The Influence of Management Control Systems on Organisational Resilience

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The Influence of Management Control

Systems on Organisational Resilience

Eva Yaniek Markerink Student number: 2148889 e.y.markerink@student.rug.nl

University of Groningen MSc. Business Administration Organisational & Management Control

Supervisor: Dr. M.P. van der Steen Co-assessor: Dr. S. Girdhar

20th of June 2016

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Abstract: In this paper, the use of management control systems as a means for enhancing

the level of organisational resilience is investigated. Eight semi-structured interviews are used for obtaining and analysing data. Findings demonstrate how management control systems are able to influence, either positively or negatively, the level of resilience in organisations. These findings contribute to theoretical knowledge that, firstly, besides having sufficient financial resources more organisational elements are important for developing a high level of organisational resilience. Specifically, a high level of organisational social capital, flexibility and creativity. Secondly, the increased use of tight management control systems is disadvantaging organisations’ level of resilience. Lastly, organisations’ information redundancy is an important issue for future research, as it has the ability to disadvantage the level of resilience in organisations.

Key words: Management Control Systems, Organisational Resilience, Changing

Environment, Case Study, The Netherlands.

Acknowledgements: I am grateful to my supervisor Dr. Martijn van der Steen, who

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1. Introduction

Organisations need to develop the right abilities to respond to unexpected changes in their business environment. Responsive organisations have a higher chance in succeeding to survive today’s disruptive events (Hamel and Valikangas, 2003). These responsive organisations are also known as resilient organisations (Coutu, 2002). This paper explains why organisational resilience (OR) is important, how management control systems (MCSs) have a positive or negative impact in the process of enhancing the level of OR and introduce MCSs as a strategic means for a developing a sustainable long-term perspective.

Organisations experience difficulties in adapting to their changing business environment, which eventually leads to bankruptcy of the vulnerable organisations (Hames, 1994; McManus, Seville, Vargo and Brunsdon, 2008). As a result, in the past decade OR has received growing attention in the academic literature. Resilient organisations are organisations that implement adjustments to their day-to-day operations. Consequently, these organisations have strong foundations to overcome unexpected disrupting events (Seville, 2008). Moreover, when overcoming profound challenges, organisations develop their strong position even future due to knowledge creation and organisational learning. This increases the organisations’ sustainable long-term perspective (Sutcliffe and Vogus, 2003).

There is a need to have an enhanced understanding of OR, as a high level of OR leads to a lower rate of bankrupted organisations. Consequently, OR adds values to the global economy. Even though there has been growing attention to OR, it is still mainly a theoretical concept (Seville, 2008; Annarelli and Nonino, 2015). As a consequence, one agreed manner on how to enhance the level of OR does not yet exist (Hamel and Valikangas, 2003). Having a single means to enhance the level of OR develops a higher chance for organisations to survive disrupting events (Klein, Nicholls and Thomalla, 2003; Braes and Brooks, 2010).

By which means is one able to develop a high level of OR? It is known that organisations can enhance the level of OR by developing and implementing several practices, structures and processes which are adaptive to the changing business environment (Sutcliffe and Vogus, 2003). However, which exact practices, structures and processes are still unknown (Annarelli and Nonino, 2015).

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5 employee behaviour. For example, when organisations place emphasis on enhancing the level of OR, MCSs will direct employees’ behaviour to act accordingly. Secondly, Emmanuel, Otley and Merchant (1990) argued that MCSs enhance the organisation’s ability to cope with change, by strengthening the adaptability of organisations. To be able to have a high level of OR, it is, as mention-above, important that organisations adapt daily to their changing business environment. Lastly, for OR it is important to have a high awareness of the internal and external situation, to know the organisation’s position in the business field (Seville, 2008). MCSs are often used as a means to collect and analyse incoming strategic information (Somers, 2009). As a conclusion, it can be stated that MCSs and OR share two similarities. They create adaptability and place importance on collecting internal and external information. Combining this with MCSs as a means to align employee behaviour with strategy of organisations, this paper considers MCSs as a strategic means to enhance the level of OR.

The research question of this paper is “In which way do management control systems

influence the level of resilience in organisations?” This paper contributes to the literature by

providing several answers to how MCSs influence, either positively or negatively, the level of OR. A qualitative research approach is taken to tighten the theoretical and practical gap in this field. This research answer provides a deeper understanding of the role MCSs have in the process of OR. This paper shows that MCSs are not only used as a controlling or incentive-oriented system, as MCSs are applied in different ways (Speklé and Verbeeten, 2014). One of the ways beyond the controlling- or incentive-oriented use of MCSs, is the use of MCSs as an essential means for a high level of OR and thus for long-term survival. By using information from eight case studies, this paper provides a practical means for managers to enable them to implement certain MCS elements that enhance the level of OR, which consequently provides a sustainable long-term perspective for their organisation.

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2. Literature review

To be able to analyse the link between MCSs and OR, a theoretical framework of existing literature is outlined that explains OR, MCSs and the link between MCSs and OR.

2.1 Organisational resilience

Even though OR has received growing attention, there is no general accepted definition for OR (Brunsdon, Wilkinson, Seville, Masurier, Dantas and Vargo, 2006; Limnios, Mazzarol, Ghadouani and Schilizzi, 2014). This is due to the fact that it is a multifaceted and multidimensional concept, which cannot directly be operationalised (Braes and Brooks, 2010). This paper uses the definition of Lengnick-Hall, Beck and Lengnick-Hall (2011: p 244) who defined OR as organisational capabilities which are “a set of individual level

knowledge, skills, and abilities and organisational routines and processes by which a firm conceptually orients itself, acts decisively to move forward, and establishes a setting of diversity and adjustable integration that enables it to overcome the potentially debilitating consequences of a disruptive shock”. This definition is chosen as it indicates that

organisations are resilient when organisations daily implement changes to enhance organisational foundations that enable organisations to respond to major, unexpected, changes in the business environment (Weick, 1988; Coutu, 2002; Freeman, Hirschhorn and Maltz, 2004). Furthermore, Sutcliffe and Vogus (2003) argued that the level of OR is an outcome of organisational processes and resources that are particularly focused on developing adjustment capacity. This also means that OR is not directly observable and measurable (Brunsdon et al., 2006).

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7 only use their financial resources during crises, however, but also use cognitive and relational resources to response to crises. Based on the above literature, it can be concluded that financial resources are important, but additional organisational elements and processes are needed to enhance the level of OR.

In previous research it is shown that organisations with a high level of OR have a high level of three organisational elements. These three organisational elements are prevalent in all the investigated resilient organisations and are less prevalent in organisations with a low level of OR (Seville, 2008). Therefore, this paper is following Seville (2008) who argued that there are three important organisational elements which strengthen the level of OR, so-called enablers (Brunsdon et al., 2006; Gallopín, 2006; McManus et al., 2008; Lee, Vargo and Seville, 2013). These three enablers are:

(1) Situation awareness;

(2) Management of vulnerabilities; (3) Adaptability.

2.2 Enablers of OR

In the following section the relationship between OR and the three enablers of OR is further explained.

2.2.1 Situation awareness & OR

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8 environmental information and match this to the internal situation. If organisations have a high external awareness, organisations recognise their strengths and vulnerabilities. This recognition enables them to manage their vulnerabilities (Seville, 2008). Elements in the business environment might change faster than forecasted or than incoming information is processed. Organisational processes then need to be flexible in order to change to a non-disruptive structure (Burnard and Bhamra, 2011). Situation awareness has two effects, which is shown in figure 1; the first effect enhances the level of OR and the second effect develops a basis for management of vulnerabilities.

2.2.2 Management of vulnerabilities & OR

Vulnerability is defined as the degree to which a system is likely to experience damage due to exposure to a threat (Turner, Kasperson, Matson, McCarthy, Corell, Christensen and Polsky, 2003). Management of vulnerabilities is the pro-active management in the identification and treatment of organisational vulnerabilities (Seville, 2008). Previous research has shown that organisational vulnerabilities are the most influential factor concerning the long-term survival of organisations (McManus et al., 2008; Seville, 2008). To be able to manage vulnerabilities, organisations need to have processes that identify and analyse vulnerabilities in its external business environment and internal organisation. Situation awareness started this process. The next step is to individually assess vulnerable elements and identify the amount of negative impact vulnerabilities contribute during an unexpected disaster. Thereafter, organisations should prioritise the vulnerabilities that have the highest negative impact and modify and adapt these vulnerabilities (Füssel, 2005; De León and Carlos, 2006; McManus et al., 2007). It is important to place emphasis on managing vulnerabilities within the organisation. (Seville, 2008). Employee involvement will be enhanced when assigning responsibility and accountability for vulnerable resources, capabilities and processes (Merchant and Van der Stede, 2007). To conclude, management of vulnerability enhances the level of OR. Management of vulnerabilities promotes the adaptability of the organisation. This is shown in figure 1.

2.2.3 Adaptability & OR

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9 implicates adaptation during crises, as well as during day-to-day business. It encompasses the modification and optimisation of vulnerable business structures to enhance performance of organisations. For example, organisations that in order to meet changing customer demand, increase or decrease their production processes. When organisations fail to have a high level of adaptability, organisations do not fit in with their business environment results in a poor long-term perspective (Miles and Snow, 1978). Adaptability is regarded as a mechanism of OR, as organisations need to develop adaptability in order to create and adjust systems and processes to meet the ever changing business environments (Burnard and Bhamra, 2011). To enable organisations to be adaptive to their environment, several elements are important. These elements are leadership, vision, culture and the ability of organisations to be transparent by the sharing of information and knowledge throughout the organisation (McManus, 2008). Valuable information ensures correct decisions, as managers take decisions based on accurate and useful information (Sheffi, 2005; Seville, 2008). Moreover, information signals when adaptability is needed and in which direction organisations need to adapt (Weick, 1988).

Situation awareness Organisational Resilience Adaptability Management of vulnerabilities Enablers Figure 1 Enablers of OR

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10 As mentioned-above, OR has mainly remained a theoretical concept, as it has not offered a practical means to enhance the level of OR. Three enablers are linked to MCSs to enable organisations to have a more manageable level of OR. In the next section background information about MCSs is provided.

2.3 Management control systems

There are several definitions for MCSs, therefore there is not one clear and agreed upon definition (Fisher, 1998). MCSs enable organisations to cope with change, as it for example enhances the adaptability of organisations (Emmanuel et al., 1990). This paper uses the MCS definition of Lowe (1971: p.5) who combined the definition of MCS with adaptability, as adaptability is an important enabler of OR. Lowe defined MCS as: “A system of

organisational information seeking and gathering, accountability and feedback designed to ensure that the enterprise adapts to changes in its substantive environment and that the work behaviour of its employees is measured by reference to a set of operational sub goals (which conform to overall objectives) so that the discrepancy between the two can be reconciled and corrected for”.

MCSs consist of several elements and achieves different goals depending on organisations’ environment and strategy. Therefore, there is not one universally applied MCS, as MCSs are implemented to assist in the development and execution of each organisation’s strategy and objectives. Furthermore, the MCS is dependent on the external environment of a specific organisation. Consequently, a MCS should be tailor-made to fit with the strategic needs of a particular organisation and to fit with the needs of a particular business environment (Langfield-Smith, 1997; Otley, 1999).

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11 2.4 Enablers of OR and MCS

In the next part of the paper, the three above-outlined enablers of OR are linked to MCSs. Four MCS elements are proposed that have a strong link with the three enablers of OR.

2.4.1 Situation awareness & MCS

For MCSs to contribute to situation awareness, it is important to provide the right information about the business environment and match this information with the internal information of the organisation. It is important that a MCS does not only provide information about the business environment. It is also important that MCSs create a feedback loop that shows where organisations are positioned in their external environment and which organisational aspects should be of major priority to improve. This results in organisations staying ahead of their competitors (Chong and Chong, 1997). The availability of information should be as timely as possible, as this enhances the flexibility to react quickly in unexpected situations (Chenhall and Morris, 1986). Chenhall (2003) proposed propositions relating to MCSs and business environments. In his article, Chenhall stated that the more complex, and thus uncertain, an external business environment, the more a MCS should enhance the openness and focus on the business environment. Moreover, MCSs should appoint the right strategic human capital in the right positions to enable those employees to actively seek and interpret internal and external information (Malmi and Brown, 2008).

2.4.2 Management of vulnerabilities & MCS

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12 accountable for detecting and improving vulnerabilities, which leads to an enhanced focus and motivation to detect vulnerabilities (Malmi and Brown, 2008).

2.4.3 Adaptability & MCS

Merchant and Otley (2007) argued that the main function of MCSs is to assist organisations to adapt to their business environment, as MCSs help organisations to be on track. One means to achieve a higher adaptability is to have a speedy reporting cycle (Granlund and Taipaleenmäki, 2005). Due to increasing environmental uncertainty, there is need for a more short-term orientation, which emphasises the importance of a short reporting time. In order to enable MCSs to respond to changes in organisations, MCSs should have flexible components in order to change along with the organisation and their business environment (Granlund and Taipaleenmäki, 2005). Lastly, for a shared adaptability in the organisation, MCSs should gain an interwoven organisational situation awareness. This means that all the specialised and general information needs to be shared among employees to have a general feeling were the organisation is positioned in the field and to which direction the organisation needs to be heading (Gorman, Cooke and Winner, 2006). Lastly, flexible employees enhance the adaptability in organisations (Lengnick-Hall et al., 2011)

To conclude this part of the literature review, it could be stated that the three enablers of OR are three categories to which several MCS elements are linked, which is shown in figure 2. From the above literature review, it is seen that the most important MCS elements for enhancing the level of OR are:

(1) Management information seeking which is linked to situation awareness; (2) Information redundancy which is linked to (1) situation awareness, (2)

management of vulnerabilities and (3) adaptability;

(3) Strategic human capital which is linked to (1) situation awareness, (2)

management of vulnerabilities and (3) adaptability;

(4) Flexibility which is linked to adaptability.

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13 2.5 Relation between enablers of OR and MCS elements

2.5.1 Managerial information seeking

Somers (2009) found a positive correlation between the amount of managerial information seeking and the level of OR. This outcome was expected as Somers reasoned that the process of collecting and analysing information would increase the understanding of the business environment (Leedy and Ormord, 2001). This is shown in Figure 2, as managerial information seeking strengthens situation awareness. It is important that the process of information seeking does not simply cover data gathering. This process has to cover the analysis of data to connect the business environment information to the internal situation. In doing so, organisations create an understanding of the exact meaning of the incoming information. Consequently, organisational knowledge building will be enhanced, allowing organisations to reduce their vulnerabilities (Somers, 2009).

To provide the right information with respect to situation awareness, the use of cybernetic controls is advised (Malmi and Brown, 2008). Green and Welsh (1988: p289) defined cybernetic controls as: “A process in which a feedback loop is represented 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”. This definition incorporates both gathering internal-

and external information and designing action plans. Malmi and Brown (2008) included four components for a MCS in order to have a cybernetic control, these are: (1) budgets (2) financial measures (3) non-financial measures and (4) hybrids that include both financial and non-financial measures. Implementing these is not enough in order to view the cybernetic controls as a MCS. A reward system should be added. Through the information gathered from these four parts of the cybernetic MCS, organisations are able to (1) set their priorities (2) monitor the business environment (3)monitor the internal situation and (4) create enhanced informed decision-making (Malmi and Brown, 2008). This ultimately results in having enhanced situation awareness.

2.5.2 Information redundancy

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14 with the, nowadays, complex information systems. As a conclusion, Wang et al. stated that organisations have become more dependent on information than ever before. Furthermore, having the ability to spread strategic information throughout the organisation limits hierarchical and functional difficulties (Abernethy and Borwnell, 1999). The interactive use of MCSs gains personal involvement of employees, as employees have the ability to collect and analyse information throughout the organisation. Additionality, employees are able to review and (dis-)approve (1) data (2) assumptions and (3) action plans (Janke, Mahlendorf and Weber, 2014). This enhances the (1) general dialogue (2) organisational learning and (3) knowledge building and (4) diminish vulnerabilities in organisations (Simons, 1995). Moreover, it leads to innovative solutions to cope with opportunities, uncertainties and risks (Simons, 1995). Lastly, information redundancy works like an antenna to signal where adaptability is needed (Weick, 1988). To conclude, as shown in figure 2, information redundancy enhances (1) situation awareness, (2) management of vulnerability and (3) adaptability.

Interactive MCSs are advised for achieving information redundancy. Bisbe and Otley (2004: p.717) defined interactive MCSs as: “Formal control systems that managers use to

become personally and regularly involved in the decision activities of subordinates and that become the basis for continual exchange between top managers and lower level management as well as between organisational members”.

2.5.3 Strategic human capital

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15 and these relationships lead to less stress and an enhanced capability to cope together with disruptive events. Moreover, there is a need for employees who are able to see where the business environment is heading (Lengnick-Hall et al., 2011). Riolli and Savicki (2003) were the first to present research focused at information systems and the level of OR. Riolli and Savicki stated that employees who work with information systems experience a higher stress level than other employees. Among those employees, there is a high job turnover and high absenteeism. This is mostly a consequence of working in a demanding environment, in which the technology is changing frequently. There is a need for employees can work with these systems and who are able to cope with the stress level. Concluding, as shown in figure 2, strategic human capital is strongly linked to all three enablers of OR.

The main MCS element for directing strategic human capital is administrative controls, as administrative controls direct employee behaviour and create employee accountability. Malmi and Brown (2008) identified three administrative controls based on existing literature: (1) organisational design that supports contact and relationships between certain employees (Alvesson and Karreman, 2004) (2) governance structures that establish authority and accountability (Abernethy and Chua, 1996) and (3) policies and procedures that outline processes and employee behaviour the organisation is aiming for (Merchant and Van der Stede, 2007). Next to administrative controls, MCSs contribute to strategic human capital through personnel controls by hiring suitable employees. These are employees who increase the adaptation and learning ability of organisations (Widener, 2004). Finally, rewards and compensation systems place emphasis on motivating employees to be willing to learn, change and adapt (Bonner and Sprinkle, 2002).

2.5.4. Flexibility

To enable organisations to respond quickly to environmental changes, organisations need to (1) develop rapid decision-making (2) have efficient and effective internal communications and (3) build new routines or adapt current routines rapidly (Vossen, 1998). In the current literature, flexibility is seen as a key factor for building OR (Sheffi and Rice, 2005; Peck, 2006; Sheffi, 2007). Figure 2 shows the relationship between flexibility and adaptability.

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16 subjective criteria, as it is hard to set solid and objective standards in changing business environments (van Veen-Dirks, 2006). Moreover, due to rapidly changing business environments, there is a higher uncertainty. Therefore, managers should have higher reward variability (van Veen-Dirks, 2006). Lastly, looking at the evaluation process, there is more attention needed to focus externally due to, for example, rapid changing customer demand. This could, for example, be implemented by organising external benchmarks (Elnathan, Lin and young, 1996).

To conclude the above four MCS elements paragraphs, it can be said that based on the existing literature MCSs enhance the level of OR. MCSs elements enhance the three enablers of OR, which as a result, enhance the level of OR.

Management of vulnerabilities Adaptability Situation awareness Organisational Resilience Managerial information seeking Information redundancy Strategic human capital Flexibility Enablers MCS

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3. Methodology

This part of the paper elaborates on the methodology of this research. It starts with explaining the research design and goes on to explain data collection and data analysis, including clarification of validity, reliability and controllability.

3.1 Research design

The purpose of this research is to provide a comprehensive understanding of the relationship between MCSs and OR. This explanatory research answers the research question: “In which

way do management control systems influence the level of resilience in organisations?” In

this paper, qualitative research was conducted. The reason why qualitative research was chosen is that there is little written about the relationship between MCSs and OR. Consequently, an explanatory study was needed to contribute to MCS and OR theory (Eisenhardt, 1989). A qualitative methodology was used in the form of a multiple case studies, as this places emphasis on theory development that includes description and explanation (Yin, 1984).

3.2 Data collection

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18 literally transcribed, which resulted in a dataset of 96 pages. Taping and transcribing the interviews reduced research biases, as this enabled the researcher to repeat the interviews to check for inconsistencies (Aken et al., 2012). The interviews were conducted via a detailed protocol that listed questions. This protocol assured that the questions were systematic and covered the main topics of MCSs and OR. The protocol enabled higher reliability, as it enhanced uniformity (Aken et al., 2012). Due to the semi-structured origin of the interviews, there was still flexibility to ask more in-depth questions to clarify answers or to go into more depth with one of the subjects.

The interviews were conducted in Dutch, since both the interviewer and the interviewees have the Dutch language as their mother tongue. This lead to less noise in communication, as people are best able to express themselves in their mother tongue. The interviews were conducted at Dutch organisations that have implemented at least some form of a MCS. The interviewees were employees with senior positions; as senior managers are able to provide more information about (1) organisational history (2) financial status (3) MCSs and (4) organisational culture than employees at junior functions. To gain a deeper understanding of the role MCSs have in enhancing the level of OR, all the interviewees had a controlling or accounting background. Therefore, the interviewees were not chosen on the basis of a random selection, according to theoretical sampling logic (Pauwels and Matthyssens, 2004). Table 1 provides detailed information about the interviewees. Information regarding the case organisations can be found in Appendix A.

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Table 1 Interviewees’ profile

3.3 Data analysis

This paper used the method of Strauss and Corbin (1994) to analyse data. To start, interviews were converted into transcriptions within two days after an interview, to avoid information loss. The next step was to analyse the transcriptions by identifying important concepts and categories through comparing the transcriptions with the above literature review. Thereafter, the important quotes were labelled with codes. An overview of the codes is provided in Appendix D. The software of ATLAS.ti qualitative data analysis was used for the coding process. This increased the reliability of this research, as ATLAS.ti enhances the correctness of analysing the transcriptions by providing an organised overview of the transcriptions and codes. The next step was axial coding which means comparing the interviews, by identifying similarities and links between codes and transcriptions. As a consequence, results could be generalised. Lastly, during the process of collecting and analysing data, a senior researcher checked the intermediate results. This opportunity strengthened the results (Swanborn, 1996). Moreover, it secured construct validity, which is the extent to which the researcher investigates what is intended to be investigated. Having a senior researcher reviewing draft versions, construct validity was controlled. The detailed information provision of the research design, the data collection and the data analysis enhanced the controllability of this research (Aken et al., 2012).

Interview Date Time Duration Position Male - Female Experience within the organisation Back Ground 1 (Pilot)

14-04-2016 13.00 60 min. Finance manager & Director shared

service centre

M 4 years Accounting & Finance

2 19-04-2016 13.00 65 min. Controller M 17 years Controlling 3 20-04-2016 10.00 45 min. Director finance &

organisation

M 13 years Controlling

4 26-04-2016 10.30 60 min. CFO M 3 years Accounting

5 26-04-2016 16.00 60 min. Finance manager M 12 years Accounting 6 29-04-2016 11.15 65 min. Group controller M 8.5 years Controlling 7 10-05-2016 10.00 60 min. Senior project

manager corporate finance

M 15 years Controlling & Finance

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4. Analysis

In this part of the paper, an analysis of the eight case studies is provided. The analysis is divided in five sections: four sections of the MCS elements combined with the three enablers of OR and a concluding section that provides an answer for the research question.

4.1 Management information seeking

4.1.1 Situation awareness

For situation awareness, management information seeking is divided into two parts (1) internal and (2) external management information seeking. It would be expected that the amount of internal and external information seeking would be approximately equal. However, this is not the case. In most of the organisations, there is a strong focus on what is happen within the organisation. Consequently, there is less focus on developments in the business environment.

Interviewees stated that their organisation is resilient when the organisation is financially healthy. All this implies that most organisations particularly focus on collecting internal financial information. One interviewee explained: ‘Yes, I believe that we are

resilient as we are still making profit’. However in contrast to this quote, all the interviewees

stated that the organisation acted reactively instead of proactively when an unexpected disruptive event happened, which indicated that the case organisations are less resilient than believed. When asking what the organisations learned from an particular unexpected disruptive event, most interviewees indicated that the organisation implemented a more tight financial MCS to have a stricter control over revenue and expenses and, consequently, to save financial resources.

This raises the question: is financial leverage the only resource they needed to be resilient? The interviews showed that more organisational elements are needed to achieve a high level of OR. For example, one interviewee stated that it is also important that the organisational structure fits within the business environment: “I believe when we hit another

crisis we will go bankrupt (...) We are too vulnerable, we made the mistake of having a knowledge intensive structure together with a capital intensive structure. That is simply not possible anymore in our business environment”. This quote shows a negative consequence

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21 search to be more aware of possible future threats. If organisations are not seeking business environment information, a large number of threats are not being identified and, consequently, the organisations are more vulnerable. Answering the question, it is also important to know what the environment is doing, how it is changing and if the organisation still fits within the business environment.

4.2 Information redundancy

For situation awareness and information redundancy, the amount of information that is spread throughout the organisation was discussed with the interviewees. Most of the organisations are only sharing financial and strategic information with a selected group of managers and directors. It is generally believed (1) that a lot of employees are not interested in strategic information (2) that employees do not have enough knowledge to fully understand the incoming information and, consequently, make wrong conclusions or (3) organisations fear an information leak as some case organisations are listed organisations. There is one organisation that actually shares all its financial information on a weekly basis and the interviewee encountered some of these problems. The interviewee explained: “We

have several financial lists which are going online every Friday (…) but if I don’t put those lists online, people would not care. It is really nice that we have such a system, but people are actually not aware of what they are reading”

However, thereafter contradictory answers were given. Even though interviewees provided answers with regard to the question why the organisations did not share strategic information with all employees, many interviewees stated that it is desired to share more information throughout the organisation to get employees more involved. It is believed that employees can strengthen their critical opinion by thinking on a higher level. Interviewees stated that there was value in sharing more strategic information with employees. This raises the question: why are organisations acting conservatively by not sharing strategic information, while the benefits of sharing information are known? One interviewee explained: “It would be too much and it not always necessary. Somebody who is responsible

for purchase just needs to buy the right products of a fair price. (…) Of course, I inform the people in this department to keep them involved, but not with too much information and especially not with sensitive financial information” This quote shows exactly where

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22 shared? (2) What kind of information should be shared? And at the same time, (3) how to avoid information leaking in to the wrong hands?

4.2.2 Management of vulnerabilities

Information redundancy enables organisations to manage vulnerabilities by indicating the strengths and vulnerabilities of organisations. In most of the organisations, as mentioned-above, there is an extensive collection of internal financial information. This information shows controllers and managers where profit is generated and which divisions experience losses. After identifying vulnerable divisions, action plans are generated to control and improve the internal financial situation of those divisions. One interviewee explained: “We

are a listed organisation, so we report very fast. Information for the past month is ready within two days. This means that the managing board has a fast control on what is happen in the organisation. If a department or event has very high costs, we can directly manage this” On exceptional occasions, when a division had occurred substantial financial losses,

the division has been sold. Most interviewees have a strong overview of their internal financial situation and know the organisation’s financial vulnerabilities, which are directly targeted to improve the organisation’s long-term perspective.

Nonetheless, two problems occur with regards to information redundancy. Most interviewees indicated that the amount of collected internal information exceeded the amount of information their employees can interpret. This means that in some of the organisations employees struggle to draw the right conclusions, as simply too much information is available. Furthermore, employees can spend many hours collecting extensive amounts of information, and some interviewees indicated that the value of this information did not merit the resources spent on collecting the information.

Secondly, organisations are mostly collecting internal financial information. This implies that organisations are not completely aware of their internal situation and business environment, as less attention is given to other types of information. Even though financial figures are satisfactory, this does not implicate that for example their employees are satisfied with the organisation. This became clear when not all interviewees could prove if their employees are satisfied with their employer. To have a proper view of all the vulnerabilities, more internal and external organisational vulnerabilities need to be identified, evaluated and addressed.

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23 provision within organisations. On the one hand, collecting extensive amounts of internal financial information and sharing this information leads to better performance. The organisations know their financial vulnerabilities. Based on this reasoning, it can be said that MCSs are enhancing the level of OR.

However on the other hand, too much information is collected. This information overload results in (1) difficulties interpreting the collected information (2) many resources spent on collecting information (3) a narrow focus on financial information and (4) less awareness of the business environment. Organisational culture leads to organisations being hesitant in sharing confidential information. Therefore, in those organisations information redundancy is not automatically increasing situation awareness and management of vulnerabilities. This raises the question: is it possible that MCSs are disadvantaging the level of OR by supporting too narrow a focus on internal financial information and a collection of too much information?

4.2.3 Adaptability

When the right information is available, information can work like an antenna to signal in which direction organisations need to adapt. As mentioned above, the case organisations are less concerned with collecting information for the business environment. In most of the organisations business information does not contribute to the improvement plan. These organisations are especially internally focused. When improvement plans are established, organisations include targets in line with the organisations’ strategy instead of changes of the business environment. This implies that organisations are less adept at responding to the business environment.

4.3 Strategic human capital

In the above part of the analysis, the role of management information seeking and information redundancy is outlined. In this part of the analysis, the analysis focuses on the link between strategic human capital and the three enablers of OR.

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24 develop a sense of (1) how the business environment develops (2) how the organisation is positioned in the field and (3) do not provide critical input towards their management, as this is not part of their job description. Interviewees stated that for most employees their main interest was in having long time job security. This does not lead to an enhanced general dialogue and leads to less organisational awareness and organisational learning.

However, during the interviews it became clear that the lack of interest of employees was not only a consequence of the competences and behaviour of employees. There was a significant difference regarding employees’ support among the case organisations. Some of the case organisations shared strategic information throughout the organisation and encouraged collective thinking. Other case organisations were afraid of information leaks and interviewees did not support innovative thinking amongst their employees.

The interviewees of the organisations that shared information talked with passion about employees. Employees were seen as the most valuable asset of the organisation. One interviewee explained: “Employees are really the core of our organisation (…) to have such

a good connection with our customers, you just need good employees” Managers had

extensive personal conversations with employees. In some organisations employees had personal development plans. This indicated that managers were highly involved with employees. Managers were able to stimulate employees to enhance their organisational view and learning processes by giving employees, for example, more responsibilities. This resulted in employees being more loyal to their organisations.

On the other hand, interviewees of the other organisations talked more monotonously about their employees. Interviewees explained that their employees lacked motivation to conduct tasks beyond their job description. Moreover, they explained that managers expected more of their employees, but their managers believed that those employees were not willing to develop themselves. These managers believed that strategic plans and information were management tasks.

For situation awareness it is important that organisations have the right strategic human capital, thus the right managers, who trust and believe in employees by providing employees with (1) strategic information, (2) more responsibility and (3) active support. As one interviewee explained: “In the beginning commercial directors were only held

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25 directors need to enhance the internal information search and ultimately also the external information search to establish satisfying results. In the organisations with an actively supporting management, interviewees stated that there are (1) bottom-up initiatives (2) steep learning curves and (3) motivated employees. As a result, this will enhance the level of OR as there is a strong foundation of developed and motivated employees. Importantly for OR, when some of the case organisations faced an unexpected disruptive event, loyal employees were highly motivated to help and resolve the immediate problems by actively participating in action groups.

4.3.2 Management of vulnerabilities

The collected information needs to be interpreted to know which vulnerabilities need to be managed. As mentioned above, employees in multiple organisations struggle to interpret large amounts of information. Additional difficulties occurred with management of vulnerabilities and strategic human capital. Some interviewees explained that their organisation collects extensive amounts of information. As a result, most employees are more concerned with collecting information than establishing conclusions based on the information. When an organisation has a proper working MCS, it should be a means to an end. However in some cases, just having a proper working MCS seems like the purpose. In these organisations, the processes and structures that cause negative financial figures are not known, discussed or treated. This leads to less awareness of the internal situation and, as a consequence organisations manage the wrong vulnerabilities. These interviewees stated that there is a need for people who ask “why” questions and draw conclusions and action plans based on financial figures.

Another problem that some organisations experienced were (division) managers who lacked motivation to analyse their (departmental) results. Some controllers stated that controllers themselves were the ones who analysed the (divisions’) vulnerabilities. Controllers proposed how (division) managers should change the (divisions’) vulnerabilities. Consequently, the controller is seen as being annoying by those (division) managers, as it is perceived as if the controller is “rapping” the (division) managers’ knuckles. As a consequence, tension arises in management teams. This leads that no general dialogue being possible as managers lack understanding about the internal situation.

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26 4.3.3 Adaptability

Generally speaking, employees are not in favour of change. This was also true in the case organisations. All interviewees indicated that when change plans are announced and implemented, there is some form of resistance. This is due to (1) employees who fear for losing their job (2) long-term employment therefore employees are not used to be flexible and (3) employees who lack the understanding why change is needed. When employees are resistant, the eight organisations acted similarly in motivating employees to change. The directors or managers organised several information meetings to answer (1) what was going to change, (2) what would be the effect of the change and (3) why the new plans were implemented. If employees were still resistant after the information meetings, employees were forced to work along with the change implementation. For a high level of OR, it is important to have strategic human capital who drive change and who are also able to properly communicate with employees at employee’ level, and this was, in the majority of the organisations, the case.

To conclude the strategic human capital section, there is one more remarkable finding. Nearly all interviewees explained that their organisation had been more actively managing human capital than the organisation had ever done before. For example, one organisation was working together with an external consultancy organisation, to establish a competency profile for their employees. This organisation was hiring more external experienced employees to have an enhanced critical view on the processes of the internal organisation. Another organisation had management meetings in which all growth profiles of employees were discussed. For the less-developed employees action plans were designed. This raises the question: why have organisations been enhancing their attention to the development and recruitment of strategic human capital? One quote of an interviewee is illustrating this development. The interviewee stated: “Society is changing fast, so when you

haven’t been investing in your employees, it will mean stagnation. (…) And consequently, you will in no-time be bankrupt.” Interviewees stated that the environment changes faster

than it has ever done. Therefore, a need has been developed for employees who are flexible and who are able to drive and manage change. This implicates that organisations are getting more aware of the need to enhance changing abilities in the organisation, which is important for enhancing the level of OR.

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27 4.4 Flexibility

4.4.1. Adaptability

For adaptability, the flexibility of the organisational structures was discussed with the interviewees. There is significant difference between the case organisations regarding adaptability. Some interviewees indicated that their organisations are able to change daily, while other interviewees stated that their organisations are bureaucratic and slow in decision-making.

Not surprisingly, the flexible organisations are organisations with a relatively small number of employees. These employees have decision rights over many aspects of the organisation. Consequently, there is room and freedom to decide quickly. Interestingly, one interviewee said that their organisation was very flexible because of the high internal and external situation awareness. This interviewee stated: “You could state that we were

reactive. (…) When something happens we are able to take fast decisions, so than everything is soon good again. Due to our MCS we have absolute control and that enables us to react really quickly” The interviewee explained that the organisation believes that the world

changes so fast, that it is impossible to know what is going to happen next. Therefore, the organisation decided to have full internal and external situation awareness. When a disruptive event happens, the organisation will almost certainly know which and how particular processes and products will be negatively influenced.

The less flexible organisations are mostly family and listed organisations. In the listed organisations there are many procedures and rules to control for employee behaviour and to control for possible mistakes. Consequently there is a high level of control, which is negatively influencing the adaptability of organisations, as the organisations are bureaucratic and slow in decision-making. In family organisations the inflexibility is mainly due to the conservative character of family organisations. Employees are simply not used to change.

For flexibility, the same results are shown as for information redundancy and information seeking. MCSs advance flexibility, thus adaptability and the level of OR. However, MCSs with too many rules and procedures react slowly and consequently, organisations being less able to adapt quickly.

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28 difficulties with sufficient external situation awareness to know which possible threats are likely to happen and to know if their internal organisational situation is still fitting in the business environment. Moreover, it was notable to see that all the interviewees associated a high level of OR with the financial state of their organisation and not with being aware of the possible vulnerabilities of their organisation.

4.5 MCS and OR

In this part of the analysis the data of the eight case studies is linked to the research question of this paper: “In which way do management control systems influence the level of resilience

in organisations?”

Of the eight case organisations, all organisations have proof that they have survived at least one unexpected disruptive event. When asking if the interviewees see their organisations as resilient, seven out of eight interviewees answered yes. Only one interviewee stated to foresee difficulties in the advent of another disruptive event. Furthermore, one interviewee indicated to have high levels on all three OR enablers. The other organisations tended to vary in the levels of the three enables of OR. Lastly, and most importantly, all interviewees indicated that their MCS influence the level of their OR. This influence is either positive or negative.

Some interviewees felt very strongly that their MCS was needed for a high level of OR. These interviewees indicated that the MCS showed on which product the profit margin was high and which products are low-margin products. This information was important to be able to develop a long-term strategy. As a result, these organisations tended to focus on the divisions where profit margins are high. Secondly, the collected information showed the (financial) vulnerabilities of organisations, which are directly treated and reduced. This results in a stronger organisational foundation to cushion the impact of a crisis. Thirdly, MCSs increase the flexibility of organisations, due to the enhanced understanding of internal situation. This enables organisations to react quickly when a disruptive event happens, as the organisations know which processes are likely to be hit. Fourthly, in some cases the MCS provides insight into the developments and trends of the business environment. The organisations collect this business information via market agencies or via people in the field. With the information, organisations are reacting quickly on innovations, trends and threats in the business environment. Lastly, there is positive impact of the MCSs with a strong focus on employees. One of those organisations uses the motto: “We give and so we expect

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29 targets for employees (3) shares as much strategic information as possible and (4) provides enough room for employees to take initiatives. Consequently, the organisation scores highly on employee satisfaction every year and their employees develop themselves quickly. A good example is the interviewee who went from controller to director of finance in a few years. The five examples show that MCSs enable organisations to increase the level of OR and also shows how the MCSs are doing this.

Nonetheless, other interviewees stated that their MCS has a negative influence on the level of OR. The interviewees indicated that their MCS is a tight MCS with formal control elements based on financial targets and information. Consequently, the purpose of the MCS is to minimise the risks faced and the possibility of making mistakes. This has four negative influences on the level of OR. Firstly, one interviewee stated that their MCS is a too tight MCS. For example, when employees need to finance an activity, employees need to have approval from several managers. As a result, acceptance of orders takes too long. Consequently, customers are going to competitors. The MCS creates an inflexible organisation, which costs the organisation contracts and therefore revenue. Secondly, multiple organisations face the problem of having little room for creativity and entrepreneurial skills due to a tight MCS. Interviewees indicated that thinking “outside the box” helped to improve the organisation before, however, since a disruptive event tight rules and procedures employees were discouraged to spontaneously undertake initiatives and propose innovations. Thirdly, as mentioned above, MCSs create negative consequences of having too much information and a narrow internal financial view. One interviewee explained: “But there is one risk, there is so much information available that there is a

possibility to draw the wrong conclusions. And maybe the risk is even bigger, as the information is historical data, so you are only looking back (…) Our control system should look at trends in the business environment” In these organisations, the threats of the

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30 acquired. The above examples of tight MCSs and a loose MCS show how MCSs are also able to negatively influence the level of OR.

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5. Discussion

The next part of this paper elaborates on the results of the analysis. It integrates the analysis with the current MCS and OR literature.

5.1 Financial resources and OR

In the literature review, it was mentioned that it is logical to assume that the financial resources are of major importance for the level of OR. The analysis of this paper confirms this by showing that the interviewees only see their organisations as resilient organisations if there are enough financial resources to cushion the impact of a crisis.

As mentioned above, Gittel et al. (2006), Sutcliffe and Vogus (2007) and Pal et al. (2014) already researched the impact of financial recourses on the long-term perspective of organisations. They argued that having (1) sufficient financial recourses (2) a low debt level and (3) enough cash on hand helps to improve the level of OR. However, they also argued that financial resources are not the only factor playing a role in enhancing the level of OR. This conclusion is also found in this paper’s analysis.

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32 5.2 MCSs design and OR

As mentioned above, there is a tendency of implementing a tighter financial MCS after a disrupting event happens. This increases the focus on financial targets and the focus on saving financial resources. However, the analysis of the interviews showed that a tighter MCS reduced the level of OR. This raises the question; how is a tight MCS influencing the level of OR?

Henri (2006) researched the effect of the diagnostic use of MCSs on four capabilities leading to strategic choices. Henri (2006, p.533) explained diagnostic use of MCSs as

“Following a traditional mechanistic notion of control, a diagnostic use provides motivation and direction to achieve goals by focusing on and correcting deviations from pre-set standards of performance. (…) The diagnostic use comprises the review of critical performance variables to monitor and coordinate the implementation of intended strategies.” The case organisations with a tight MCS use approximately their MCS on the

same manner. Henri found that a diagnostic use of MCSs has a significant negative effect on (1) market orientation (2) entrepreneurship (3) innovation and (4) organisation learning, and, consequently, on organisational performance. This paper also shows that tight MCSs have a negative effect on (1) external orientation and (2) creativity. This paper found that a tight MCS also has negative impact on (3) flexibility and (4) motivation of employees. So combing the two papers, it can be concluded that tight MCSs have a negative effect on organisations. However, Henri’s research stopped at organisational performance. This paper adds value by looking further than organisation performance, as it looks at the link between MCSs and the level of OR, thus the ability to develop a sustainable long-term perspective. This papers proposes that not only MCS elements are important for enhancing the level of OR but also MCS design. The case organisations with a high level of OR had a MCS design that is less focused on financial control. This MCS design is preferred over a tight MCSs design.

5.3 Employee support and OR

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33 employees are highly motivated to resolve problems during a crisis time. This is key in increasing the level of OR.

The outcome of this analysis was in line with the above literature review. Brunsdon et al. (2006), Gittel et al. (2006) and Lengnick-Hall et al. (2011) already found a positive relation between the level of organisational social capital and the level of OR. These researchers place emphasis on the importance of having transparent communications and strong relationships with employees, as this reduces employee resistance and enhances knowledge sharing and organisational learning. This paper adds value by including the role of MCSs in the relation between the level of social capital and the level of OR. It was seen in some of the case organisations that controllers or financial managers are mostly focussed on numbers and results instead of employee’ support. Moreover, these controllers are hesitant in sharing strategic information and responsibility. In those organisations, employees have a tight job description. Consequently, in those organisations employees are less motivated and there are no employee’ initiatives. Concluding, this paper proposes that MCSs have influence on the link between the level of social capital and the level of OR.

5.4 Future problems information redundancy

In the last paragraph of the discussion, this paper places emphasis on possible future problems organisations might face with information redundancy. The case organisations struggle with the amount of information collected in the organisation. The business environment and technology have been innovating and changing at a rapid speed. Therefore, in general, organisations will face more difficulties with information management, as the process of colleting internal and external information becomes even more elementary. Due to fast changes in the business environment, more information is needed to know how and why the business environment is changing.

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6. Conclusion

This paper aims to contribute to management control literature by answering the research question: “In which way do management control systems influence the level of resilience in

organisations?” It can be stated that MCSs influence the level of OR. However, the level of

positive or negative influence depends on several factors: (1) financial resources (2) social capital (3) information redundancy (4) MCS design and (5) MCS elements. This answer increases the general understanding of MCSs and its’ role in enhancing the level of OR.

6.1 Theoretical and managerial implications

There are two theoretical implications. Firstly, little empirical research has been conducted on the effects of organisational practices, structures and processes on the level of OR. In this paper MCSs are suggested as a means to enhance the level of OR. It can be concluded that MCSs influence the level of OR and thus are able to improve the long-term perspective of organisations. Moreover, this paper shows that organisations have increased their use of tight financial-oriented MCSs after disruptive events have happened. This shows a link between the amount of faced disruptive events and the design of MCSs.

The managerial implications of the conclusions of this paper are manifold. Firstly, organisations’ understanding of organisational elements that have different effects on the level of OR is enhanced. Specially, this paper develops the opportunity to increase the level of OR by MCSs. Financial recourses and social capital are important elements to increase the level of OR. Secondly, there is possibility to create bespoke MCS that provide an answer during crisis time.

6.2 Research limitations

Even though the research in this paper is carefully conducted, there are some limitations in this paper. Firstly, this paper used eight case organisations. These organisations (1) are of different size (2) are active in different industries and (3) have differences in their founding year. Therefore, data might be influenced by organisational characteristics or business environmental influences, which was not possible to observe while conducting interviews.

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36 low on masculinity. This might suggest, for example, the need for support and trust by employees that some interviewees indicated. Therefore, the Dutch culture might influence this research, which was not possible to observe while conducting the interviews.

Thirdly, the attention around OR has been growing in the last couple of years. However, there is still no consensus on the definition of OR. Having different definitions for OR influences this research. Moreover, this paper chose to focus on three main enablers that enhance the level of OR. There is likelihood that other enablers also play a significant role in the level of OR, for example, the role of national- and organisational culture (Hofstede, 1980; Chenhall, 2003; Sawalha, 2015).

6.3 Directions for future research

As mentioned before, the OR literature has gained attention over the last couple of years. However, none of the research focused on the relation between MCSs and OR. Therefore more research is needed to fully understand the link between MCSs and OR. This paper proposes a couple a suggestions for future research.

Firstly, this research is an explanatory research that shows how MCSs influence the level of OR. However, more research is needed to understand in which environmental circumstances MCSs are positively influencing OR and in which other environmental circumstances MCSs have a negative impact. More in-depth research of the four MCS elements in this paper and other MCS elements will show how MCS elements in isolation influence the level of OR and how organisations should implement these elements to achieve a high level of OR.

Secondly, in the above literature review, transparent communication and relationship building are seen as strong elements influencing the level of OR. This paper shows the influence of MCSs on the level of organisational social capital. Because social capital is an important factor for a sustainable long-term perspective, more research is needed to understand how MCS design and different MCS elements are positively or negatively influencing the level of social capital in organisations.

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The Influence of Management Control Systems on Organisational Resilience