Management Control Systems in
Self-Managing Organizations
A research on how management control systems are designed in self-managing
organizations
V. van de Water
S3254224 24 June 2018
University of Groningen
MSc. BA – Organizational & Management Control Faculty of Economics and Business
Supervisor: dr. R.A. Minnaar Co-assessor: dr. C. P. A. Heijes
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Abstract
There has been little empirical research on management control systems (MCS) in self-managing organizations (SMO). This research aims to contribute to this topic by means of a single case study in which data is gathered through archives, interviews, and observations. New insights on MCSs in SMOs are found through comparing the MCSs implemented at an agile organization to the traditional MCSs designed by Malmi and Brown (2008). The outcomes of the study are clarified by the stewardship theory and the enabling type of bureaucracy. The differences between traditional MCSs and the MCSs implemented at SMOs can be explained according to (1) the difference between the management styles and (2) the problems which are identified from moving from a traditional managerial hierarchy to an agile organization.
Keywords
Self-management, management control systems, stewardship theory, bureaucracy.
Acknowledgement
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1. INTRODUCTION
The functioning of traditional managerial hierarchies in modern organizations is as persistent as are the calls for its replacement. According to the literature, the managerial hierarchy which dominated in the late nineteen and twentieth century proved to be resistant to change (Lee and Edmondson, 2017). Resistance to change derived from the fact that managers are seen as essential mechanisms in guiding and directing work (Adler, 2001; Burns and Stalker, 1961). Moreover, managerial authority contributes to establishing goals in an efficient and simple way, and to resolving disagreement (Magee and Galinsky, 2008; Nickerson and Zenger, 2004; Simon, 1947; Wiliamson, 2000). On the other hand, persistence of managerial hierarchy is questionable due to its effectiveness. Over the last-half century, the limitations of the traditional managerial hierarchy have become visible (Lee and Edmondson, 2017). It is suggested that the traditional managerial hierarchy effectively operates under stable conditions. However, when the environment is dynamic, the traditional managerial hierarchy encounters serious challenges (Burns and Stalker, 1961). Adler (2001); Barley (1996); Heckerscher & Donnellon, (1994) state that managerial hierarchy works effectively for known tasks, but it lacks the ability to solve complex non-routine problems. Due to the persistence of the managerial hierarchy on the one hand and the replacement of the traditional managerial hierarchy on the other hand, a contradiction is found.
Due to this contradiction, trends are defined that motivate the search for less-hierarchical forms of organizing (Lee and Edmondson, 2017). This search results from threats to the traditional system. Especially the ability to spread information faster and the continuous technological developments are challenging the traditional managerial hierarchical systems. Moreover, many organizations currently operate in a knowledge economy. Within a knowledge economy, individuals of different organizational levels contribute to the overall success (Lee and Edmondson, 2017). According to Lee and Edmondson (2017), there are many approaches to design less-hierarchical organizations. The focus of this research will be on agile in order to diminish the scope.
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to be conducted on decision-making processes in SMOs in order to define how such organizations handle conflict and crisis (Lee and Edmondson, 2017).
On the contrary, much is written about management control systems (MCS) in traditional managerial hierarchies. Among others, Merchant and van der Stede (2012) define four types of control; result controls, action controls, personnel controls, and cultural controls. Simons (1996) developed the four levers of control: belief systems, boundary systems, interactive control systems, and diagnostic control systems. Lastly, Malmi and Brown (2008) define the MCS as a package including cultural, planning, cybernetic, reward and compensation, and administrative controls. The focus of this research will be the MCS defined by Malmi and Brown since this is seen as the most extensive definition.
Since little is known about MCSs in SMOs, the following research question has been developed: “How are management control systems designed in self-managing
organizations?”. By answering this research question it is aimed to contribute to the debate
on MCSs in SMOs. Secondly, it tries to clarify how MCSs are designed within SMOs and what situational and psychological factors and types of bureaucracy are influencing the design.
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2. LITERATURE REVIEW
2.1. Self-Management
For most organizations, self-management is a relatively new phenomenon. Self-management is explained as organizations that “capture efforts that radically decentralize authority in a formal and systematic way throughout the organization” (Lee and Edmondson, 2017).
In order to create less-hierarchical organizations, decentralization takes place. This can occur in different ways: the number of formal authority levels – leadership – can be decreased, or the authority across existing hierarchical levels can be equally distributed (Lee and Edmondson, 2017). These different ways lead to different forms of self-management such as agile (Rigby, Sutherland, and Takuchi, 2016), Holacracy (Bernstein, Bunch, Canner, and Lee, 2016), business process re-engineering (Hammer and Chamy, 1993), and lean or high performance organizations (Jentasch, 2016). The focus of this research will be on agile since this is the form of self-management the case company adapted to.
One of the advantages of SMOs is that information and technological developments can flow faster through the organization. Secondly, it provides a growth in knowledge-based work. A less-hierarchical organization leads to a knowledge economy in which ideas and expertise are shared among the employees. New ideas, goals, and tasks are tackled by divisions or departments, not individuals (Bernstein et al., 2016). Thirdly, it improves the employee’s work experience. Employees have the opportunity to express their personal meaning which is highly valued by the other employees (Lee and Edmondson, 2017). Lastly, through self-managing, impediments to day-to-day work progress can be removed which also set colleagues up to be helpful and supportive for one another (Bernstein et al., 2016).
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2.2. Agile
According to the agile principles people are taken out of their functional silos and put in self-managing, customer-focused multidisciplinary teams (squads) with a focus on innovation in highly dynamic environments (Rigby, Sutherland, Takeuchi, 2016; Venkatesh, Agarwal, 2009). Every team has an “initiative owner” who is responsible for the output delivered to the customers and the business. However, the initiative owners nor divide or delegate tasks and neither define how long the tasks will take. This is up to the squad members themselves (Rigby et al., 2016). Likewise, according to Maruping et al. (2009, p. 381), squad members are “responsible for managing their own processes and making decisions about how project goals will be attained.”
The implementation of agile can differ across companies; however, it shares the same basis. It includes “scrum, which emphasizes creative and adaptive teamwork in solving complex problems; lean development, which focuses on the continual elimination of waste; and Kanban, which concentrates on reducing lead times and the amount of work in process” (Rigby et al., 2016). A Kanban is a large whiteboard divided into three sections: “to-do”, “doing”, and “done”. In this way, the teams keep their progress and impediments constantly visible and transparent to all employees (Rigby et al., 2016).
As stated by Rigby et al. (2016), the major benefits of agile are increased team productivity and employee satisfaction, a minimization in waste inherent in redundant meetings, repetitive planning, excessive documentation, quality defects, and low-value product features.
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employees but the output delivered is checked by the initiative owner. According to agile practices, the process is transparent to everyone and information is shared in stand-up meetings (Rigbey et al., 2016). This can be related to the organizational/work design. Since all information is available to different functions and divisions, it can be said that this factor is decentralized. Personnel/performance management is decentralized. Performance is increased since agile minimizes the waste inherent in meetings, planning, documentation, and quality defects (Rigby et al., 2016). Personnel management is decentralized since employees can choose their own tasks (Rigby et al., 2016). Finally, according to agile practices, the firm’s strategy is developed by senior managers since they devote themselves to creating and adjusting the corporate vision and prioritizing strategic initiatives (Rigby et al., 2016). Therefore, this factor is not decentralized.
Even though some is written about agile practices, it is unknown to what extent MCSs are used in SMOs in general (Lee and Edmondson, 2017) and how project managers should manage teams who are using agile principles (Maruping et al., 2009). However, before more clarity can be given about the just mentioned problems, MCSs will be described in detail first.
2.3. Management Control Systems
Within the literature, several forms of MCSs are defined such as Merchant and van der Stede (2012) who define four types of control – result controls, action controls, personnel controls, and cultural controls – which should be implemented within an organization to operate effectively and efficiently. Based on these four types of control, Merchant and van der Stede (2012) define MCSs as dealing with employees’ behaviour. Moreover, according to Simons (1995, p. 5) “MCSs are the formal, information-based routines and procedures managers use to maintain or alter patterns in organisational activities”. Simons (1995, 2000) defines MCSs based on four levers of control which are: belief systems, boundary systems, diagnostic control systems, and interactive control systems. Furthermore, Malmi and Brown (2008) define MCSs as a package including cultural, planning, cybernetic, reward and compensation, and administrative controls. In which MCSs can be defined as “those systems, rules, practices, values and other activities management put in place in order to direct employee behavior” (Malmi and Brown, 2008, p. 290).
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Also, according to Malmi and Brown (2008), the definition of Merchant and van der Stede (2007) “is based on the assumption that someone (senior manager/top management team/dominant coalition) is seeking to control the behaviour of others (middle management, employees)”. This assumption does not define the difference between an MCS and decision-making authority. Subsequently, if there is no mechanism to monitor subordinate manager’s goal congruence and behaviour it cannot be seen as an MCS, then it rather functions as a decision-support system or an information system (Malmi and Brown, 2008). Therefore, the definition of Merchant and van der Stede (2012) is not seen as appropriate for this research. Furthermore, as is stated by Malmi and Brown (2008), Simons (1995) levers of control are akin to the definition of Malmi and Brown except that the focus of Simons is on information-based routines. Due to this focus, the levers of control are not functioning as a control system but rather as information for decision-making (Malmi and Brown, 2009).
Malmi and Brown (2008) study MCSs as a package since MCSs do not operate in isolation. “If the links between various MCSs are not recognized, then the way in which the considered MCSs components relate to studied contingent variables will lead to erroneous conclusions” (Malmi and Brown, 2008, p. 287). Furthermore, through studying MCSs as a package, cultural and administrative controls are taken into consideration (Malmi and Brown, 2008). Considering the reasoning of Malmi and Brown about studying MCSs as a package, the MCSs defined by Merchant and van der Stede (2012) and Simons (1996) both do not include all types of control. Therefore, the definition of the MCS provided by Malmi and Brown (2008, p. 290) – “those systems, rules, practices, values and other activities management put in place in order to direct employee behaviour” – will be used within this research since it is seen as the most extensive definition.
2.3.1. Management control systems as a package
Malmi and Brown (2008) define five types of control; planning, cybernetic, reward and compensation, administrative and cultural controls.
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ordination through aligning a set of goals across the functional areas of an organisation, thereby controlling the activities of groups and individuals to ensure they are in line with the desired organisational outcomes” (Malmi and Brown, 2008, p. 291). The planning controls can be divided into two categories, long-range planning and action planning. Long range planning has a strategic focus and goals and actions are defined for the medium to long run. Action planning refers to the immediate future, where the focus is one year or less (Malmi and Brown, 2008).
The second type of control is cybernetic control. According to Green and Welsh (1988, p. 289) “cybernetic control is a process in which a feedback loop is presented by using standards of performance, measuring system performance, comparing that performance to standards, feeding back information about unwanted variances in the systems, and modifying the system’s comportment”. The MCS literature considers four cybernetic systems; budgets (Bunce, Fraser, and Woodcock, 1995; Hansen, Otley, and van der Stede, 2003), financial measures (Ittner and Larcker, 1998), non-financial measures, and hybrids (Greenwood, 1981; Ittner and Larcker, 1998; Kaplan and Norton, 1992; Kondrasuk, 1981; Malina and Selto, 2001). Budgets are used as a control mechanism focusing on planning acceptable levels of behaviour and evaluating performance against those levels. Financial measures focus on narrow target-setting. Examples of financial performance measures are return on investment and economic value added. Non-financial measures are an addition to the financial measures since it is aimed to overcome the limitations of the financial measures such as indentifying the drivers of performance. Lastly hybrids, these include both financial and non-financial measures such as the balance scorecard (Malmi and Brown, 2008).
Thirdly, reward and compensation controls. These systems “focus on motivating and increasing the performance of individuals and groups within organisations by achieving congruence between their goals and activities and those of the organisation” (Bonner and Sprinkle, 2002), and can be divided into extrinsic and intrinsic rewards and compensation (Malmi and Brown, 2008). The general argument is the presence of rewards and compensation for good behaviour and effort leads to an increase in effort, as compared to an absence of rewards and compensation (Malmi and Brown, 2008).
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Brown, 2008, p. 293). The administrative controls can be separated into; organization design and structure (Abernethy and Chua, 1996; Alvesson And Karreman, 2004; Otley and Berry, 1980), governance structure (Abernethy and Chua, 1996), and procedures and policies (Macintosh and Daft, 1987; Simons, 1987). The organization design and structure can encourage certain types of contact and relationships (Malmi and Brown, 2008). The governance structure includes the formal lines of authority and accountability (Abernethy and Chua, 1996) and the systems put in place in order to guarantee that the various functions and organizational units coordinate their activities horizontally and vertically (Malmi and Brown, 2008). The procedures and policies are the bureaucratic approach to specifying the processes and behaviours within an organization (Malmi and Brown, 2008).
Lastly, cultural controls which can be defined as “the set of values, beliefs and social norms which tend to be shared by its members and, in turn, influence their thoughts and actions” (Flamholtz et al. 1985). Within cultural controls, three subgroups are defined: value-based controls (Simons, 1995), symbol-based controls (Schein, 1997), and clan controls (Ouchi, 1979). Value-based controls refer to the “values and direction that senior managers want subordinates to adopt” (Simons, 1995, p. 34). Value-based controls work on three levels. The first level is when organizations hire individuals which personal values match the organizational values. The second level is when individuals change their values accordingly to match the values of the organizations. The third level refers to individuals who do not have the same personal values as the organization but the individuals act in accord with them even though the individuals do not adhere to them personally (Malmi and Brown, 2008). Symbol-based controls are visible expressions such as the building, workspace design, and dress code which create a particular culture (Schein, 1997). Clan controls are distinct subcultures which are created within the organization. Subcultures may result for example from having the same function (Malmi and Brown, 2008).
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Figure 1: Management Control Systems Package (Malmi and Brown, 2008).
2.4. Stewardship Theory
The literature shows that there is still much unknown about how control systems are defined in SMOs (Lee and Edmondson, 2017). However, the stewardship theory may provide new insights on how control could be designed in agile organizations. Stewardship is used as a form of corporate governance (Davis, Schoorman, and Donaldson, 1997).
The stewardship theory can be defined as collectivistic behaviour in which “a steward’s behaviour will not depart from the interests of his or her organization. And a steward will not substitute or trade self-serving behaviours for corporative behaviours” (Davis et al., 1997). The focus is on the collective behaviour since the stewards (employees) of the organization seek to attain the objectives of the organization over individual objectives. A steward is motivated to maximize organizational performance, and at the same time, satisfying the competing interests of shareholders (Davis et al., 1997). Moreover, according to the stewardship theory personal needs can be met if all stewards work towards the organizational objectives through collective behaviour.
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Since the focus of the stewardship theory is on the collective, aligned organizational interests and objectives, and optimizing organizational performance, it can be said that the stewardship theory focuses on structures that facilitate and empower rather than those that monitor and control (Davis et al., 1997). Monitoring and controlling is referred to as the agency theory which states that the agents (management) and the principals (shareholders) wish to increase individual utility. It is the responsibility of the agent to maximize shareholder utility, however, “executives accept agent status because they perceive the opportunity to maximize their own utility too” (Davis et al., 1997). According to the agency theory, alignment between the agent and the principle could be achieved through MCSs. The MCS is imposed in order to keep the agent’s self-serving behaviour in check and to monitor agents and employees (Davis et al., 1997). The MCS can help to reach the organizational goals through influencing the employees’ behaviour (Reimer, Van Doorn, and Heyden, 2016).
However, in order to define the difference between facilitating and empowering (stewardship theory), and monitoring and controlling (agency theory), a number of dimensions are defined by Davis et al. (1997) to differentiate between the theories. These dimensions can be divided into two broad factors, psychological factors and situational factors. Both are described in the subsequent sections.
2.4.1. Psychological factors
The psychological factors include motivation, identification and use of power.
With regard to motivation, the major difference between the agency theory and the stewardship theory is the focus on extrinsic versus intrinsic motivation (Davis et al., 1997). The focus of the agency theory is on extrinsic rewards which define commodities that have a market value. The extrinsic rewards form the basis for the reward system and can be used as a control mechanism. The better the employee’s performance, the higher the reward (Davis et al., 1997). With regard to the stewardship theory, the focus is on intrinsic motivation. Intrinsic motivation defines rewards including “opportunities for growth, achievement, affiliation, and self-actualization” (Davis et al., 1997). It is expected that intrinsic motivation results in higher levels of performance and larger satisfaction with work (Davis et al., 1997).
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this belief are working towards achieving the organizational objectives and tackle barriers that could prevent them from achieving these goals. On the other hand, if managers do not identify themselves any longer with the organization and make organization problems worse, they fall within the principles of the agency theory (Davis et al., 1997).
The last psychological factor is the use of power. The stewardship theory refers to personal power which is not influenced by position and is used to establish interpersonal relationships through identification of one person with another. On the contrary, the agency theory refers to power as institutional power. This type of power is based on the position of somebody in the organization (Davis et al., 1997).
2.4.2. Situational factors
The situational factors include management philosophy and cultural differences.
The management philosophy factor can be divided into two contradicting views, control oriented versus involvement oriented. As stated by Lawler (1986), the control oriented view is based on the fact that the thinking and controlling part should be separated from doing the work. This view is related to the agency theory. However, the involvement oriented view does not make this separation and emphasizes on self-control and self-management. This view of management philosophy is related to the stewardship theory (Davis et al., 1997).
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2.5. Types of bureaucracy
The literature regarding self-management, agile, MCSs, and the stewardship theory can be used to define what kind of control is implemented at the case company and/or define the characteristics of control types matching the self-managing principles. However, in order to understand how the implemented control systems are used at the case company, the type of bureaucracy used can be considered.
There are two types of bureaucracy, coercive and enabling. The coercive type of bureaucracy can be defined as the asymmetry of power, rules and procedures, and divergence of economic interests in capitalist firms (Adler and Borys, 1996). On the other hand, the enabling type can be defined as learning from experiences, define opportunities for improvement, interaction with employees and the environment (Adler and Borys, 1996), and “involves explaining the goals of procedural requirements to employees” (Feeney and DeHart-Davis, 2009).
According to the literature, reduced bureaucracy leads to an organization having internal deregulation, in which organizational rules are trimmed or eliminated, and the organization is decentralized in which decision-making authority is pushed downwards in the organization (Feeney and DeHart-Davis, 2009). These consequences of reduced bureaucracy could be linked to agile.
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3. METHOD
3.1. Research design
Qualitative research is considered the most appropriate since it provides a useful understanding for the underlying relationships between self-management and MCSs in this study (Eisenhardt, 1989). Also, since little is known about MCSs in SMOs, exploratory research in required (Eisenhardt, 1989). Furthermore, inductive reasoning will be used because the outcomes are not certain or well-defined. Therefore, it is necessary to collect information from the real world, gathered by means of a case company, in order to formulate general theories based on the collected data (Lee and Lings, 2008). Since only one case company is selected, the research is focused on a single case and therefore the single case study approach is chosen as the most suitable research strategy (Eisenhardt, 1989).
At the start of this research the literature has been examined extensively. Based on the literature, the MCS defined by Malmi and Brown (2008) has been chosen as a construct in order to shape the initial design of this research (Eisenhardt, 1989). The interviews were conducted to research to what extent company X is actually working according to the agile principles and to understand how the MCSs are designed at the company. Next to the interviews, observations were conducted and archives were read leading to triangulation. Triangulation is used to enlarge the data set, to reduce the researcher’s biases, and to reassure the readers that the conclusions are valid, leading to enhanced validity (Lee and Lings, 2008). In order to control for respondents validity the full field notes of the observations are checked by the operations manager and a team leader (Lee and Lings, 2008).
All the interviews are recorded, transcribed, and eventually coded. Through this reliability is assured (Lee and Lings, 2008). Since all interviews are transcribed word by word, the transcripts only contain opinions, expressions, and thoughts of the interviewees.
After having conducted eight interviews, theoretical saturation was reached since the observing phenomena were seen before and no new information was obtained (Eisenhardt, 1989; Lee and Lings, 2008).
3.2. Case company
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Company X is seen as appropriate for this research since they adapted to agile practices three years ago. Moreover, the company is operating in the Information Technology (IT) industry which is undergoing rapid restructurings (Halkos, Tzeremes, 2007) and can therefore be labelled as a dynamic environment. Furthermore, the company has multidisciplinary teams which are self-managing. Both the dynamic environment and the multidisciplinary teams are characteristics of agile (Rigby, Sutherland, Takeuchi, 2016; Maruping, Venkatesh, Agarwal, 2009). Due to this, it can be assumed that company X matches the agile practices and can contribute to the emergent theory about how MCSs are designed in agile organizations. However, the case company adapted to agile practices only three years ago,so they are still searching their way through.
3.3. Data collection
The data is collected from three different sources, namely archives, interviews, and observations. Firstly, the archives were analyzed. Based on this analysis part of the interview questions were formulated. Subsequently, the observations were carried out in order to check the answers of the interviewees.
3.3.1. Archives
At the start of this research the internal policy document, called the handbook, has been analyzed in order to get a good understanding of the business and its main operations. Overall the handbook is used to provide employees with descriptions and explains how certain tasks could be carried out. The handbook is written in an informative way and does not contain any rules or explicit work procedures. Neither is anything written about the agile practices or how the company should adapt to it.
However, one document – the project control scheme – was useful in this study. This scheme was used by the controller in order to check with the team leaders whether they were still on track with regard to the financials such as invoicing, costs, and hours. This information has been processed in the interviews by means of questions about how individual and team performance is measured and how this measurement is experienced.
3.3.2. Interviews
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the interviews were semi-structured in which the interview questions were guided by an interview guide. Please refer to Appendix I for the interview guide. The interview guide has been based on the subjects discussed in the literature review in order to ask the interviewees generally the same questions (Lee and Lings, 2008). However, next to the guidance of the interview guide, a high degree of flexibility remained in order to follow up interesting points (Lee and Lings, 2008).
Since this is an exploratory research in which the reasoning is inductive, some adjustments were made during the data collection process (Eisenhardt, 1989). Beforehand, interview questions were established. However, after having conducted two interviews, new input was found and new additional questions were formulated (Eisenhardt, 1989).
The interviewees are chosen according to the different roles present in the case company. In the table below the interviewee profiles can be found.
Team Function Length of the interview Date
Team green Team leader 30.25 min 24 April 2018 Team red IT manager/team leader 56.49 min 2 May 2018
Management team CEO 45.16 min 8 May 2018
Management team Operations manager 43.28 min 2 May 2018 Team red Front ender 42.32 min 25 April 2018 Team orange Digital Marketeer 35.31 min 3 May 2018
Team blue Back ender 32.10 min 8 May 2018
Team blue Consultant 33.25 min 3 May 2018
Table 1: Interview profiles
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3.3.3. Observations
Within this research, two observations were carried out. One observation was held during a daily stand-up in which everybody told about the tasks they were working on and any additional feedback and/or feedforward was provided by team members towards one another. The second observation was held during the four weekly company heads-up meeting in which every team told something about their tasks, their progress, and any future ideas/tasks. During this meeting, the aim was to keep each other informed about what is going on in the business. During the observation, attention was paid to the setting, the atmosphere, and the aim of the meeting in order to emerge myself into the agile culture of the company (Lee and Lings, 2008). Every occurred impression during the observation which seemed important was written down briefly and discretely in a notebook (Eisenhardt, 1989; Lee and Lings, 2008). After the observation, the brief notes were used in order to write full field notes which contained as much detail as possible, including the contexts described above: the setting, the atmosphere, and the aim of the meeting (Lee and Lings, 2008).
The observations were carried out after the interviews had been conducted since replication within a case can confirm or disconfirm the information provided in the interviews (Eisenhardt, 1989). The observation details can be found in the table below.
Observation Length of the observation Date
Stand-up team green 15 min 2 May 2018
Heads-up 75 min 3 May 2018
Table 2: Observation details
3.4. Data analysis
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4. RESULTS
4.1. Management control systems at company X
By conducting a single case study at company X, it can be understood how MCSs are designed in this SMO.
4.1.1. Planning controls
As is stated by Malmi and Brown (2008), planning controls are subdivided into long-range planning and action planning.
Company X is operating in a highly dynamic and changing environment – the IT industry – in which all teams make their own planning. Nevertheless, several teams at company X are dealing with ad hoc proceedings making planning a difficult aspect. These ad hoc proceedings do not have any tactical focus let alone a strategic focus. An employee explained:
“We need to deal with ad hoc proceedings which you do not add to your planning. The processing time of these proceedings is longer than the actual time you would spend on fixing the customer’s problem”.
Next to the ad hoc proceedings, company X defined three organisation goals with a strategic focus. Company X aims to increase its revenue by 10%, obtain an 8 for customer satisfaction, and an 8 for employee satisfaction. The amount of effort to reach the goals is currently determined by the teams and management, but it is aimed to shift this responsibility more to the teams alone within the future.
“The teams need to make sure that they can change, from being dependent on management to carrying their own responsibilities”.
The organizational goals are set by management and can be referred to as strategic goals. These goals are set in order to provide focus for the employees. However, the teams are asked to what extent they can contribute to reaching these goals. The following quotes explain.
“We do not have any influence on setting the organizational goals”.
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Even though the organizational goals are set by the management, employees do not have the necessity to interfere with setting these goals.
As is stated by Malmi and Brown (2008), long-term planning has a focus of more than 12 months, action-planning has a focus up to 12 months. Nevertheless, the interviews show that both the long-range planning and the action planning have a too large time span for company X. Therefore, it is aimed to switch from year goals to quarter goals. In which the set targets are lowered and the time span is shortened. An employee explained:
“Keeping focus on a yearly goal is difficult. You constantly have to repeat it”.
This repetition is done during the four weekly heads-up meeting in which every team represents their progress towards reaching the organizational goals.
“The heads-up is a moment of repetition. In which we tell where we want to go and what we want to reach. We also demonstrate where we’re currently at as an organization. Also, every team presents it contribution and tells what goes well and what not”.
Finally, after having conducted the interviews and doing the observations, it became clear that the long range planning is not applicable to company X.
4.1.2. Cybernetic controls
Cybernetic controls contain four divisions: budgets, financial performance measures, non-financial performance measures, and hybrid performance measurement systems (Malmi and Brown, 2008).
The organizational goals are set by management but every team defines their own subgoals related to the organizational goals.
“I am responsible for the KPI’s and how we as management measure these KPI’s”. “Every team has its own goal and every sprint we know how many hours we need to make”.
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“We measure performance along the way, not afterwards. I do not want to know how it was I want to know how it is going”.
“If you realize along the way that you are not going to reach the target, then you should not continue, you should first tackle the problem. You can always ask for help. And if you do that, you will see that you reach the target”.
Overall, employees experience that there is enough information available about the progress towards achieving the organizational goals and what every team can contribute in order to achieve the goals.
The financial performance measures at company X are based on a 10% increase in revenue. In order to specify this more clearly per team, every sprint and the billable hours (70% of the total hours) of every team are based on this 10% increase in revenue. An employee explained that the financial measures are mostly based on hours:
“Most of the performance measures are based on hours. How many hours are made per team, how many hours are invoiced”.
Even though the financial numbers are presented in the four weekly heads-up, employees experience that financial measures only do not provide a complete adequate picture of what is going on.
“The numbers look good so probably we are doing well. But it’s not all about the numbers, the numbers are guidelines”.
Nevertheless, several actions are taken which do measure non-financial performance. The non-financial performance measures are related to the following goals: an 8 for customer satisfaction and an 8 for employee satisfaction. In order to measure the customer satisfaction, company X started a market research. Moreover, the employees work with the customers directly resulting in close contact.
“We have direct contact with the customer. So in case a customer is unsatisfied you hear it immediately”.
Regarding employee satisfaction several teams have their own measurements.
“In our team we use a smiley factor in order to measure our satisfaction”.
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Moreover, in order to improve the employee and subsequently the customer satisfaction one management member is doing individual meetings with employees. During these meeting it is discussed how the employee experiences his or her work, how he or she experiences the team work, and what could be improved in order to proceed towards the 8 for customer- and employee satisfaction.
Finally, based on the interviews and the observations at company X, it became clear that the company does not make use of hybrid performance measurement systems.
4.1.3. Rewards and compensation controls
According to Bonner and Sprinkle (2002), rewards and compensations lead to an increased effort of individuals and groups. At company X, all employees receive a percentage of the profit at the end of the year.
“Every year we pay out a percentage of the company profit to the employees. That is a collective reward for the achieved results”.
Next to that, company X added this year a new developed classification scheme. According to this scheme the organization can perform below the target, at the target, better than the target, or far above target. Based on these classifications, different rewards are set. The higher the performance, the larger the reward. The aim of these classifications is to give the employees an extra reward after a certain classification has been reached. However, the effectiveness of this classification scheme is interpreted differently among employees.
“If you tie compensation to performance, people are hunting. They are willing to put in some extra effort”.
“Your motivation should be intrinsic and should not be based on nice trips or parties. Of course you can celebrate good results, but it should not be the goal in itself”.
The effectiveness referred to above is with regard to the compensation after a certain classification has been researched. Nevertheless, the interviewees made explicit that (next to extrinsic motivation rewards) intrinsic motivation is the most important. This can be concluded from the following quotes:
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“People are not working here because they receive a bonus at the end of the year. But you should motivate people by providing enjoyable work and giving them the opportunity to develop themselves”.
To what extent the classification scheme eventually contributes to extra motivation cannot be said yet since the year has not ended. By the end of 2018, the beginning of 2019 company X can evaluate whether and how it has contributed to the motivation.
4.1.4. Administrative controls
As is stated by Malmi and Brown (2008), administrative controls are divided into organizational structure, governance structure, and policies and procedures.
Before company X adapted to the agile principles, all the employees were grouped according to their function. However, after changing to the agile way of working people were no longer grouped according to the functions but instead multidisciplinary teams were formed. Moreover, after restructuring, all teams were placed on the same hierarchical level.
Due to the new organization structure is it aimed to ease communication among different functions, to ease communication between the teams and management, and to reduce the hierarchy. However, there are some contradictions experienced by the employees:
“What happens in the teams is easier communicated upwards since there is one layer with team leaders who transport this information. Therefore the information is not only provided top-down but also bottom-up”.
“I do not have the feeling that there is any hierarchy at all. Everybody is treated with respect”.
“Eventually there is no hierarchy, but on the other hand there still is a sort of hierarchy. In the end someone has to take responsibility. You cannot not decide that’s the worst you can do”.
Currently, management is still placed above the teams since the company is still in the transition phase with regard to the implementation of agile. However, it is aimed to move management to the same layer, or maybe even below the teams in the future.
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need to be involved. That the teams have the feeling they decided themselves on the targets”.
Regarding the governance structure, company X organizes once a week a ‘weekly’ meeting in which all team leaders meet together with one management member. During these meeting all team leaders meet to ensure that they are informed about what is going on in the organization. Subsequently, the team leaders forward this information to the teams. A management member explained:
“We make sure that the team leaders are informed about everything in the organization. To ensure that they know what is going on and to keep the teams focused”.
Also the four weekly heads-up meeting is used to inform all the employees. During these meetings employees are reminded of the organizational goals and some updates are given in order provide boundaries and direction for the employees. But how they fulfil the work within the boundaries is up to the employee.
“I am completely free in how I do my task. And the funny part is, it works. I just report to management to keep them updated”.
The heads-up meeting is not only used to remind and inform the employees about the organizational goals. Also management is informed about the work in progress or finished work of the teams. The aim of the heads-up meeting is to keep each other informed about the activities within the organization. Moreover, by means of these mutual information flows management wishes to reduce its control practices. A manager explained:
“We as management need to let go, switch to coaching instead of directing. This is something we as management are working on”.
The fact that management is still working on it is also realized by the employees:
“Management wants to keep the control. Sometimes it’s hard for them to let go”. “Management tries to be facilitative towards the teams. […] they are really involved and therefore know exactly what is going on. But this also makes it hard for management to take a step back”.
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“I never asked for any approval thus far”.
But the freedom is not infinite; the employees have prespecified frameworks which they cannot exceed. These frameworks can be the number of hours, an amount of money, or their job description. However, in case the boundaries are touched or about to be touched, management steps in.
“We still check the projects and as soon as we see something extraordinary we ask for explanations”.
The frameworks which are currently used are sometimes questioned too. Obviously employees need to act within a social framework (e.g. law, behaviour) but to what extent frameworks need to be established regarding the work procedures is questioned. Managers explained:
“The more we guide, the more the employees say: I did this because you wanted me to. But the more we let them make decisions, the more responsible they feel. And the more responsible they feel, the more they like their job”.
“As long as it is clear where we as an organization want to go, we as management do not have to do a lot, at least no guidance”.
The fact that the establishment of frameworks is still questionable is related to the fact that company X is still in the transition phase with regard to adapting to agile practices.
4.1.5. Cultural controls
Cultural controls are subdivided into three aspects: value-based controls, symbol-based controls, and clan controls (Malmi and Brown, 2008).
Regarding value-based controls certain aspects of the hiring procedure have changed. Currently, the level of knowledge is not the only measurement during the recruitment process, company X also evaluates attitude, behaviour, and personal motivation, and it’s more focused on the mentality of an individual. Furthermore, it is wished to include team members in the recruitment processes. According to the employees the company mentality is important. Therefore, new employees should fit within the team. An employee explained:
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Symbol-based controls are focused on visible expressions such as building and workspace design. Company X moved to a new office three years ago, at the time company X also decided to switch to agile practices. The new office is an open office in which everybody is working on the same floor. This does not only lead to an open culture, but it also eases communication. On the contrary, it could lead to a higher degree of work interruption or concentration.
“The space is open and the teams are open. Everybody knows what the others are doing. We can even see each other’s dashboards”.
“I think it is very positive that we can approach each other easily. However, it is also a fact that it leads to an increased interruption of your focus”.
Next to the fact that all employees are working on the same floor, so is management. Management is not working in a closed office and the Kanban board of management is just a largely present in the company as are the Kanban boards of the teams.
Lastly clan controls. Company X works in an open office but nevertheless, particular clans are formed due to organizational units.
“There are certain clans formed between the teams, but also team transcending. But that is something you cannot withhold”.
“It is important that we as back-enders have good contact”.
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5. DISCUSSION
The previous section explained how the MCS is designed at company X being a SMO. In this section it will be explained how the MCS at company X differentiates from the MCSs in traditional organizations and to what extent this difference can be explained by the stewardship theory. The findings of this research show that SMOs do not necessarily use the same types of control or that the control types are carried out similarly. Therefore, this single case study proposes that MCSs in traditional organizations differ from MCSs in SMOs. The research findings show that company X does not uses the exact same planning controls as defined by Malmi and Brown (2008). According to Malmi and Brown (2008) MCSs can be designed differently due to contingent factors such as an uncertain environment. Environmental uncertainty combined with agile practices reduces the need for extensive accounting controls (Malmi and Brown, 2008). Company X is operating in an uncertain, quickly changing environment (IT industry) and according to the agile practices. Therefore, the findings of this research show that the environmental uncertainty and the ad hoc proceedings do indeed lead to less extensive use of planning controls. Moreover, the uncertain and quickly changing environment also causes the fact that the long-term planning control has a too long focus and is therefore inappropriate for use. However, the planning controls are used to align the organizational goals across the different teams. The only difference with the traditional planning control is that at company X the necessary behaviour and effort to achieve the organizational goals are defined in conjunction with management and the teams. This can be explained by the stewardship theory and the agile practices in which employees can make their own decisions about how goals are reached (Maruping et al., 2009).
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view (Lawler, 1986). The indenting of management is related to the control oriented view (Davis et al., 1997). Regarding the financial measures a similarity has been found between this research and the literature (Malmi and Brown, 2008). Company X has a narrow target of 10% increase in revenue which is also contained in the budgets (Malmi and Brown, 2008). This narrow target is set and controlled by management and is therefore linked to the control oriented view (Lawler, 1986). The non-financial measures at company X are mostly measured in the teams themselves without interference of management. This is consistent with the involvement oriented view defined by Davis et al. (1997) but contradicting with the view of Malmi and Brown (2008) who state that non-financial measurements are a management initiative. Lastly, the findings of this research show that company X does not use any hybrid performance measurement systems. Company X adapted to financial and non-financial performance to control for the progress towards achieving the organizational goals.
According to the literature reward and compensation controls contain extrinsic and intrinsic rewards but management accounting research has largely focused on extrinsic rewards (Malmi and Brown, 2008). The fact that extrinsic rewards increase effort and performance (Malmi and Brown, 2008) is partly confirmed in this research. The implemented classification scheme is a form of extrinsic rewards which can be explained according to the motivation psychological factor which is consistent with the agency theory. On the other hand, company X uses intrinsic rewards by means of providing a satisfactory office and higher work satisfaction in order to increase motivation which is consistent with the stewardship theory (Davis et al., 1997).
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performance measures, management steps in to discuss the upcoming practices to reduce deviations. This is linked to the control oriented view since a distinction is made between thinking and controlling (Lawler, 1986).
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6. CONCLUSION
By exploring the MCSs in a single case company, the difference between MCSs at traditional organizations and MCSs at SMOs has been highlighted. The research question central in this study was: “How are management control systems designed in self-managing
organizations?”. The difference between the traditional MCSs and the MCSs implemented in
the studied SMO can be explained in two ways.
Firstly, based on this case study, it can be concluded that the traditional MCSs do not completely match the SMO. This difference can be explained due to the new way of managing which is – according to the agile practices and the stewardship theory – focused on facilitation and empowering, whereas the traditional hierarchical organizations are focusing on monitoring and controlling. Comparing the new way of managing to the traditional form, it can be concluded that management is less involved in the work execution, managing/monitoring work, work/resource allocation, organizational/work design, and personnel/performance management. This can also be concluded from the following control types since they diverge with the literature about traditional MCSs: long-term planning, action planning, performance evaluation, non-financial measures regarding employee satisfaction, organization design, and policies and procedures. However, the firm’s strategy is still set by management and therefore convergent with the traditional MCS. This can also be concluded from the governance structure since a similarity is found between the execution of this control at the case company and how it is described by Malmi and Brown (2008).
Secondly, in this case study some difficulties in adapting to the agile practices have been found. Based on this it can be concluded that moving from a traditional organization to an agile organization is a process which is accompanied by problems. Such as how agile should be implemented at the marketing or service department. And what the role of management should be within an agile organization. This again has consequences for the implementation of the MCSs at the case company since management is currently more guiding as they wish. It is aimed to reduce the guidance and hierarchical position of management and make the teams more responsible for their targets and tasks.
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partly management. The fact that employees get more involved can also be seen in the flat hierarchy and the aim of management to move to the same (or an even lower) level.
6.1. Theoretical and managerial implications
The literature about MCSs in SMOs is limited; therefore this research supplements the existing literature regarding this subject. By doing so, this study answers directly to the call of Lee and Edmondson (2017) to study what MCSs SMOs are using.
Furthermore, this research encompasses managerial implications since this case study defines how project managers are guiding teams according to the agile practices (Maruping et al., 2009).
6.2. Research limitations
The aim of this research is to contribute to the literature about MCSs in SMOs. Nevertheless, some limitations have to be taken into account. First, the study followed a cross-sectional approach and all interviews were conducted at one point in time however a longitudinal approach would have been more appropriate since this allows studying the MCSs at a SMOs over time. Second, the case company only recently adapted to agile practices and is still searching their way through. Therefore, the single case study results could change within the future.
6.3. Directions for future research
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APPENDIX
I. Interview guide
Name interviewee: Function interviewee: Date: IntroductionGive a short introduction about why the interviews are conducted and provide some background information about the research. Ask whether the interviewee agrees with the interview being recorded.
Background information interviewee:
1. How would you describe your function at company X? a. What are your daily tasks?
b. What are your responsibilities? 2. How long are you working at company X?
Self-management/agile
3. When has been decided to switch to a self-managing organization? 4. Why has been decided to switch to a self-managing organization?
a. How did you experience the switch to self-management? Did you/the organization encounter any problems?
5. To what extent has your work changed after switching to self-management?
a. To what extent has the switch to agile influenced the productivity of the teams/the individuals?
i. Think about improved quality, efficient meetings, tight planning b. To what extent has the switch to agile influenced the job satisfaction? 6. How would you describe the role of the team leader?
Management control systems
Goals (organizational, teams, individual)
7. What is/are the organizational goal(s) of company X?
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i. How are you informed about the organizational goal(s)?
ii. Do you experience any participation in defining the organizational goal(s)?
b. How do you experience the progress towards the organizational goal(s)? 8. How does your team contribute to the organizational goal(s)?
a. Does your team have any goals?
b. To what extent do you feel involved in defining the team goal(s)? c. What do you try to achieve as a team?
d. How do you experience the progress towards the team goal(s)? 9. What are your personal goals?
a. How are these goals defined?
b. How do you ensure that your personal goals are achieved? Systems for achieving the goals
10. What for systems are used to ensure that the organizational goals are reached? a. How is performance measured?
i. How is the organizational performance measured? ii. How is the team performance measured?
iii. How is the individual performance measured? b. Are there any rewards if the goals are achieved? c. Are there consequences if the goals are not achieved? Agile and self-management
11. Do you experience equality among the employees?
a. Do you experience any distance between management and the teams with regard to equality?
b. Do you have the feeling that you can always express your thoughts/opinion? 12. How do you experience the collaboration between colleagues/teams?
13. How are conflicts or problems handled at company X? a. How are different opinions/thoughts handled?
14. Do you experience more decision making power after the organization switched to agile?
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i. How is this different from the old situation (before agile was implemented)?
b. For which aspects do you need to ask permission? i. If yes, to whom?
ii. If yes, what kind of decisions are these?
Stewardship theory
15. How are you as an employee/team motivated to achieve the organizational goal(s)? a. How do you motivate yourself to achieve the organizational goal(s)?
