Controlling needs the right tools

But good tools alone do not make good controlling

Controllers have a wide variety of tools at their disposal. However, there is often a risk involved in using them – tools can be misused, not used due to lack of knowledge, or only partially used. What are the reasons for this? We have the answers.

In practice, we find that there is a wide range of different tools currently in use. Moreover, in recent years, there have been several initiatives to make more additions to the toolbox: Activity based costing appeared in response to deficiencies in the development of cost accounting in the USA; value based management addressed the problem that financial accounting does not recognize the cost of equity capital. The balanced scorecard was an attempt to overcome the excessive financial orientation of control systems. The focus today is on developing tools that support decision making where there is a degree of uncertainty and thus provide planning reliability. The keywords here are “bandwidth planning”, “forecasting”, and “predictive analytics”.

These tools can be classified in different ways: Some are differentiated by a traditional mindset (activity based costing), while others open up a management control perspective (balanced scorecard). Many are very complex and sophisticated (bandwidth planning), whereas others break new ground in terms of methodology.

In principle, it is not conceivable to carry out management control in organizations without using tools. No investments are made without previously carrying out capital budgeting; it is inconceivable to think of demand management without contribution margins, budgets without cost plans, and incentives without performance data. Processes should always be backed up by figures, which result from the use of tools.

Controllers must be proficient in using these tools. They are not only the "master of numbers", but also the "ruler of the tools" on which management control is based. Controllers need to know which tool is apt for each problem and how to use it. They are also responsible for maintaining and adding to the existing toolbox. All in all, tools are an integral part of the controller’s role. Some controllers even attribute their personal success to having the appropriate tools at their disposal.

There is empirical evidence to support the importance of tools. Our study on volatility (Schäffer et al. 2015, see also "Latest Thinking"), for example, shows that companies that are particularly successful in handling volatility make greater use of tools, such as scenario and sensitivity analysis, than companies that handle it less successfully.

Not all controlling tools have proven to be successful in practice. There are many reasons for this, and they can all be traced back to the controller.

Controllers make mistakes when implementing a tool. The textbooks generally recommend two procedures for capital budgeting: net present value analysis (where the investment is fixed) and real option analysis (where the investment can still be changed over its duration). However, in practice we see a different picture: Profit margins or costs, for example, are used instead of payment amounts, or payback periods are considered as equally important as net present values. Thus, it is not possible to obtain correct results, although this would be the expected outcome of using a tool. 

Controllers do not succeed in explaining the tool sufficiently well to managers. This is a well-known problem – "methodology expert versus user". Bandwidth planning is a typical example of a method that only experts understand. If managers do not really grasp the results generated by the tool, they are less likely to use this method. 

Controllers do not add new tools to the existing toolbox often enough. We can see from the example of value based management that cost accounting in German-speaking regions has always recorded the cost of equity capital as imputed costs, although the risk aspect was approached in a rather hands-on manner. When operating results are used for management control, there is only a small difference in value-oriented variables. The same is true for activity based costing, which is known in the German-speaking world as "Verrechnungssatzkalkulation”, or cost analysis. New tools do not always fare better than existing solutions. 

Controllers do not link new tools to standard control processes often enough. If the Balanced Scorecard, for example, is not a permanent part of the control system – from the budget framework through to discussions in management meetings – it cannot work. The Federal Audit Office (Bundesrechnungshof) has criticized this in public authorities and administrations, where cost accounting was introduced without identifying any consequences as a result to its findings.

Controllers are not really interested in the conditions under which tools work. Controllers pay too little attention to whether or not their managers are able or willing to use the tools. Yet, if a manager does not really understand a tool, he will not use it. If a manager can manipulate a tool in his favor, he is likely to succumb to temptation and exploit the situation. In the first case, there is no payback on investment in the tool, while in the second case it may even be damaging to the company.

Controllers do not sufficiently differentiate between decision-making and coordination tools. There are two different types of tools. The first are more suited for decision-making, while the others serve to coordinate the various decision makers. The rule is that decision-making tools may be complex, whereas coordination tools may not. It is important that all stakeholders understand the latter group, however, it is sufficient for the experts to know how to use the decision-making tools. It is counterproductive to use complex decision-making tools for coordination purposes.

An innovative company will have good controlling tools at its disposal. However, this alone is no guarantee of success. Tools are only of benefit when used in an appropriate context and they direct the behavior and decisions of managers. For the controller, this means that in individual cases it can be better to invest scarce time in influencing the context for using them rather than pulling off a toolbox masterclass. Our volatility study shows that the main reason why companies were able to react more successfully to volatility is a strong culture of information exchange and critically challenging the status quo. It often makes more sense to cultivate the controlling culture than to add to an already well-stocked toolbox (read more under Perspective: Controlling & Culture).

What should controllers do with regard to tools?

  • Incorporate tools in the control process correctly. Do not use a tool without an explicit reason for doing so.
  • Make sure that each tool is fully understood by the managers as well as the controllers.
  • Take care that tools are not influenced by opportunistic behavior.
  • Ensure that there are no tools competing to do the same task (i.e., "clean up the toolbox from time to time").
  • Choose simple tools over complex ones when it comes to coordinating various decision makers and issues.
  • 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.
  • Weber, J., & Schäffer, U. (2016). Einführung in das Controlling (15. Aufl.). Stuttgart: Schäffer-Poeschel.