Management Control – Simple Over Complex?

The difference between decision making and coordination

Controllers are often unaware that, although a tool they use may be extremely useful for making individual decisions, the same tool is much less suitable for coordinating decisions within the company – and vice versa. The requirements for making correct decisions are different from those for optimal coordination. This is because managers inevitably have cognitive limitations and are also prone to opportunistic behavior. As a general rule, the more coordination that is involved, the less complex the tools should be.

Controlling means assuring management rationality. Controllers want to help managers make better decisions. Yet in most cases, these decisions do not involve individual managers alone. Leadership is a heavily networked process. Strictly speaking, there is no such thing as an isolated, individual decision. A decision is always linked to various other decisions and this should be taken into account. The art of a management control system lies in being able to reconcile a range of subjects and a range of interests. Controllers have to be aware of these various connections and find ways to give them all adequate consideration. Complex management control systems are a means to do this.

It is mainly large companies that have gained experience with complex management control systems, for example, where the budgeting process is a central part of operational planning. Despite their extensive experience, however, neither managers nor controllers are really satisfied with it, as our WHU Controller Panel shows. The budgeting process is too complex, it lacks clarity, and it is too far removed from individual managers. Jack Welch, the former CEO of General Electric, put the problem in a nutshell when he said, “The budget is the bane of corporate America.”

Value-based management is another example. Many companies introduced this in the 1990s, but despite considerable investment in systems, consulting, and training, it was only moderately successful. All too often, management control on the basis of economic value added or cash value added was understood only by specialists. It was not implemented in an appropriate form for managers at the local level, and this in spite of best efforts and extensive training programs. Today, companies use much simpler solutions which also take into account the market value of equity capital.

Managers are not stupid, nor are controllers. So why is it that complex management control systems do not work satisfactorily? You can explain how an EVA is calculated to any normal manager. There is not a single controller who doubts that he can critically analyze an investment plan. However, none of them are able to take in and process an unlimited amount of information correctly. People have cognitive limitations. You cannot expect that an area manager can judge where scarce funds should best be invested across the company, or who can make the biggest contribution toward turning around a declining business. The complexity of the tasks involved in management control can quickly overwhelm individuals.

Moreover, there is a second aspect to be considered: Managers are potentially opportunistic (as are controllers, by the way, although with different effects). Consequently, a controller should always expect that a manager will try to push his own agenda, that he will prepare his arguments and figures accordingly, and that he will disregard any counter-arguments. This applies not only for making individual decisions (e.g., on an investment project), but for decisions in general within the management control system.
Cognitive limitations and potential opportunism are the death knell for the effectivity of complex management control systems. Reaching an agreement that addresses problems across a range of areas assumes that the management involved has had sufficient time to exchange ideas and develop a mutual understanding. Ultimately, agreement will only be reached if the opportunistic behavior of individual managers is detected during the reconciliation process and either contained or avoided altogether.

The conventional solution to this problem has been to involve controllers more closely in the process of developing content for management control as well as at an organizational level. We know from the WHU Controller Panel that managers and controllers amiably share the tasks involved in planning content. But this is not a textbook solution. Planning content is actually a matter for the management to decide! This is one of the main reasons why managers are basically dissatisfied with the planning process. The only way to remedy this is to reduce the level of complexity of the management control system. This paves the way for more intensive communication and reduces the scope for opportunism. The more complex the management control system is, the easier it is to conceal oneself, and the easier it is to use the “room for maneuver” to one’s own Advantage.

Whenever business tools are mentioned, decision making is often implicitly equated to management control. This implies that a better decision inevitably results in better coordination. However, between making the decision and implementing it in a well-coordinated manner lies a process of communication. Here, the general rule of thumb is: the more complicated the decision, the worse it is to communicate, and the worse it is to communicate, the more difficult it is to coordinate. For example, a real option value that was produced using every newfangled technique is totally unsuitable for use in distributing investment funds because virtually none of the managers involved are familiar with new capital budgeting methods. Consequently, they are not able to understand how carefully and objectively the amounts involved are calculated and aggregated to create the metric. The same applies for value-based metrics: the more complicated they are, for example, by including risk when calculating the cost of equity, then the less suitable the final value is for determining interest rates that will be accepted throughout the company. It is difficult for individual managers to understand whether the high interest rate calculated for them is really fair if a colleague is paying considerably less.

In order for a company to achieve sustainable success, its management control framework must be able to coordinate a diversity of decision makers, each with different business management skills and individual goals in differing business situations. This is the only way to ensure that dealings are coordinated  across the company as a whole. This limits significantly the permitted level of complexity of the metrics used, but complex calculations are generally not suitable for management control decisions anyway.

Controllers need to systematically divide their toolbox into tools for decision making and tools for coordination. In the hands of a small group of experts, there is an advantage in using sophisticated tools to examine every question in fine detail. If, however, the results of the analysis are for coordination purposes, they require explicit transformation: Technical language has to be put into more colloquial terms because coordination requires everyday language rather than technical jargon. If the translation is inadequate, not even a call to simply trust the experts will help in the long term. Managers will not accept what they do not understand. For them, a "black box" is not an option.

In the end, controllers are going to have to live without going into the minute detail of management control. In this case, a healthy dose of pragmatism is less hands-on than he is generally presumed to be : it requires a more realistic assessment of what managers are cognitively able to achieve given their workload, and on what they want. The primary aim of controllers should be to increase the quality of coordination; in most cases, this is probably far more advantageous than aiming to provide better support for decision making.

What controllers need to consider

  • Strictly differentiate between decision making and coordination. Do not be fooled by the fact that the subject matter does not appear to be any different at first glance.
  • By all means prepare decisions that are both detailed and methodically challenging. However, at the same time consider how the final decision can be explained to the management.
  • Bear in mind that managers need to not only understand the final decision but also have a “gut feeling” for it (analytics and intuition).
  • Keep the tools that are used primarily for coordination purposes (e.g., budgeting) as simple as possible so that everybody understands them.
  • If there has to be a trade-off, when in doubt, choose better coordination over better decision making.

Professor Utz Schäffer & Professor Jürgen Weber

  • Weber, J. (2015). Entscheidung oder Kommunikation. Controller Magazin, Vol. 40, Issue 4, p. 14 f.
  • Weber, J., & Schäffer, U. (2016). Einführung in das Controlling (15. ed.). Stuttgart: Schäffer-Poeschel.