Explain special characteristics of professional organizations which impact Management Control. What are interactive controls?
1. Goals
A dominant goal of a manufacturing company is to earn a satisfactory profit, specifically a satisfactory return on assets employed. A professional organization has relatively few tangible assets; its principal asset is the skill of its professional staff, which 'doesn't appear on its balance sheet. Return on assets employed, therefore, is essentially meaningless in such organizations. Their financial goal is to provide adequate compensation to the professionals.In many organizations, a related goal is to increase their size. In part, this reflects the natural tendency to associate success with large size. In part, it reflects economies of scale in using the efforts of a central personnel staff and units responsible for keeping the organization up-to-date. Large public accounting firms need to have enough local offices to enable them to audit clients who have facilities located throughout the world.
2. Professionals
Professional organization is labour intensive and the labour is of a special type. Research and development organization use in setting selling price and for other management purposes .standard cost system ,separation of fixed and variable cost and analyses of variance were built on the foundation are example of organization whose product are professional service. Professional tends to give in adequate weight to the financial implication of their decision they want to do the best job they can regardless of its cost.Because profession are the organization most important resource some authors have advocated that the value of these profession should be counted as assets the system that does this is called human resource accounting .in the1970’s many books and articles were written on this subject but few comp actually such a system and we do not know of any that one current .the problem of measuring the value of human assets is intractable.
3. Output and input measurement
The output of a profession organisation cannot be measured in physical terms, use in setting selling price and for other management purposes .standard cost system, separation of fixed and variable cost and analyses of variance were built on the foundation. We can measures the number of patient a physician treats n a day and even classify these visit by type of complaint but this is by no means equivalent to measuring the amt or quality earned is one measures of output in some professional organization but these monetary amts at most relate to the quantity of service rendered not to their quality.Some profession notably scientist engineer, and professional are reluctant to keep track of how they spend their time and this complicate the track of measuring performance .this reluctant seems to have its root in tradition usually it can be overcome if senior management is willing to put appropriate emphasis on the necessity for accurate time reporting .nevertheless difficult problem arise in deciding how time should be charged to clients .if the normal work week is 40 hrs should a job be charged for 1/40th of a week compensation for each other spent on it? If so how should work done on evening and weekend be counted how to account for time spent reading literature ,going to meeting ,and otherwise keeping up to date?
4. Small Size
With a few exception such as some law firm and accounting firms ,professional organisations are relatively small and operate at a single location .senior management in such organisations can personally observe what is going on and personally motivate employee .thus there is less need for a sophisticated management control system ,with profit centres and formal performance reports nevertheless even a small organisations need a budget a regular comparison of performance against budget ,and a way relating compensation to performance.
5. Marketing
In a manufacturing company there is a dividing line between marketing activities and production activities only senior management is concerned with both .such a clean separation does not exist in most Professional organisation, however their time and this complicate the track of measuring performance .this reluctant seems to have its root in tradition usually it can be overcome if senior management is willing to put appropriate emphasis on the necessity for accurate time reporting. Nevertheless difficult problem arise in deciding how time should be charged to clients .if the normal work. These marketing activities are conducted by professional usually by professional, usually by professional who spend much of their time in production work that is working for clients.In such situation it is difficult to assign appropriate credit to the person responsible for selling a new customer; in a consulting firm for example a new engagement may result from a conversation between a member of the firm or from the reputation of one of the firm professional as an outgrowth of speeches or articles. Moreover the profession al who is responsible for obtaining the engagement may not personally involved in carrying it out.until fairly recently these marketing contribution were rewarded subjectively –that is they were taken into account in promotion and compensation decisions. Some organisation now give explicit credit, perhaps as a percentage of the project revenue, if the person revenue, if the person who hold sold the project can be identified.
What is Interactive Control?
Interactive control alerts management of strategic uncertainties either trouble or opportunities that become the basis for manager to adapt to a rapidly changing environments by thinking about new strategies.1.A subset of the management control information that has a bearing on the strategic uncertainties facing the buss becomes the focal point.2.Senior executive take such information seriously.3.Managers at all levels of the org focus attention on the information produced by the system.
How do we evaluate the Performance Appraisal?
As noted earlier in regard to teachers, at the extremes the performance of professionals is easy to judge.Appraisal of the large percentage of professionals who are within the extremes is much more difficult. For some professions, objective measures of performance are sometimes unavailable: The recommendations of an investment analyst can be compared with actual market behaviour of the securities; the accuracy of a surgeon's diagnosis can be verified by an examination of the tissue that was removed; and the doctors' skill can be measured by the success ratio of operations. These measures are, of course, subject to appropriate qualifications,and in most circumstances the assessment of performance is finally a matter of human judgment by superiors, peers, self, subordinates, and clients. Judgments made by superiors are the most common. For these, professional organizations increasingly use formal systems to collect performance appraisals as a basis for personnel decisions and for discussion with the professional. Some systems require numerical ratings of specified attributes of performance and provide for a weighted average of these ratings. Compensation may be tied, in part, to these numerical ratings. In a matrix organization, both the project leader and the head of the functional unit that is the professional's organizational "home" judge performance. "
Appraisals by a professional's peers, or by subordinates, are sometimes part of a formal control system. In some organizations, individuals may be asked to make a self-appraisal. Expressions of satisfaction or dissatisfaction from clients are also an important basis for judging performance, although such expressions may not always be readily forthcoming.
The budget can be used as the basis for measuring cost performance, and the actual time taken can be compared with the planned time. Budgeting and control of discretionary expenses are as important in a professional firm as in a manufacturing company.
Such financial measures are relatively unimportant in assessing a professional's contribution to the firm's, profitability, however. The professional's major contribution is related to quantity and above all quality of work,and its appraisal must be largely subjective. Furthermore, the appraisal must be made currently; it cannot wait until one learns whether a new building is well designed, a new control system actually works well, or a bond indenture has a flaw.
In some professions, internal audit procedures are used to control quality. In many accounting firms, the report of an audit is reviewed by a partner other than the one who is responsible for it, and the work of the whole firm is"peer reviewed" by another firm. The proposed design of a building may be reviewed by architects who are not actively involved in the project.