature mainly focusses on the similarities between all PFS’s and their general distinctive approach related to the management of professionals, therefore assuming homogeneity. However, the taxonomy of Von Nordenflycht (2010) gives clear insights in heterogeneity between the different classes of PSF’s and their different management challenges. In this paper I will start with an analysis on general level by including all categories from this taxonomy, which makes it possible to test for heterogeneity that may exists between different professional service sectors. Further, I will perform a test which compares classical and non-classical PSF’s to see if there are differences between both categories. By comparing the results of each class it will be possible to check for homogeneity in the professional service sector. I will do that based on predictions about different organizational outcomes resulting from table 2.1.
In the next chapter, the concept of Management Control Systems will be explained.
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3 Management Control Systems
3.1 What is Management Control?
The concept of “control” refers to the management and directing of the organization in the widest sense (Sieverdink, 1998). Focussing on management control suggests that also other forms of organization control exist. Anthony & Govindarajan (2004) define management control as ‘the process by which managers influence other members of the organisation to implement the organisational strategies.’ The necessity for management control arises when an organisation gets bigger and starts to hire more employees. At that point, firms need to delegate decision rights what means that management loses their oversight on the daily activities and behaviour of their employees. Since it still wants to make sure that goal congruence exists in the whole firm, it makes use of management control. By stimulating people to act in the best interest of the firm, the chances on achieving the organisational goals will increase.
Merchant & van der Stede (2012) consider management control as a critical function in any firm. They consider it as the final step in the management process after objective setting and strategy formulation. It is more efficient for an organisation to improve management control instead of improving the strategy, assuming the strategy of the firm is valid. The focus therefore should lie at the strategy execution by the employees. When management does not have control over their employees this could lead to reputation damage, financial losses and even bankruptcy.
Merchant & van der Stede (2012), just as Anthony & Govindarajan (2004), also argue the behavioural emphasis of management control. They classify the root causes for the need for management control into three categories: lack of direction, motivational problems and personal limitations. Lack of direction means that the people within the firm do not know what is expected from them. Therefore, the firm must inform their employees about what they should do in order to meet the organizational objectives. Motivational problems are the result of the fact that people are self-interested. An organization can implement incentives in order to motivate people to act in the best interest of the firm. Finally, personal limitations refer to the situation where people are unable to meet the objectives of the organisation, since they are for example limited by their knowledge base and expertise. These problems all individually can lead to an organisation not meeting its goals. Firms therefore should implement a management control system that tackles as much of these problems as possible. Surely, “It is people who make things happen.” The next paragraph will go further on these control systems.
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3.2 Management Control Systems
In the previous paragraph the concept of management control has been explained. The main objective of management control is achieving goal congruence in all levels of the organisation. This is pursued by means of using a management control system (MCS). Merchant & Van der Stede (2012, p. 6) already referred to management control systems in their definition of management control: ‘all the devices or systems managers use to ensure that the behaviors and decisions of their employees are consistent with the organizations objectives and strategies’. Several colleagues of them also provided a definition of MCS’s. Simons (1994, p. 170) for example defines a MCS as: “the formal, information-based routines and procedures used by managers to maintain or alter patterns in organizational activities”. Comparing the theory of Merchant & van der Stede and Simon’s theory of the levers of control shows that in the existing literature, all management control systems are divided into unique sets of control components.
This paper will focus on the theory of Merchant & van der Stede who distinguish between four different control mechanisms based on the object of control. Their theory about the components of a MCS is empirically tested. According to them, organizations can focus on the following components: result controls, action controls, personnel controls and cultural controls. By making use of these controls in a firm-specific combination, organizations try to increase the desired behaviour of their employees. The choice of relying on which controls mostly depends on the degree to which performance is measurable and if the organization knows which behaviour it desires. In the next subparagraphs all control components will be provided with a short description.
3.2.1 Result Controls
Result controls are performance measures which can reward or punish certain performance levels of employees. By choosing for these controls, employees can be made accountable for the delivered results. Since employees are not instructed about how to reach specific results or targets, this control mechanism gives a lot of autonomy to the employees. It stimulates the employees to choose actions of which they think that will deliver the best results in order to increase their reward.
Certain requirements for implementing results controls however do exists. When employees are held responsible for their achievements they must be materially able to influence the results where they are evaluated on. This is called the “controllability principle.” Further, the results must be properly measurable.
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However, the process of setting a performance target and choosing incentives are problematic steps in the process of achieving control and can lead to people feel less autonomous. The research area about developing performance measures and motivating employees is very comprehensive. Atkinson e.a. (2012) mention that constraining employees with for example budgets can lead to dysfunctional behaviour and that monetary incentives linked to performance levels are perceived as controlling and thus a feeling of less autonomy by the employees. The Human Resource Model of Motivation (HRMM) argues that employees should be involved in the process of target setting and decision making. In accordance with HRMM, Groen e.a. (2012) note that employees should be involved in the development of performance measures. This will lead to better quality measures, employees feeling more responsibility and autonomy and also to better performance. Conclusively, applying result controls is complicated and there is a reasonable chance that application in practice will lead to people feeling less autonomous.
3.2.2 Action Controls
Action controls make sure that the employees commit themselves to actions which have a positive impact on the firm or do not take actions which harm the organization. The most important forms of action controls are:
- Behavioural and Administrative Constraints: The internal controls such as passwords, segregation
of duties and personal identification
- Action Accountability: Reward or punish actions which deviate from the established norms
- Pre-Action Review: Direct supervision, which means that actions need to have approval before they
can get executed
- Creating Overlap: By creating overlap between several tasks and having an overabundance of people,
chances will be higher that tasks will be performed as desired
The requirements for implementing action controls are that the actions are directly observable and that management knows what behaviour is desired or which actions certainly are not. Possible advantages of action controls are the codification of desired behaviour. This leads to people knowing what to do and who specifically has to do what. Disadvantages could be the postponing of innovation since creativity is not required and also people can over-focus on the actions while forgetting the organisational objectives.
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3.2.3 Personnel Controls & Cultural Controls
Personnel controls built on the self-control, intrinsic motivation and ethical standards of each individual in an organisation to do the right thing. People have the natural tendency to control and motivate themselves. They can also feel satisfaction out of organizational success. The most important personnel controls are the job selection procedures, training of employees and job design. So, personnel controls serve for maximizing goal congruence between employee and firm through training, job selection procedures etc. .
Cultural controls refer to the values and norms, and social pressure from a group on individuals. This mechanism encourages mutual monitoring. Pressure from a powerful group on individuals is seen as an effective control since members of a group often have emotional bonds with each other. Cultural controls try to increase the monitoring from the group. Examples of cultural controls are codes of conducts, group rewards, tone at the top and intra-organizational transfers. The culture of a organization has developed over time by means of shared traditions, norms, believes, attitudes and ideologies. Therefore, management cannot force a culture. However, by means of cultural controls it can stimulate the culture to move into a certain direction, increase the motivation or diminish personal limitations. So, cultural controls focus on employees having internalized the organisational objectives.
3.2.4 Design
After choosing for a specific set of controls, management can evaluate their management control system. Management can say they have good control over their employees when they have reasonable assurance that no big negative events will arise. Having perfect control is hardly possible since it is too difficult to make systems that guarantee 100% compliance of the employees and besides that it is too expensive. The costs will outweigh the benefits. There is always some control loss in a system. A firm can say it has optimal control when the control loss is expected to be less than the costs of implementing more controls.
3.3 Soft and Hard Controls
In the literature it also common that, instead of dividing a MCS into several control components, there is a made a distinguish between soft and hard controls. Soft controls can be defined as the measures who influence the intrinsic motivation, loyalty, integrity, inspiration and norms and values of
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employees (Soons, 2011). Linking the components of the theory of Merchant & van der Stede (2010) to this concept, then soft controls are the personnel controls and cultural controls implemented in an organisation. In the previous paragraph is explained that personnel controls serve for maximizing goal congruence between employee and firm through training, job selection procedures etc., while cultural controls focus on employees having internalized the organisational objectives.
In contrast, hard controls are result and action controls which define specific targets, procedures and routines. Soft Controls are increasing in importance since they can serve as a substitute and complement of hard controls (Budding & Poulisse, 2010; Aardema, 2007). More use of the latter can result in people feeling less connected to the organisation since autonomy and authority are restricted, which is the opposite effect of what is trying to be achieved in diminishing the chance on misalignments with client needs, as is the case in a professional service setting. Professionals can feel controlled, which makes them follow the rules but does not motivate to perform optimally. Since soft controls can increase autonomy and bonding with the organisational goals, these may be more effective in PSF’s. Surely, these are the characteristics preferred by the professionals. Result controls generally also serve as a good incentive to perform maximally, but in PSF’s the performance is not always measurable. For example, how does a firm measure the performance of professionals regarding innovation (which will be the topic of next chapter)? Therefore, soft controls may be more important in achieving goal congruence in this setting. Conclusive, the difference between both types of controls is that soft controls more than hard controls try to address the intrinsic motivation of each individual.
Having explained the concept of management control and the different types of control that can be implemented by organisations, the next chapter will look at innovation in PSF’s and client power. After having that done, the hypotheses for answering the research question will be developed.
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4 Innovation and Client Power in PSF’s
4.1 Innovation in PSF’s
The professional service sector is considered to be one of the fastest growing and significant sectors on a global basis. The Dutch Central Bureau of Statistics (2016) reported in accordance with this notion, that the Dutch firms in these industries experienced a growth rate of 8,5% in the last quarter of 2015 compared to the same period one year earlier. However, the contribution of PSF’s to the world economy reaches further than only the size of several professional service giants such as Accenture and the Big 4 companies. They also have a crucial role in the development of human capital, service innovation, establishing and interpreting the principles of the financial markets and creation of professional standards. Hence, their economic influence can be considered significantly (Empson e.a., 2015).
This paragraph will elaborate on the importance and challenges regarding service innovation for PSF’s. Innovation not only contributes to the world economy but is also an important determinant for sustaining and increasing a competitive position in the industry for the firm itself.
One of the key characteristics, accentuated before, which sets PSF apart as an organisational typology is the relative importance of the human element in the process of value creation (Hitt et al., 2001). The performance of professionals largely influences if one organization has a competitive advantage over its peers. Therefore a main factor contributing to the differences in performance between different firms in the same industry is the human capital. High quality human capital is difficult to imitate by competitors and because of that it provides a competitive advantage in providing satisfactory service delivery to the clients (Hitt et al., 2011). Satisfactory service delivery is influenced by the client-interaction and the nature of the facilitated services. The ability to recognize and adapt to changes in client demands is crucial in this process (Lovelock, 1983). Especially in PSF’s, innovation is an important business activity since the service sector is subject to continuous changes. Therefore PSF’s have to commit to innovation in order to meet new client demands and sustain their competitive power.
Innovation in a professional service setting can be considered as the development of a new service or the improvement of an “old” service in order to create or sustain an advantage on the market. Innovation is the outcome of the application and deployment of ideas from personnel. The degree to which a company is able to create innovations depends on the innovative capability. According to
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Hogan et al. (2011, p. 1266), this is “a firm’s ability, relative to its competitors, to apply the collective knowledge, skills and resources to innovation activities relating to new services in order to create added value for the firm or its stakeholders.” Since the innovative capability relies on the human capital possessed by the PSF, it should also be seen as something difficult to imitate and therefore providing a competitive advantage. Grant (1996) argues that integrated knowledge is the most important capability a company needs in order to create value and associates having a competitive advantage always with integrated knowledge.
For PSF’s the process of innovation is an important business activity in order to sustain their position in a competitive market. The same holds for traditional manufacturing firms, however the process of innovation and thus creating a competitive advantage is different. In traditional manufacturing firms a R&D-department will be installed where lots of funds will be put in, in order to develop new products and investigate the demands of customers (Blindenbach-Driessen & Van den Ende, 2014). In professional service firms, the organization depends more on the knowledge base and creativity of the professionals and their agreement to integrate all necessary information with all their co-workers into one common pool of information. This is called: innovation involvement. How can the innovation process between these typologies be so distinct? In PSF’s the product delivered is a complex service. These firms mainly sell their services on a contractual basis and next to that, the required knowledge and expertise which is made available to the customer differs for every specific assignment. This is called: client-specific knowledge. The knowledge possessed by the professionals is crucial in these firms in order to deliver services and can never be substituted by a R&D unit. According to Blindenbach-Driessen & Van den Ende (2014), implementing a R&D department in a PSF with as main task driving the innovation process will lead to a significant decrease of knowledge since client contact, high-end service knowledge and innovation competencies are separated. In PSF’s, innovation is the result of creative ideas and problem solving originated by people operating in the field.
This paragraph explained the importance of innovation in PSF’s and gave an explanation of why innovation is different in PSF’s than in other types of organisations. This argumentation is important since it gives insights in the relevance of this thesis. The paper namely tries to give insights in how PSF’s exercise control over their professionals in their organisation. More specifically, how the management control system involves and stimulates the employees in the process of innovation. In the next paragraph will be elaborated on the role of client power in PSF’s and in particular the link with innovation.
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4.2 Client Power and Hypothesis development
Client power is defined as “potential influence”, which means the relative capacity of a certain individual to modify a target’s attitudes and behaviours (Frazier, 1999). Menon & Bansal (2006) found that customers with a high score on “power” also realize that they are able to influence a situation in their advantage. Translating this concept into this paper, I consider customer power as the ability of customers to influence the way firms stimulate innovation, more specifically the control structure in a firm. As shortly mentioned in the introduction, competition and income uncertainty (i.e. environmental uncertainty) can be considered as a problem with large consequences to PSF’s (Empson e.a., 2015). In the demand-side of the sector, the demand to specific services can become volatile. Especially when customers have a diversity of options to choose between.
Jaworski & Kohli (1993) reported that successful innovations, discussed in the last paragraph, highly depend on the degree of competiveness in the industry. Tsai & Yang (2013) agreed with this notion, by arguing that the continuous changes in demands by customers influence the need to take initiative to innovate. This means that we can state that client power has a relationship with innovation. The importance of innovation in order to improve performance therefore should be higher in situations where firms face more environmental uncertainty or face more powerful clients. (Nandakumar et al., 2012). Firms must be quickly able to adapt to changing market conditions and demands (Hutt & Speh, 2010). Buganza et al. (2009) also examined the relationship between environmental uncertainty and innovation and found that the first can be a problem for organisations regarding to innovations. They emphasize the importance of flexibility in the process of innovation in these situations. According to Tsai & Yang (2013), organizations have to invest significantly in innovation and the management of innovative processes in situations where environmental uncertainty is high.
Looking at the situation of specifically PSF’s, these firms even have to focus more on taking a position in the market, identify specific needs and build long-term relationships in order to survive (Empson e.a., 2015). Because of environmental uncertainty they are in a more vulnerable position, while the client has gained a more powerful position. This means that due to the increased client power, the importance of innovation is expected to be even higher. As a result of these developments in the professional service sector, firms are confronted with new management dilemmas. The human resources must be integrated and managed to identify and serve the demands of the clients in an efficient and effective manner. Firms have to stimulate innovate behaviour, but how will they do that? A tension in the MCS arises between empowering and restricting the professionals.
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The unique nature of PSF’s requires individual autonomy and authority for the individuals working in the firm in order to serve each client most effectively and efficiently (Løwendahl, 2007). Soft controls are crucial here, since they built on an individual their mind-set and require individuals to identify these needs. We found earlier that one way to respond to the cat-herding problem is by giving more autonomy to your employees. However, it is also possible that management prefers a control framework with more structure and rules when it faces more client power to be able to control more tightly. I argued earlier that more use of hard controls can result in people feeling less connected to the organisation since autonomy and authority are restricted, which is the opposite effect of what is trying to be achieved in diminishing the chance on misalignments with client needs. Professionals can feel controlled, which makes them follow the rules but does not motivate to perform optimally. Since soft controls can increase autonomy and bonding with the organisational goals, these may be more effective in dealing with client power by stimulating innovative behaviour.
Given the benefits of soft controls in challenging the cat herding problem, I predict that firms will make relatively more use of soft control compared to hard controls when they face more powerful clients.
H1: Higher Client Power leads to a higher Reliance on Soft Controls compared to Firms who face less powerful Clients
Since H1 considers the professional service sector to be a sector consisting out of firms with homogenous characteristics, I would like to examine the relationship between client power and reliance on soft controls also on a more detailed level by looking at heterogeneous characteristics between PSF-categories. Several authors argue that differences exists between PSF’s. Based on the taxonomy of Von Nordenflycht, in hypothesis 2 there will be made a distinguish between classic PSF’s and non-classic PSF’s. Table 2.2 shows that the cat herding problem is the largest within the classic-category. This indicates that the professionals in these firms more intensively require to have autonomy and soft controls therefore are more necessary. Therefore, I predict the following.
H2: The relationship between client power and use of soft controls is more positive when the cat herding problem is larger. (also shown in Figure 4.1 on the next page)
However, I say that innovation is an important business activity and that client power increases the need for innovation. Therefore the relationship between client power and use of soft controls is expected to be mediated by innovation. In other words, I do not necessarily expect that there is a direct relationship between client power and use of soft controls, but I predict that it runs through the
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context of innovation. Figure 4.2 gives a clear oversight of this. It also says that when there is low innovation in a firm, client power is not expected to influence the reliance on soft controls. Thus, the prediction that client power increases the use of soft controls relies critically on the role of innovation as a mediating variable. Accordingly, the third hypothesis will be as follows.
H3: Innovation has a Mediating Effect on the relationship between Client Power and use of Soft Controls.
This hypothesis will be tested on all professional services, only the classic PSF’s and only the non-classic PSF’s.
Figure 4.1: Overview of Hypothesis 2
Figure 4.2: Overview of how innovation (M) is expected to influence the relation between X and Y
Classic PSF Non-Classic PSF
Client Power SC/TC
Client Power Soft Controls
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5 Methodology
In this paper an answer is tried be given on the question of how PSF’s deal with client power. Will they choose to be more reliant on using soft controls or are they not changing their management control system? In order to find an answer on this question and test the developed hypotheses, I chose for conducting a survey research. In this chapter a description is given about how the research is done. First, I will give a small clarification about the sample composition and manners in which data is collected. After that, a description of the methods of use will be given followed by a section which explains the application of statistical methods.
5.1 Sample
In order to conduct this survey research I participated in a large survey research project initiated by the University of Amsterdam. The project is led by Ms. H. Kloosterman. In her project, she is investigating the design and impact of management control systems in PSF’s. By joining her project I was able to get access to a broader amount of survey responses than I could have gathered on my own. Next to that, the survey questions have been developed and tested by someone with experience in doing this. All the survey questions have been added to this paper in Appendix 1. These arguments are benefits related to the relevance and validity of this thesis. However, every participant in the project was felt free to examine a relationship he or she thought to be interesting. No restrictions regarding this were set. The only requirement for participation was that every participant had to collect seven surveys himself from people who fulfilled the following requirements:
- Working experience in the professional service field for at least three years
- Respondent cannot be an owner/partner or board member of the PSF, since they should not be able
to influence the design of the MCS.
- Respondent works in an organisation with a size of at least 50 employees - Respondents must speak and understand English at a business level
Ultimately, the survey project has led to 372 responses. From these 372 responses, 57 respondents did not complete the question list sufficiently. The final sample used in the models therefore consists only out of the 315 completed questionnaires. 61% were filled in online by males (N=192) and 39% by females (N= 123). The respondents were on average 34.5 years old. The youngest was 19 years old, while the oldest respondent was 63 at the time of filling in the survey.
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5.2 Regression Analysis
In order to analyse the data and test the hypotheses, multiple linear regression analysis has been used. The formulated regression equations consist out of a dependent variable, independent variable of main interest, mediating variable and control variables. All possess different kind of interests. Client power is the independent variable of interest and reliance on soft controls the dependent variable. Innovation is expected to be the mediator. Further, several control variables are included in the regression models since prior literature suggests that they have or might have an impact on the use of soft controls. Even though these variables are not our main interest, we have to control for their impact. Model 1: 𝑆𝐶𝑡𝑜𝑇𝐶 = 𝛽0 + 𝛽1 ∗ 𝐶𝑃 + ß2 ∗ 𝐶𝐿𝐴𝑆𝑆𝑃𝑆𝐹 + 𝛽3 ∗ 𝑇𝐴𝑆𝐾𝐶𝑂𝑀𝑃+ 𝛽4 ∗ 𝐶𝐴𝑃𝐼𝑁𝑇+ 𝛽5 ∗ 𝐸𝐷𝑈_𝐿𝑉𝐿 + 𝛽6 ∗ 𝑌𝑅𝑆_𝐸𝑋𝑃 + 𝛽7 ∗ 𝐹𝐼𝑅𝑀_𝑆𝐼𝑍𝐸 + 𝜀 Model 2: 𝑆𝐶𝑡𝑜𝑇𝐶 = 𝛽0 + 𝛽1 ∗ 𝐶𝑃 + ß2 ∗ 𝐶𝐿𝐴𝑆𝑆𝑃𝑆𝐹 + 𝛽3 ∗ 𝑇𝐴𝑆𝐾𝐶𝑂𝑀𝑃+ 𝛽4 ∗ 𝐶𝐴𝑃𝐼𝑁𝑇+ 𝛽5 ∗ 𝐸𝐷𝑈_𝐿𝑉𝐿 + 𝛽6 ∗ 𝑌𝑅𝑆_𝐸𝑋𝑃 + 𝛽7 ∗ 𝐹𝐼𝑅𝑀_𝑆𝐼𝑍𝐸 + 𝛽8 ∗ (𝐶𝑃𝑥𝐶𝑙𝐴𝑆𝑆_𝑃𝑆𝐹) + 𝜀
Model 1 will be used for hypothesis one. For hypothesis two, to this model an interaction variable is added as Model 2 shows. For testing hypothesis 3, which predicts that innovation has a mediating role between use of soft controls and client power, in this study the step-wise regression method from Baron & Kenny is used for determining this relationship (Baron & Kenny, 1986). The first step tries to find evidence about the independent variable (client power) having a significant effect on the mediating variable (innovation). The second step measures the impact of X on Y (reliance on soft controls) and the last step examines the impact of a model containing both independent variables X and M on Y. For this hypothesis therefore three different regression models have to be tested. Below, the model for step 3 is formulated:
Model 3, step 3:
𝑆𝐶𝑡𝑜𝑇𝐶 = 𝛽0 + 𝛽1 ∗ 𝐶𝑃 + ß2 ∗ 𝐶𝐿𝐴𝑆𝑆𝑃𝑆𝐹 + 𝛽3 ∗ 𝑇𝐴𝑆𝐾𝐶𝑂𝑀𝑃+ 𝛽4 ∗ 𝐶𝐴𝑃𝐼𝑁𝑇+
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The third step measures whether the effect of client power on use of soft controls is weaker or even not existent when innovation is included in the model.
From these regression models can be derived that several control variables are used. This is because these possibly can lead to alternative insights and declarations. Further, β0 = the intercept; β1,…, βi are the partial regression coefficients of the independent variables and ε is the residual.
5.3 Explanation of the variables and the reliability of measurement
In the survey several topics are discussed. For most of the topics there exists a list of more than one question. Since the variables of interest are not always directly measured by one question and because for some variables only a part of the questions of a specific survey topic are relevant, constructs have to be created for measuring the variables in the testing model. Each construct only tests one variable and is calculated by taking the average of all questions. All constructs consist out of questions measured at a five-point Likert scale. Since creating a construct is only allowed when all included items are measuring the same, the reliability needs to be tested. This can be done by calculating the Cronbach’s Alpha for every construct. Below, all variables included in the model are explained and an indication is given about the reliability of the measurement based on their alphas. This measure should ideally be above 0.7.
5.3.1 Dependent Variable
The dependent variable “SC_to_TC” serves as a proxy for measuring the reliance on soft controls and is calculated as the proportion of soft controls in relation to total controls. In order to calculate the reliability of this measure, two constructs have to be analysed: soft controls and hard controls. Namely, for calculating a score on total controls, the average on a total including both constructs is calculated. The formulas used are:
Average Score for SC =
(
𝐴𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 𝑆𝑐𝑜𝑟𝑒 𝑓𝑜𝑟 𝑆𝑜𝑓𝑡 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝐹𝑖𝑙𝑙𝑒𝑑 𝑖𝑛 𝑄𝑢𝑒𝑠𝑡𝑖𝑜𝑛𝑠 𝑜𝑛 𝑆𝑜𝑓𝑡 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠)
Average Score for TC = 𝐴𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 𝑆𝑐𝑜𝑟𝑒 𝑓𝑜𝑟 𝑆𝑜𝑓𝑡 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝐴𝑔𝑔𝑟𝑒𝑔𝑎𝑡𝑒𝑑 𝑆𝑐𝑜𝑟𝑒 𝑓𝑜𝑟 𝐻𝑎𝑟𝑑 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝐹𝑖𝑙𝑙𝑒𝑑 𝑖𝑛 𝑄𝑢𝑒𝑠𝑡𝑖𝑜𝑛 𝑜𝑛 𝑆𝑜𝑓𝑡 á𝑛𝑑 𝐻𝑎𝑟𝑑 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 SC_to_TC = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑐𝑜𝑟𝑒 𝑓𝑜𝑟 𝑆𝐶 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑐𝑜𝑟𝑒 𝑓𝑜𝑟 𝑇𝐶
The construct for soft controls includes the following 8 questions about personnel controls and 8 questions about cultural controls:
30 Personal Controls
1. The hiring process to become employed at my firm is extensive. 2. You have to go through many steps in order to be hired at this firm.
3. I interviewed with several people in my organization before being offered a position.
4. The hiring process at my organization evaluates the knowledge, skills, abilities, values and motives of prospective employees.
5. Before being hired, most of my colleagues and I acquired the same kind of job experience. 6. There seems to be little consistency in the type of professional that gets hired for my job. (R) 7. Before being hired, most of my colleagues and I followed the same type of education and training. 8. The competence of employees within my job title varies greatly. (R)
Cultural Controls
1. I socialize with my colleagues outside of work.
2. Since starting this job, my personal values and those of this organization have become more similar. 3. My organization regularly hosts social events for employees.
4. I am not friends with any of my colleagues. (R)
5. I feel a sense of “ownership” for this organization rather than just being an employee. 6. My organization communicates its core values to employees.
7. My organization plans team-building events for employees.
8. My organization creates company sponsored teams for sporting events/fundraisers/volunteer events.
As mentioned before, an average for each respondent is calculated based on their filled in questions. The questions which are marked with an “(R)” at the end had to be reverse coded since they mean the opposite of what is measured. Having this done, the calculated Cronbach Alpha for the measure including all these questions about soft controls is 0.798, which means that the target of 0.7 is met. No problems regarding the reliability of this measure are identified.
The construct for hard controls includes 8 questions about behavioural controls and 8 questions about results controls:
Behavioural Controls
1.Whatever situation arises, we have existing processes, procedures or rules to follow in dealing with it. 2. Established processes, procedures and rules cover all of my job tasks.
3. In my organization, we have rules for everything.
31 5. My job allows me to decide how to adjust rules to best perform my job tasks. (R)
6. The organization I work in primarily uses established processes, procedures and rules to give broad
guidelines as to how activities are to be performed. (R)
7. Employees in my organization are encouraged to use procedures flexibly. (R)
8. Employees in my organization are encouraged to adjust procedures to suit the situation. (R)
Result Controls
- In my job, there is a performance measure for everything.
- My organization sets a large number of performance goals/targets that I am expected to meet. - Employee attainment of goals/targets is checked constantly.
- My supervisor frequently checks to make sure that I am meeting my performance targets. - In our organization, goals/targets are essentially a guideline rather than a true commitment. (R)
- My supervisor is very considerate of my explanations of deviations from pre-established goals/targets. (R) - Responding to new, unforeseen opportunities is considered more important by my supervisor than achieving
pre-established goals/targets. (R)
- In my organization, employees are expected to meet pre-established goals/targets with no exceptions.
Looking at all these items shows that 7 out of 16 questions had to be reverse coded. The Cronbach Alpha for the whole construct is 0.654, which only just does not meet the lower bound of 0.7. Since this paper measures reliance on soft controls using an unique approach, this is not considered to be a problem. Namely this paper identifies the relative use compared to total controls.
5.3.2 Independent Variables
The independent variable of interest is CP (means: Client Power). In the regression I use the survey questions about “environmental uncertainty” as a proxy for client power. When firms experience more competition and pressure, the environment is considered to be uncertain, while in these situations clients have a more powerful position. In the literature section a detailed argumentation has been given about the relationship between client power and use of soft controls. Uncertainty as a fundamental variable in MCS-design has also been stressed out by Chenhall (2003), Chapman (1997) and Hartmann (2000).
