Management Control in Services Organizations

The type of control which would be suitable for a particular firm depends upon the nature and complexities of its operations. A suitable control system has to be designed to suit the specific requirements of a particular firm.

Service organizations are those organizations that provide intangible services. Service organizations include hotels, restaurants, and other lodging and eating establishments; barbershops, beauty parlors and other personal service; repair services; motion picture, television and other amusement and recreation services; legal services; and accounting, engineering, research/development, architecture and other professional service organizations.

Characteristics of Service Organizations

1. Absence of Inventory: Services cannot be stored. If the services available today are not sold today, the revenue from these services is lost forever. In addition the resources available for sale in many service organizations are essentially fixed in the short run.

A key variable in most service organizations therefore is the extent to which current capacity is matched with demand. Organizations attempt this matching in two ways:

  1. They try to stimulate demand in off-peak periods by marketing efforts and price concessions. Airlines and resort hotels offer low rates in off-seasons; utilities offer low rates on slack periods during a day.
  2. If feasible, they adjust the size of the work force to the anticipated demand, by such measures as scheduling training activities in slack periods and compensating for long hours in busy periods with time off later.

2. Labor Intensive:  Service organizations tend to be labor intensive. It is difficult to control the work of a labor-intensive organization than that of an operation whose workflow is paced or dominated by machinery. Manufacturing companies add equipment and automate production lines that replace labor and reduce costs. Most service companies cannot do this. Hospitals do add expensive equipment; but most of these provide better treatment, and they increase, rather than reduce costs.

3. Quantity Measurement: It is not easy to measure the quantity of many services. For many services, the amount rendered can be measured only in the crudest terms, if at all it can be measured.

4. Quality Measurement: The quality of a service cannot be inspected in advance (as in the case of tangible goods). At best, it can be inspected during the time that the service is being rendered to the client. Judgments as to the adequacy of the quality of most services are subjective; measuring instruments and objective quality standards do not exist. A public accounting firm can measure the number of hours spent on an audit, but not the thoroughness of the work done during those hours.

5. Historical Development: Cost accounting started in manufacturing companies because of the necessity for valuing work-in-process and finished goods inventories for financial statement purposes. These amounts provided raw data that was easily adapted to use, first for setting selling process and then for other management problems. Standard cost systems, the separation of fixed and variable costs, and the analysis of variances and the foundation of actual cost systems, and the fact that managers in manufacturing companies were accustomed to using cost information facilitated the general adoption of these techniques. Until the last few decades, most books on cost accounting and related subjects dealt only with manufacturing companies.

6. Size:  With some notable exceptions, service organizations are relatively small and operate in a single location. Top management in such organizations can personally observe what is going on and personally motivate employees. Thus, there is less need for a sophisticated management control system, with profit centers and heavy reliance on formal reports of performance. (Nevertheless, even a small organization needs a budget, a regular comparison of actual performance against a budget, and the other essential ingredients of a management control system.

7. Multi-unit Organizations: Some service organizations operate many units in different locations, each of which is relatively small. These include fast food restaurant chains, auto rental companies, gasoline service stations, and many others. Some of the units are owned; others operate under a franchise. The similarity of these separate units provides a basis for analyzing budgets and evaluating performance that is not present in the usual manufacturing company. The information for each unit can be compared with system wide or regional averages, and high performers and low performers can be identified. Because units differ in the mix of services they provide, in the resources that they use, and in other ways, care must be taken in making such comparisons.

Implications for Management Control System in Service Organizations

There are some differences between management control system in service organizations and those in manufacturing organizations. There are differences in degree, rather than in kind, however. The essential features are the same in both types of organizations. In both, planning is done in terms of programs and responsibility centers, including profit centers and investment centers for organization units that meet the criteria. The management control process in both organizations involves the steps of programming, budgeting, the measurement of performance, and the appraisal of that performance.

Because of their relatively recent development, systems currently found in service organizations tend to be less advanced than those in manufacturing organizations. Because of the difficulty of measuring both the quantity and the quality of output, judgments about both the efficiency and the effectiveness of performance are more subjective than is the case when output consists of physical goods, which means that there is more room for legitimate differences of opinion about performance. Managers are coming to recognize that performance is not easy to measure; this suggests that a search for better tools for improving its measurement is likely to be eminently worthwhile.

Credit: Management Control Systems-MGU

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