Academic journal article Management Accounting Quarterly

Designing Complementary Budgeting and Hybrid Measurement Systems That Align with Strategy

Academic journal article Management Accounting Quarterly

Designing Complementary Budgeting and Hybrid Measurement Systems That Align with Strategy

Article excerpt

As the economy continues to emerge from the Great Recession, it is time for companies to widen their focus on budgeting and financial controls and for management controllers to take a more proactive role in designing complementary Management Control Systems (MCS). Over the last two decades, MCS packages have evolved through the emergence of Hybrid Measurement Systems (HMS) and corresponding adjustments in budgeting systems.

Budgets and HMS are part of the cybernetic control system. The budget is the financial expression of a comprehensive plan that states the revenues and expenses planned for a year and that is used for performance planning and performance post-evaluation. Unlike budgets, and because they incorporate both financial and nonfinancial measures of performance, HMS do not focus solely on achieving financial outcomes. Their role is also to evaluate and monitor the drivers (quality, customer satisfaction, delivery time, skills development, etc.) of the financial performance. In recent years, the balanced scorecard has become the most dominant HMS. Because they offer two alternatives for performance measurement, budgets and HMS sometimes are perceived as incompatible.

The articulation of the control mechanisms that comprise an MCS package is one of the main challenges for controllers and business managers. Designing the control package requires defining the respective roles of each component so that the whole delivers the level and form of control that companies expect. This implies an understanding of how the components interact, especially when a new element is added.

The first objective of our study is to determine whether HMS and budgeting systems interact with each other and, if they do, to observe the form this interaction might take. The second is to evaluate how strategy influences the combined control packages. (See Figure 1. (1))

MCS Package and Strategy

The challenge in leading an organization consists of finding a coherent design between organizational components. (2) The same principle applies in designing Management Control Systems. Certain experts recommend that the different MCS generally implemented simultaneously in an organization should be "managed" so that the "the proportion of mix" varies and is adapted according to the needs and the constraints of the company. (3) MCS should include processes for formal control that are associated with tools that are structured in relation to each other in a complementary manner.

During the last few years, budgets have been greatly criticized for no longer being able to fulfill the expectations of companies faced with uncertain and complex environments. In reaction to the deficiencies of budgets, HMS, such as the balanced scorecard, have been developed. Yet the question of their interaction remains: Do budgets and HMS operate as complements or as competitive substitutes?

Numerous studies indicate that the type of strategy a company pursues impacts the MCS design. (4) It has been demonstrated that a cost leadership strategy is associated with centralized, standardized, and stable control processes while a differentiation strategy encourages innovation, customer responsiveness, or other activities responsible for product/service leadership by implementing decentralized, flexible, and less formal MCS. (5) In light of these findings, it seems appropriate to also study how strategy sets up the combination of the HMS/budgets package.

Data Collection and Measures

We collected data in two phases. During an exploratory phase, we interviewed 20 managers from different companies. They responded to questions concerning the way budgets and HMS were used. During the second phase, a survey questionnaire was sent to 400 management controllers in companies operating in France and ranging in size from 500 to 5,000 employees. These companies were selected randomly from the Kompass database. …

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