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COMM414 - CHAPTER 5 Control System Cost

Indirect costs of management control systems are often greater than direct costs and can negatively impact organizations. Some indirect costs include behavioral displacement when the control system encourages behaviors that do not align with organizational objectives. Gamesmanship, such as creating slack resources or manipulating data, allows employees to appear to meet performance targets without actual benefits. Other indirect costs are operating delays from review processes, and negative employee attitudes towards certain control systems. Careful design and implementation of controls can help minimize these unintended consequences.

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Blaze Glazer
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70 views

COMM414 - CHAPTER 5 Control System Cost

Indirect costs of management control systems are often greater than direct costs and can negatively impact organizations. Some indirect costs include behavioral displacement when the control system encourages behaviors that do not align with organizational objectives. Gamesmanship, such as creating slack resources or manipulating data, allows employees to appear to meet performance targets without actual benefits. Other indirect costs are operating delays from review processes, and negative employee attitudes towards certain control systems. Careful design and implementation of controls can help minimize these unintended consequences.

Uploaded by

Blaze Glazer
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER 5 Control System Costs

Direct cost in MSC’s are the cost of investing in MSC’s in return for one primary benefit: a
higher probability that employees will both work hard and direct their energies to serve to
organization’s interest.

Indirect costs are many times greater than their direct costs. Some are created by
negative side affects others are caused by a poor MCS design or by an implementation
of the wrong type of control for a give situation.

5.1 Direct/ out-of-pocket costs

This type of costs refers to the direct, monetary costs of implementing an MCS. These costs
should affect decisions about whether the benefits of a particular type of control justify
the costs and whether one or another form of control should be implemented.

5.2 Indirect costs

These include the following:

1. Behavioral displacement

This is a side effect that can subject organizations to significant indirect costs. It occurs
whenever the MCS produces, and actually encourages, behaviors that are not consistent
with the organization’s objectives. It is most common with results or action accountability
where the specification of the results or actions desired is incongruent. But some forms of
personnel/cultural control can also produce behavioral displacement.

In a results control system, behavioral displacement occurs when an organization defines


sets of results measures that are incongruent with the organization’s true objectives. This
happens when:

• Managers have a poor understanding of the desired results


• Managers over rely on easily quantified results: they concentrate on results areas
that are concrete and quantifiable, rather than intangible, difficult-to-quantify
results areas that may be even more important for organizational success.
Employees then concentrate on the results that are rewarded by the control
system.

A form of action control-related displacement is often referred to as means-end inversion.


This means that employees pay attention to what they do while losing sight of what they
are to accomplish. Action control-related displacement can occur because the defined
actions are incongruent or because the action controls promote compliant but rigid,
nonadaptive behaviors. The latter often happens in bureaucratic organizations. Action
controls and bureaucratization can be good in stable environments with considerable
centralized knowledge about what actions are desired because they help establish
good, efficient work habits.

Behavioral control can also occur with personnel/cultural controls. It occurs when
organizations recruit the wrong type of employees or provide the wrong training.
2. Gamesmanship

Gamesmanship refers to the actions that employees take to improve their performance
indicators without producing any positive economic effects for the organization. There
are two forms:

• Creation of slack resources:

Slack is the consumption of resources by employees that cannot be justified easily in terms
of its contribution to organizational objectives. This often takes places when tight controls
are in use. Budget slack is negotiating highly achievable targets that are deliberately
lower than their best-guess forecast in the future. It protects managers against unforeseen
contingencies and improves the probability that the budget target will be met. Slack is
feasible only where there is information asymmetry.

Advantages:

• Slack can reduce manager tension


• It can increase organizational resiliency to change
• Can make available some resources that can be used for innovation

Disadvantages:

• Slack obscures true underlying performance


• It distorts the decisions based on the obscured information

• Data manipulation: It involves an effort on the part of the employee being


controlled to look good by fudging the control indicators. Two basic forms:

• Falsification: Reporting erroneous data


• Data management: Any action designed to change the reported results.

Accounting methods are interventions in the measurement process and operating


methods involve the altering of operating decisions.
3. Operating delays

Operating delays are an often-unavoidable consequence of the preaction review types


of action controls and some of the forms of behavioral constraints. Where fast action is
important, decisions delays can be quite costly. Bureaucracy can cause operation
delays.

4. Negative attitudes

• Negative attitudes produced by action controls:

Most people react negatively to the use of action controls. Pre-action reviews can be
particularly frustrating if the employees being reviewed do not perceive the reviews as
serving a useful purpose.

• Negative attitudes produced by results controls

They can also produce negative attitudes. Lack of employees’ commitment to the
performance targets defined in the MCS can be a cause. Negative attitudes can also be
caused by the measurement system (accountable for things they cannot control) or the
rewards (not equitable).
Behavioral Operating Negative
Type of control: Gamesmanship
displacement delays attitudes

Results controls

Results
X X X
accountability

Action controls

Behavioral
X X
constraints

Preaction reviews X X

Action
X X X
accountability

Redundancy X

Personnel/cultural
controls

Selection and
X
placement

Training X

Provision of
necessary
resources

Creation of a
strong
X
organizational
culture

Group-based
X
rewards

Table: control types and possible harmful side effects

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