Management Control Systems in Organizations in Prigogine’s “Far From Equilibrium Conditions”

1. Management Control Systems in Organizations in Prigogine’s “Far From Equilibrium Conditions” Bruce Gurd University of South Australia

2. Introduction • “mechanistic, non-interactive and linear”. Hines (1992, p.324) • Management researchers willing to explore organizations on the edge of chaos (Brown and Eisenhardt, 1997, Davis, Eisenhardt and Bingham, 2009) • “Change must not be thought of as an emergent property of organization. Rather, organization must be understood as an emergent property of change.” (Tsoukas and Chia, 2002, p.570).

3. MCS using Simons definition • “MCS are the formal, information based routines and procedures managers used to maintain or alter patterns in organizational activities” Simons, Levers of Control, 1999, p.5

4. Some reflections from the literature • Dermer and Lucas (1986, p.471), is the ‘illusion of control’; “that conventional controls … accurately and validly measure, and thereby help determine, behaviour. … management can intervene when necessary and successfully effect change. … To those managing with an illusion of control, negative consequences of managerial action often signify the necessity for more controls”.

5. MCS in turbulent conditions • Used concepts such as environmental uncertainty (Chapman, 1997; Hartmann, 2000), environmental difficulty/hostility (e.g.Khandawalla, 1972; Otley, 1978) and drawn from complexity theory (e.g. Hines, 1992; Jermias and Gani, 2004). • Dynamic environments more central to MCS (Bjornenakand Kaarboe, 2012) • Chenhall (2003) raises the question of how organizations face conditions of uncertainty, turbulence and hostility

6. Prigogine and Stengers

7. Management researchers using Prigogine • Hints in Prigogine and Stengersespecially the Introduction by Alvin Toffler • Burgelman (B, 1983; B and Grove, 2007, B, 2009) • Human Relations Gemmill and Smith (1985) and Leifer (1989). • More recently Anderson, 1999; Tsoukas and Chia, 2002; McKelvey, 2004; Meyer, Gaba, and Colwell, 2005; Stacey, 2007

8. “An equilibrium structure requires little effort to retain its structure and great effort to change it, while a dissipative structure requires great effort to retain its structure and relatively little to change it.” Stacey, 2007, p.193

11. Research method • Identified two existing longitudinal studies that included far-from-equilibrium positions one that went to greater success and one that disintegrated • Both included many interviews, significant observation of meetings, and substantial documentary analysis • Both used NVivo as a data analysis tool

12. The Illustrative Cases • ETSA, an electricity utility company in South Australia, came to the bifurcation point in mid 1994 and while it had made significant adaptation it disintegrated as an organization around 1997. Large investment in MCS and changes saw no benefit. • EuroFinance went through several phases of crises. The GFC was around a time of a large internal fraud. EuroFinance used its MCS to be able to bring change and hold off financial loss

13. ETSA

14. 1988 – Major change but not a bifurcation point • Outside CEO from international company • National Electricity Grid – end of monopoly • End of the build stage of the electricity distribution in South Australia • Zenith of staffing – around 6,000

15. Change in belief systems in late 1980s • End of the “bottomless bucket of money” • End of the “family” culture with the end of work for life and training • End of the networked environment with strong horizontal relationships

16. Change in diagnostic systems from a public sector to commercial culture • Inter-departmental charge rates • Full attribution of cost • Managers charged for the floor space and other resources they needed • Devolution • Market test of efficiency • Belief that market test and commercial orientation would bring about survival

17. Failure of MCS • New belief systems within organization but new belief systems in the public sector • Diagnostic systems which were devolutionary replaced by command and control budget vv actual

18. EuroFinance

19. Bifurcation point • GFC/collapse of Lehman Brothers Q.3 2007 + significant internal crisis early 2008 with large losses   • New energy - Board created a special committee of independent directors to enhance operational control and operational risk management, and promote culture of accountability discipline and mutual respect. • Reorganizing the business lines world-wide.

20. Changes in strategic presence and organization structure • Late 2008 re-aligned worldwide to better manage capital and resources (closed 4 foreign business units in Asia and centralized some ops to the RO. • New division in 2008 to reduce risks • Reorganized its support functions. All Foreign Business Units were required to align with the global framework. • Align with the global framework.   • Responsibility of regional CEOs for business strategy, risk etc.

21. Changes in the design of the Management Control System • Belief systems appear to have been used to try and change the culture to overcome the crises. (May 2008) Values such as personal accountability, discipline, rigor and transparency around a lasting people focused value. • Boundary systems through internal controls – handbook with compliance rules. Measure unauthorized transactions and identify fictitious deals. •  Interactive control - an increase in communication, more visits to Asia by CEO

22. Diagnostic control systems • New performance appraisal (late 2009) focus on actions and behaviour employed to achieve the results. • Increments and bonuses based more tightly on annual objectives e.g. career management dashboards monitored on a quarterly basis. • New standardized performance measurement system based on regional rather than business line performance. Track daily regional results with quarterly meetings. More centralized HO control.

23. Budgets and cost controls • 2008 tighter top down approach with stringent control on both headcount and costs. HO decided cuts and allocated by location without discussion. • 2009 top down budget process but used meetings for arbitration to give some power to Regional Offices.

24. Cost control • Cost optimization project - accountability for project expenses. • Cost containment project in 2009 - Strict controls on travel etc. • Quarterly meetings to monitor the progress of cost savings • Report standardization and streamlining project 2009

25. Informal controls very strong • Knowing the right person - open positions filled immediately by candidates recommended by the manager at the top of the hierarchy. • Less formalized structure and detailed procedures empowered staff to find the best way to carry out the tasks, which enable the organization to react effectively and efficiently upon urgent request.

26. External crisis in 2011 • EuroFinance survived GFC – still profitable. • Not able to meet forecasts by the end of 2011 – profitability • Focused on controlling its expenses, defined a cost control policy, and pushed outsourcing to achieve the targeted cost and headcount. • Budget 2012 targeted drastic cost reduction Voluntary redundancies. • HO worried about first headcount cut in France after French president election.

27. Changes • Change top management and org.structureas the Global CEO left end 2011. • No change to belief system • Diagnostic control systems - Cost controls were tightened. • New policy to stop reimbursement of some expenses • Approval by exception by top management • Reports tracking the expenses incurred by staff. • Meetings for information sharing and interactive use of accounting data, and these included decisions on how to control the expenses. • Project management system

28. Some conclusions • Accounting research tends to ignore far from equilibrium conditions • Management control systems may be very useful in relatively stable situations, up to the bifurcation point– how useful beyond? • Leifer’scircle suggests that the alternative of destruction comes through denial, this is not always the case. Impossible to change? Enough energy? An organization?

29. Conclusions • The heat source from outside may be so intense that disintegration may be the result. Denial may not feature – there may be active attempts to recognize the change. • MCS, subsequently abandoned, as at ETSA, are not necessarily wasted resources. Smooth external turbulence. Not provide the impetus to more dramatic changes needed in the organization. • Periods of dramatic change are not necessarily destructive.

30. Conclusions cont • Used early shocks to draw energy • More formal control systems for risk • Strong organizational learning through Leifer circle. • Different responses across the organization cf. Bénardscell • Yet organizations can fail because of disorder at a single point, especially financial institutions. Shifting the whole organization to a higher level and using management control systems to do it is highly problematic.

31. Conclusions • EuroFinance used diagnostic control systems to bring about immediate reductions in the use of resources in order to survive • Lack of interactive control systems

32. Limitations • From European perspective using complexity as a metaphor • Unit of analysis as organization leads to reification cf. Simon, 1962 • Longitudinal cases with data collected NOT for this purpose.

33. A future direction • “given the right container, and the right liquid, and the right process of heating, the Bénards convection cells will emerge, and their patterns will be quite similar to those observed in previous experiments”. (Goldstein, p.72). • Identify the patterns from typical emergence “far from equilibrium”