Service Service OrganizatioOrganizatio

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Service Organizations in General

Management control in service industries is

somewhat different from management control in

manufacturing companies

Management control in service industries is

somewhat different from management control in

manufacturing companies

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Service Organizations in General

Characteristics :Characteristics :• Absence of Absence of

inventory bufferinventory buffer• Difficulty in Difficulty in

controlling qualitycontrolling quality• Labor intensiveLabor intensive• Multi unit Multi unit

organizationsorganizations

Characteristics :Characteristics :• Absence of Absence of

inventory bufferinventory buffer• Difficulty in Difficulty in

controlling qualitycontrolling quality• Labor intensiveLabor intensive• Multi unit Multi unit

organizationsorganizations

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Service Organizations in General

a.a.Absence of inventory bufferAbsence of inventory buffer• Goods can be held in inventory but Goods can be held in inventory but

services cannot be storedservices cannot be stored• Although a manufacturing company can Although a manufacturing company can

earn revenue in the future from earn revenue in the future from products that are on hand today, a products that are on hand today, a service company cannot do so. A service company cannot do so. A service company must try to minimize service company must try to minimize its unused capacityits unused capacity

• The cost of service organizations are The cost of service organizations are essentially fixed in the short run essentially fixed in the short run

• A key variable in most service A key variable in most service organizations, therefore, is the extent organizations, therefore, is the extent to which current capacity is matched to which current capacity is matched with demand.with demand.

a.a.Absence of inventory bufferAbsence of inventory buffer• Goods can be held in inventory but Goods can be held in inventory but

services cannot be storedservices cannot be stored• Although a manufacturing company can Although a manufacturing company can

earn revenue in the future from earn revenue in the future from products that are on hand today, a products that are on hand today, a service company cannot do so. A service company cannot do so. A service company must try to minimize service company must try to minimize its unused capacityits unused capacity

• The cost of service organizations are The cost of service organizations are essentially fixed in the short run essentially fixed in the short run

• A key variable in most service A key variable in most service organizations, therefore, is the extent organizations, therefore, is the extent to which current capacity is matched to which current capacity is matched with demand.with demand.

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Service Organizations in General

b. Difficulty in Controlling b. Difficulty in Controlling QualityQuality

• A manufacturing company A manufacturing company can inspect its products can inspect its products before they are shipped to before they are shipped to the customer, and their the customer, and their quality can be measured quality can be measured visually or with instrumentsvisually or with instruments

• A service company cannot A service company cannot judge product quality until judge product quality until the moment the service is the moment the service is rendered, and then rendered, and then judgments are often judgments are often subjectivesubjective

b. Difficulty in Controlling b. Difficulty in Controlling QualityQuality

• A manufacturing company A manufacturing company can inspect its products can inspect its products before they are shipped to before they are shipped to the customer, and their the customer, and their quality can be measured quality can be measured visually or with instrumentsvisually or with instruments

• A service company cannot A service company cannot judge product quality until judge product quality until the moment the service is the moment the service is rendered, and then rendered, and then judgments are often judgments are often subjectivesubjective

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Service Organizations in General

c. Labor Intensivec. Labor Intensive• Manufacturing companies add Manufacturing companies add

equipment and automate production equipment and automate production lines, thereby replacing labor and lines, thereby replacing labor and reducing costs.reducing costs.

• Most service companies are labor Most service companies are labor intensive and cannot do thisintensive and cannot do this

d. Multi Unit Organizationsd. Multi Unit Organizations• Some service organizations operate Some service organizations operate

many units in various locations, many units in various locations, each unit relatively small.each unit relatively small.

c. Labor Intensivec. Labor Intensive• Manufacturing companies add Manufacturing companies add

equipment and automate production equipment and automate production lines, thereby replacing labor and lines, thereby replacing labor and reducing costs.reducing costs.

• Most service companies are labor Most service companies are labor intensive and cannot do thisintensive and cannot do this

d. Multi Unit Organizationsd. Multi Unit Organizations• Some service organizations operate Some service organizations operate

many units in various locations, many units in various locations, each unit relatively small.each unit relatively small.

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Professional Service Organizations

Special Characteristics :

a. Goalsb. Professionalsc. Output and Input

Measurementd. Small Sizee. Marketing

Special Characteristics :

a. Goalsb. Professionalsc. Output and Input

Measurementd. Small Sizee. Marketing

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Professional Service Organizations

a.Goals• A dominant goal of

manufacturing company is to earn a satisfactory profit, specifically a satisfactory ROA

• A professional organization has relatively few tangible assets, its principal asset is the skill of its professional staff, which does not appear on its balance sheet

• In many organizations, a related goal is to increase their size.

a.Goals• A dominant goal of

manufacturing company is to earn a satisfactory profit, specifically a satisfactory ROA

• A professional organization has relatively few tangible assets, its principal asset is the skill of its professional staff, which does not appear on its balance sheet

• In many organizations, a related goal is to increase their size.

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Professional Service Organizations

b. Professionals• Professional organizations are labor

intensive, and the labor is of a special type

• Professional tend to do the best job they can, regardless of its cost

c. Output and Input Measurement• The output of a professional

organizations cannot be measured in physical terms.

• Revenues earned is one measure of output, but these relate to the quantity of service rendered, not to their quality.

b. Professionals• Professional organizations are labor

intensive, and the labor is of a special type

• Professional tend to do the best job they can, regardless of its cost

c. Output and Input Measurement• The output of a professional

organizations cannot be measured in physical terms.

• Revenues earned is one measure of output, but these relate to the quantity of service rendered, not to their quality.

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Professional Service Organizations

d. Small Size• With a few exceptions, such as some law

firms and accounting firms, professional organizations are relatively small and operate at a single location

• There is less need for sophisticated management control system

e. Marketing• In a manufacturing company there is a

clear dividing line between marketing activities and production activities.

• Such a clean separation does not exist in most professional organizations

d. Small Size• With a few exceptions, such as some law

firms and accounting firms, professional organizations are relatively small and operate at a single location

• There is less need for sophisticated management control system

e. Marketing• In a manufacturing company there is a

clear dividing line between marketing activities and production activities.

• Such a clean separation does not exist in most professional organizations

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Professional Service Organizations

Management Control Systems :

a.Pricingb.Profit Centers and

Transfer Pricingc.Strategic Planning and

Budgetingd.Control of Operationse.Performance Measurement

and Appraisal

Management Control Systems :

a.Pricingb.Profit Centers and

Transfer Pricingc.Strategic Planning and

Budgetingd.Control of Operationse.Performance Measurement

and Appraisal

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Professional Service Organizations

a. Pricing• The selling price of work is set in

a traditional way in many professional firms

• Fees generally are related to professional time spent on the engagement.

• In manufacturing companies, the profit component of the selling price is normally set so as to obtain, on average, a satisfactory ROA employed

a. Pricing• The selling price of work is set in

a traditional way in many professional firms

• Fees generally are related to professional time spent on the engagement.

• In manufacturing companies, the profit component of the selling price is normally set so as to obtain, on average, a satisfactory ROA employed

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Professional Service Organizations

b. Profit Center and Transfer Pricing

• Support units, such as maintenance, information, processing, transportation, telecommunication, printing and procurement of material and services, charge consuming units for their services

c. Strategic Planning and Budgeting• In general, formal strategic

planning systems are not as well developed in professional organizations as in manufacturing companies of similar size.

b. Profit Center and Transfer Pricing

• Support units, such as maintenance, information, processing, transportation, telecommunication, printing and procurement of material and services, charge consuming units for their services

c. Strategic Planning and Budgeting• In general, formal strategic

planning systems are not as well developed in professional organizations as in manufacturing companies of similar size.

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Professional Service Organizations

d. Control of Operations• Much 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

e. Performance Measurement and Appraisal

• Judgments made by superiors are the most common

• Appraisals by a professional’s peers, or by subordinates, are sometimes part of a formal control system

• The budget can be used as the basis for measuring cost performance, and the actual time taken can be compared with the planned time.

• Internal audit procedures are used to control quality

d. Control of Operations• Much 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

e. Performance Measurement and Appraisal

• Judgments made by superiors are the most common

• Appraisals by a professional’s peers, or by subordinates, are sometimes part of a formal control system

• The budget can be used as the basis for measuring cost performance, and the actual time taken can be compared with the planned time.

• Internal audit procedures are used to control quality

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Financial Service Organizations

Financial service organizations include commercial bank and

thrift institutions, insurance companies and

securities firms

Financial service organizations include commercial bank and

thrift institutions, insurance companies and

securities firms

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Financial Service Organizations

The Financial Service SectorGeneral observations can be made about the

financial sector :a. Financial services are very important in the

overall performance of economyb. 30 years ago, financial services, existed as

distinct and separate industries.c. Financial services firms have used the IT

revolution to innovate new products and discover new methods of trading

d. The need for controls in the financial services sector has become paramount.

e. During the 1990s, new form of financial instruments (such as derivatives) designed by financial service firms sometimes resulted in millions of dollars of losses for their clients.

The Financial Service SectorGeneral observations can be made about the

financial sector :a. Financial services are very important in the

overall performance of economyb. 30 years ago, financial services, existed as

distinct and separate industries.c. Financial services firms have used the IT

revolution to innovate new products and discover new methods of trading

d. The need for controls in the financial services sector has become paramount.

e. During the 1990s, new form of financial instruments (such as derivatives) designed by financial service firms sometimes resulted in millions of dollars of losses for their clients.

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Financial Service Organizations

The Financial Service SectorThe corporate scandals during 2000 have

created a huge push for investment banks to spin off their Research Department. The arguments for spin off are many :

a. This separation will ensure objective research data.

b. At present, cost of research is being subsidized by investment banks

c. Investor confidence will improve if they are convinced that research is unbiased.

On the other hand, arguments against such a spin off, are

a. The cost of research will go up if they are set up as separate firms

b. To keep costs down, research departments may issue short reports instead of a rich.

The Financial Service SectorThe corporate scandals during 2000 have

created a huge push for investment banks to spin off their Research Department. The arguments for spin off are many :

a. This separation will ensure objective research data.

b. At present, cost of research is being subsidized by investment banks

c. Investor confidence will improve if they are convinced that research is unbiased.

On the other hand, arguments against such a spin off, are

a. The cost of research will go up if they are set up as separate firms

b. To keep costs down, research departments may issue short reports instead of a rich.

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Financial Service Organizations

Special Characteristics :While the general principles and concepts of management control systems apply, they need to be adapted to the following special characteristics of the financial services industry :

a. Monetary Assetsb. Time Period for Transactionsc. Risk and Rewardd. Technology

Special Characteristics :While the general principles and concepts of management control systems apply, they need to be adapted to the following special characteristics of the financial services industry :

a. Monetary Assetsb. Time Period for Transactionsc. Risk and Rewardd. Technology

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Corporate Strategy

Implications for Management Control

Strategic planning• Conglomerates tend to

use vertical strategic planning systems

• Related diversified firms tend to be both vertical and horizontal

• Single industry firms tend to be both vertical and horizontal

Implications for Management Control

Strategic planning• Conglomerates tend to

use vertical strategic planning systems

• Related diversified firms tend to be both vertical and horizontal

• Single industry firms tend to be both vertical and horizontal

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Business Unit Strategy

Mission• The mission of existing

business should “pure build” at one end and “pure harvest” at the other hand.

• To implement the strategy effectively, there should be congruence between the mission chosen and the types of controls used.

Mission• The mission of existing

business should “pure build” at one end and “pure harvest” at the other hand.

• To implement the strategy effectively, there should be congruence between the mission chosen and the types of controls used.

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Business Unit Strategy

Competitive Advantage

A business unit can choose to compete either as a differentiated player or as a low cost player.

Competitive Advantage

A business unit can choose to compete either as a differentiated player or as a low cost player.

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Top Management Style

Implications for Management Control

• The various dimensions of management style significantly influence the operations of control systems

• Style affect the management control process

Implications for Management Control

• The various dimensions of management style significantly influence the operations of control systems

• Style affect the management control process

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Top Management Style

Implications for Management Control

Personal versus Impersonal Controls

• Some managers are “number oriented”, and they deriving tentative conclusions from it.

• Other managers are “people oriented”, they usually arrive at their decision by talking with people

Implications for Management Control

Personal versus Impersonal Controls

• Some managers are “number oriented”, and they deriving tentative conclusions from it.

• Other managers are “people oriented”, they usually arrive at their decision by talking with people

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Top Management Style

Implications for Management Control

Tight versus Loose Controls

• A manager’s style affects the degree of tight versus loose control in any situation.

• The manager of a routine production responsibility center can be controlled relatively tightly or loosely.

• The actual control reflects the style of the manager’s superior

Implications for Management Control

Tight versus Loose Controls

• A manager’s style affects the degree of tight versus loose control in any situation.

• The manager of a routine production responsibility center can be controlled relatively tightly or loosely.

• The actual control reflects the style of the manager’s superior

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Summary

Business units have missions that can be classified as “build”, “hold” or “harvest”, and their managers can also decide to build competitive advantage based on low cost or differentiations.

Control systems should be designed in the context of each organization’s unique, external environment, technology, strategy, organization structure, culture and top management style

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The EndThe End