Management control, a key piece within the company governance
Before defining this role, I would like to give a brief summary of the evolution of the setting to understand the value of this position that is becoming essential within any company, from multinationals to SMEs.
At the start of the 20th century, the industrial market was basically offer. Production was located in a few western countries, and it was scarce. For this reason, competition between companies was practically non-existent, and their management systems were extremely similar and far from sophisticated.
After the 2nd World War, the number of companies grew, and were established in different geographical locations, offering similar products. Trade increased and demand began to take control. Clients became more demanding, less loyal to a specific brand, and acquired quicker-changing habits. Sound familiar?
By the middle of the century, around the 1960s, electronics began to appear, and in parallel to technology came information and communication. The development of IT and telecommunications revolutionised internal company processes in all aspects and allowed for the major development of available information. With the arrival of all these changes, production settings shifted from a Taylorist system to “delayed production”, allowing for better adaptation to client demands. We could say that an End-to-End Governance System should centre on the technology and information processing that the company implements to achieve its targets, regardless of where this information is processed. This is where the function of controlling comes into play.
What is a management controller?
The main objective of a company is to obtain benefits and to generate shareholder value. The job of the controller is to contribute towards this target, generating trust and supporting the other areas to create value. How is this done? Undertaking the following duties:
For this work to be performed effectively, the company must be based on the following principles:
- Principle of having objectives: the company must base its development and growth on setting clear and well-defined targets.
- Principle of responsibility: all targets must be assigned to someone in charge, who must coherently break them down into a pyramid of sub-targets.
- Principle of target information: though it seems trivial, all owners of a target must be aware of it with sufficient notice, understand it and take it on. It is a highly common mistake in companies to notify employees of annual objectives several months into the year, often leading to situations that are difficult to redirect, or announcing already complicated objectives to meet.
- Control by exception principle: The existence of objectives allows highly efficient work control to be carried out based on the analysis of deviations (in both senses). Work is done by exception: differences are analysed within the budget and the objectives, and there is an attempt to understand what is happening in order to take corrective actions.
- Principle of delegation: an organisation can only delegate decision making if there is a control function which constantly assesses the delegated decision process. In other words, a centralised, substantial management style, grouped in a highly reduced number of decision-makers, will not require high Management Control; a decentralised management style, based on the delegation of responsibilities, will require the establishment of a solid Management Control area, which ensures the maintenance of high levels of trust.
Where is this within the organisation?
Depends on the size of the company. We could broach two models:
For this position to be truly effective, the company must have good management systems which enable this department to autonomously obtain all the information needed for its analysis duty. As we can see, in this case the Management Control does not have hierarchical power. It is a department that supports management, and therefore its function is more strategic.
However, the American model is at the same level as other management, making its function more operational.
Within this last model, management control appears within the finance area.
What about technology?
As commented at the start of this article, the development of information and telecommunications revolutionised company internal processes in all its facets. The Controlling department has the important job of defining the company’s information system. This information system is fed by the information or functional departmental subsystems. Therefore, the global information requirements must be defined, as well as communication flows.
Why is the controller a key figure within the company?
We could say the main reasons are as follows:
- The role encompasses the entire company, and the staff position enables this individual to have a global vision of it.
- This person is independent when it comes to detecting information needs, though on this point it is worth remembering that detecting these needs is an issue belonging principally to the interested parties.
- This individual is a coordinator, an intrinsic characteristic of the information system itself.
This last section is of vital importance. Various alternatives can occur in terms of coordination in the design and implementation of information systems, depending on the different structural forms that the company has for this. For example:
- Independent data processing department, i.e., staff.
- Data processing dependent upon some functional area, which in practically all cases is financial management.
- Organisation and systems department. If it is independent, given that this only occurs in large companies - or smaller companies with complicated information system frameworks - it is the central entity of everything, and in this case the controller must work in close collaboration with it.
Logically, the structure chosen conditions the role of the controller regarding the information system, at the same time connected to the choice of the structure in terms of the controller’s position within the organisation. The basic point of reference is that technologies and information systems mainly have a direct impact on strategy and the company structure. Therefore, to the extent that controllers have greater relevance within the company as coordinating elements in strategic planning, their contribution to the design and information handling, is not only justified, but becomes a fundamental requisite.
The challenge will be to perfectly coordinate the functions and responsibilities of each of the elements participating in the design. On the other hand, it should be remembered that within companies, the centralisation and/or decentralisation of the information must be proposed, aiming to find the best balance between effectiveness, efficiency and cost in data handling and use. On this point there is a generalised trend to believe that decentralisation is always a positive point, when in reality it is something to be questioned, and always preceded by an in-depth study. Here the controller can also contribute valuable help as an expert in the different information needs as well as the structure of the company.
To end, does the position condition the role of the controller? Structural decisions should largely respond to strategic proposals. To the degree that strategic, planning and control information constitutes the axis of the information within the company, controllers must play a more important role. Their independent character within the structure, their global knowledge of the company, their closeness to top management and their coordinating role - which should be understood by the organisation with the full support of top management - can play a determining role in the future, as can be seen in other countries.