Controlling and the Challenge of Volatility

Toolbox versus corporate culture 

The world is getting more and more volatile. It is almost a truism to say that companies have to mount a comprehensive response. What role does volatility play in controlling? What does it mean for corporate management to focus on rapid changes? What are the major levers? What should controllers focus their efforts and attention on? We can give you the answers you need based on the findings of our extensive empirical study.

Managers and controllers have witnessed a significant increase in the volatility of the business environment. Although the latest financial crisis is now generally considered to be over, the underlying trends that contribute to volatility still remain: the world is becoming more densely networked, and the barriers of time and space are getting increasingly blurred. For some time, we have been able to process and analyze more and more data in real-time, while texts and emails can be answered almost instantly around the clock. The supply chain is global and closely interlinked, product life cycles are getting shorter, and air travel to, say, Shanghai or New York is affordable even to our young students and no big deal. The world’s economic centers are becoming more and more like a village that is committed to greater efficiency and short-term optimization. This means that the buffers available to absorb the shocks are getting smaller – in sharp contrast to the rising threats posed to this fragile balance by natural catastrophes, terrorist attacks, wars, and disease. As a result, local problems can quickly lead to cross-market and global crises – and a greater susceptibility to fluctuations.

How can managers best address the issue of rising volatility?

Controllers, financial directors and managers tend to see volatility primarily as a rationale for using tools. Their toolbox contains a huge array of instruments including rolling forecasts, risk cockpits, scenario analyses, bandwidth planning, and hedging. When confronted with volatility, controllers and managers use these tools to improve the company’s ability to anticipate changes in the business environment and to respond more quickly. One Head of Corporate Controlling that we surveyed put it in a nutshell, ”In finance, our first instinct is always to think in terms of tools and data.”

A current study of the WHU Controller Panel confirms that this instinct to turn to tools is widespread. On average, companies that are more severely affected by volatility use appropriate tools more intensively than organizations that are less affected. Although each company has its own preference as to which tools to use, the findings of the study show that hedging, leading indicators, and contingency plans are used to a particularly high degree in companies that are more affected: The first central finding of the WHU survey is that, by and large, controlling tools are used more intensively across the board when companies are faced with high volatility.

Fig. 1: Use of Controlling tools according to degree affected by volatility (Source: WHU Controller Panel 2013)

This is by no means irrational. In fact, our study shows that the more intensively a company uses controlling tools, the more successful that company is in handling volatility. Interestingly, this correlation does not apply in equal measure to all elements of the toolbox. Companies that are particularly successful in handling volatility make greater use of scenario and sensitivity analyses than companies that handle it less successfully, whereas there is no evidence of a statistically significant correlation between the use of hedging – or the relatively new bandwidth planning – and managing volatility successfully.

A key factor influencing the use of the tools mentioned above is, in any case, whether and, if so, how these are involved in the company’s decision-making processes. For instance, leading indicators that are not an integral part of the regular management process will generally make little or no difference to the company. Similarly, risk cockpits that do not have the backing of the board are likely to turn out to be ineffective “paper tigers”. Moreover, the findings of the WHU study show that, according to controllers, the reason why companies are constrained in their ability to respond is not because change is being identified too late. In fact, in most cases it appears that the problem lies in management's ability to turn their discussions into an actual decision and that this decision, once made, is implemented too slowly.

This clearly shows that it is not enough to enhance and extend the use of leading indicators. In many companies, the anticipation and early warning capability is already very well developed; nevertheless these companies are still not able to predict major changes, such as the next crisis, sufficiently well – and they never will be! That is why it is important to take all relevant aspects of volatility management into consideration. Controllers must not limit themselves to their role as guardian of the toolbox. On the contrary, they need to ensure that management is fully focused on being able to respond rapidly at the first sign of change.

Improving the flexibility of the resource base and the adaptability of the business model come to play an increasingly pivotal role, and this poses a number of fascinating questions for management and their counterparts in controlling: Does it make sense to further raise the proportion of variable (and consequently more easily reduced) costs? Should a greater emphasis be placed on leasing? Has the company exhausted the use of temporary workers, working time accounts, employee pools, and temporary contracts of employment? Are sales and distribution channels flexible enough? Would it make sense to disinvest in volatile fields of business, or could these be absorbed into the overall portfolio in times of crisis? The list could go on.

Moreover, even if you have addressed all of these questions, you will find that the effects of volatility are still very much in evidence. This is because – to return to the findings of our study – the real reason lies elsewhere: Success in handling volatility results primarily from developing a distinct culture of information exchange and consistently challenging the status quo.

Fig. 2: Key drivers for handling volatility successfully (Source: WHU Controller Panel 2013)

The catch here is the fact that it is not easy to change culture and, even so, it is generally a slow process. Whereas implementing a new tool provides controllers with a comparatively reliable option that they know they can trust, it requires courage to overstep the limits of the more traditional controller role and to cultivate – or even imprint – a controlling culture, that is, to adopt the role of business partner and encourage an open exchange of information and critical discourse within the company.

Fig. 3: Culture of communication in organizations differentiated by degree affected by volatility (Source: WHU Controller Panel 2013)

It is precisely because the time taken to turn a discussion into a decision is too long and this decision is then implemented too slowly that a culture of transparency and candor can strengthen the company’s ability to respond.

In many cases, it is necessary to overcome ingrained patterns of thought, internal politics, as well as organizational inertia. This is precisely where a culture of open information exchange and internal criticism comes to play a central role, which can be improved by ‘thinking out of the box’ using tools such as scenario and sensitivity analyses.

Professor Utz Schäffer & Professor Jürgen Weber

  • Schäffer, U., Bechtoldt, C., Grunwald-Delitz, S., & Reimer, T. (2014). Controlling-Kultur als Schlüssel im Umgang mit Volatilität. WHU Controlling & Management Review, 58(5), 62–68.
  • Schäffer, U., Bechtoldt, C., Grunwald-Delitz, S., & Reimer, T. (2014). Steuern in volatilen Zeiten: Wie Unternehmenskultur und Instrumente zusammenspielen. Advanced Controlling: Vol. 90. Weinheim: Wiley.