MCS in Service

Chapter 9 Management Control System in Service Sector

Management Control Systems in aService Organizations

Absence of Inventory BufferIf not used today wont be able to retrieve laterService industry should try to minimize its unused capacitythe costs of many service organizations are essentially fixed in the short run

Characteristics

A key variable in most service organizations, therefore, is the extent to which current capacity is matched with demand. Service organizations attempt this matching in two ways.. First, they try to stimulate demand in off- peak periods by marketing efforts and price concessions. Second, if feasible, service organizations adjust the size of the workforce to the anticipated demand by such measures as scheduling training activities in slack periods and compensating for long hours in busy periods with time off later.

Difficulty in Controlling QualityA manufacturing company can inspect its products before they are shipped to the consumer, and their quality can be measured visually or with instruments (tolerances, purity, weight, color, and so on). A service company cannot judge product quality until the moment the service is rendered, and then the judgments are often subjective.

Labor IntensiveManufacturing companies add equipment and automate production lines, thereby replacing labor and reducing costs. Most service companies are labor intensive and cannot do this.

Multi-Unit OrganizationsSome service organizations operate many units in various locations, each unit relatively small. These organizations are fast-food restaurant chains, auto rental companies, gasoline service stations, and many others. Some of the units are owned; others operate under a franchise. The similarity of the separate units provides a common basis for analyzing budgets and evaluating performance not available to the manufacturing company. The information for each unit can be compared with system wide or regional averages, and high performers and low performers can be identified.

ClassificationProfessional OrganizationsFinancial Service OrganizationsHealth Care OrganizationsNon-Profit Organizations

Professional Organizations

Research and development organizations, law firms, accounting firms, health care organizations, engineering firms, architectural firms, consulting firms, advertising agencies, symphony and other arts organizations, and sports organizations (such as baseball teams) are examples of organizations whose products are professional services.

Goalsdominant goal of a manufacturing company is to earn a satisfactory profit, specifically a satisfactory return on assets employed. A professional organization has relatively few tangible assets; its principal as set is the skill of its professional staff, which doesnt appear on its balance sheet.Return on assets employed, therefore, is essentially meaningless in such organizations. Their financial goal is to provide adequate compensation to the professionals.In many organizations, a related goal is to increase their size. this reflects the natural tendency to associate success with large size. Large public accounting firms need to have enough local offices to enable them to audit clients who have facilities located throughout the world.

PS0 Special Characteristics

ProfessionalsProfessional organizations are labor intensive, and the labor is of a special type. Many professionals prefer to work independently, rather than as part of a team. Professionals who are also managers tend to work only part time on management activities; Education for most professions does not include education in management, but quite naturally stresses the skills of the profession, rather than management; for this and other reasons, professionals tend to look down on managers. Professionals tend to give inadequate weight to the financial implications of their decisions; they want to do the best job they can, regardless of its cost. This attitude affects the attitude of support staffs and nonprofessionals in the organization; it leads to inadequate cost control.

Output and Input ManagementThe output of a professional organization cannot be measured in physical terms, such as units, tons, or gallons. We can measure the number of patients a physician treats in a day, and even classify these visits by type of complaint; but this is by no means equivalent to measuring the amount or quality of service the physician has provided. At most, what is measured is the physicians efficiency in treating patients, which is of some use in identifying slackers and hard workers. Revenues earned is one measure of output in some professional organizations, but these monetary amounts, at most, relate to the quantity of services rendered, not to their quality

Furthermore, the work done by many professionals is non repetitive. No two consulting jobs or research and development projects are quite the same. This makes it difficult to plan the time required for a task, to set reasonable standards for task performance, and to judge how satisfactory the performance was.Some professionals, notably scientists, engineers, and professors, are reluctant to keep track of how they spend their time, and this complicates the task of measuring performance. how should work done on evenings and weekends be counted? (Professionals are exempt employeesthat is, they are not subject to government requirements for overtime payments.) How to ac count for time spent reading literature, going to meetings, and otherwise keeping up to date?

Small SizeWith a few exceptions, such as some law firms and accounting firms, professional organizations are relatively small and operate at a single location. Senior management in such organizations can personally observe what is going on and personally motivate employees. Thus, there is less need for a sophisticated management control system, with profit centers and formal performance reports. Nevertheless, even a small organization needs a budget, a regular comparison of performance against budget, and a way of relating compensation to performance.

MarketingIn a manufacturing company there is a clear dividing line between marketing activities and production activities; only senior management is concerned with both. Such a clean separation does not exist in most professional organizations. In some, such as law, medicine, and accounting, the professions ethical code limits the amount and character of overt marketing efforts by professionals (al though these restrictions have been relaxed in recent years). Marketing is an essential activity in almost all organizations, however. If it cant be conducted openly, it takes the form of personal contacts, speeches, articles, conversations on the golf course, and so on. These marketing activities are conducted by professionals, usually by professionals who spend much of their time in production workthat is, working for clients.

In this situation, it is difficult to assign appropriate credit to the person responsible for selling a new customer. In a consulting firm, for example, a new engagement may result from a conversation between a member of the firm and an acquaintance in a company, or from the reputation of one of the firms professionals as an outgrowth of speeches or articles. Moreover, the professional who is responsible for obtaining the engagement may not be personally involved in carrying it out. Some organizations now give explicit credit, perhaps as a percentage of the projects revenue, if the person who sold the project can be identified.

PricingThe selling price of work is set in a traditional way in many professional firms. If the profession is one in which members are accustomed to keeping track of their time, fees generally are related to professional time spent on the engagement. The hourly billing rate typically is based on the compensation of the grade of the professional (rather than the compensation of the specific person), plus a loading for overhead costs and profit. In other professions, such as investment banking, the fee typically is based on the monetary size of the security issue. In still others, there is a fixed price for the project.

Management Control Systems

Prices vary widely among professions; In manufacturing companies, the profit component of the selling price is normally set so as to obtain, on average, a satisfactory return on assets employed. As noted before, the principal asset of a professional organization is the skill of its professionals, which is not measurable.Actually, the total value of the whole organization is greater than the sum of what the value of the individuals would be if they worked separately. This is because the firm already has incurred the cost of acquiring and training these individuals, has organized them according to their personality fit and other considerations, and has developed policies and procedures for assuring that the work is done efficiently and effectively. In this manner, the firm accepts responsibility for producing a satisfactory product, including the risk of loss if the work is not well done, and it absorbs the cost of personnel who are not working on revenue-producing work. These considerations implicitly affect the size of the profit component that is included in the fee.

Profit Center & Transfer PricingSupport units, such as maintenance, information processing, transportation, telecommunication, printing, and procurement of material and services, charge consuming units for their services.

Strategic Planning & BudgetingIn general, formal strategic planning systems are not as well developed in professional organizations as in manufacturing companies of similar size. Part of the explanation is that professional organizations have no great need for such systems. In manufacturing companies, many program decisions involve commitments to procure plant and equipment; they have a predictable effect on both capacity and costs for several future years, and, once made, they are essentially irreversible. In a professional organization, the principal assets are people; although the organization tries to avoid short-run fluctuations in personnel levels, changes in the size and composition of the staff are easier to make and are more easily reversed than changes in the capacity of a physical plant. The strategic plan of a professional organization typically consists primarily of a long-range staffing plan, rather than a full-blown plan for all aspects of the firms operation.

Control of OperationsMuch attention is, or should be, given to scheduling the time of professionals. The billed time ratio, which is the ratio of hours billed to total professional hours available, is watched closely. The inability to set standards for task performance, the desirability of Carrying out work by teams, the consequent problems of managing a matrix organization and the behavioral characteristics of professionals all complicate the planning and control of the day-to-day operations in a professional organization. When the work is done by project teams, control is focused on projects. A written plan for each project is needed, and timely reports should be prepared that compare actual performance with planned performance in terms of cost, schedule, and quality.

Performance Management & AppraisalFor some professions, objective measures of performance are sometimes available: The recommendations of an investment analyst can be compared with actual market behavior of the securities; the accuracy of a surgeons diagnosis can be verified by an examination of the tissue that was removed; and the doctors skill can be measured by the success ratio of operations. These measures are, of course, subject to appropriate qualifications, and in most circumstances the assessment of performance is finally a matter of human judgment by superiors, peers, self, sub ordinates, and clients.In some professions, internal audit procedures are used to control quality. In many accounting firms, the report of an audit is reviewed by a partner other than the one who is responsible for it, and the work of the whole firm is peer reviewed by another firm. The proposed design of a building may be reviewed by architects who are not actively involved in the project.

Financial service organizations include commercial bank and thrift institutions, insurance companies, and securities firms. These companies are in business primarily to manage money. Some act as intermediaries; that is, they obtain money from depositors and lend it to individuals or companies. Others act as risk shifters; they obtain money in the form of premiums, invest these premiums, and accept the risk of the occurrence of specific events, such as death or damages to property. Still others are traders; they buy and sell securities, either for their own account or for customers.Financial Service Organization

Monetary AssetsMost of the assets of financial service firms are monetary. The current value of monetary assets is much more easily measured than the value of plant and other physical assets, or patents and other intangible assets. Currency is the extreme example of a fungible commodity. At any time, dollars held by all companies have the same value; each dollar is worth a dollar, valued at both its face amount and its purchasing power. Its purchasing power changes with time, but at any given future time, all dollars have equal value. This means that ones dollar has the same quality at any given moment.In the financial services industry, quality refers to the quality of services rendered and to the quality financial instruments other than money; there is no need for quality control safeguards for money.

FSO- Special Characteristics

Financial assets Financial assets also can be transferred from one owner to another easily and quickly. In an electronic funds transfer, money moves almost instantaneously. In other transactions, it moves in a few days at most. Its portability is tempting to thieves and forgers. For this reason, firms that handle financial as sets, especially money, must take strong measures to protect them. These involve not only physical measures to safeguard currency and documents, but also measures designed to maintain the integrity of the system for transferring money from one party to another.

Time Periods of Transactions The ultimate financial success or failure of a bond issue, a mortgage loan to an individual, or a life insurance policy may not be known for 30 years or more. During this period, the soundness of the loan or policy may change, and the purchasing power of money will certainly change. This means that the ultimate performance of those involved in authorizing and structuring the loan, or in selling and pricing the insurance policy, cannot be measured at the time the initial decision is made. It also means that control requires that there be a means of continued surveillance of the soundness of the transaction during its life, including periodic audits of all outstanding loans. Failure to identify troubled loans at an early stage is one important reason for the rash of failures of banks and thrift institutions.

At the other extreme, some transactions are completed quickly. Many trades are made on the basis of information that the trader has acquired in the previous few minutes, or even seconds.For currency transactions and for listed securities, new information may become available almost instantaneously in markets throughout the world. Traders either buy or sell securities on the basis of the information they have. If they buy securities, future changes in prices will change the value of the securities held. Therefore, there is a need for a system to report held and to assess the risk to the organization if prices move against the traders securities. This means that the firm must have an accurate, prompt system for obtaining this information, for summarizing it, for estimating the risk of the securities held (if applicable), and for making this information available to traders; a computer model (expert system) evaluates the information and in some cases acts with, human intervention.

Risk and RewardMany financial services firms are in the business of accepting risks in return for rewards. Most business decisions involve a trade-off between risks and re wards. The greater the risk, the greater should be the anticipated reward. In financial services firms, this trade-off is more explicit than in business investments such as those involving the purchase of a machine or the introduction of a new product. Interest rates on loans and premiums on insurance policies are based on assumptions about risk that may, or may not, turn out to be accurate.

TechnologyTechnology has revolutionized the financial services industry. Financial service firms have used information technology as a way to offer innovative services. Automated teller machines of banks are just one example. Insurance and mutual fluids have developed electronic marketplaces. Financial service firms, via their website on the Internet, market their products electronically to consumers. Investment banks, using concepts from quantum physics and high- level mathematics formulas, have designed new forms of financial instruments. Banks have become virtual by offering cyber-payment systems. Online brokerage services are a fast-growing segment.

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