Management Control System of a Commercial Bank XY Essay Example

1900s, dividing itself into separate divisions for manufacturing, sales, and purchasing. Each division had its own specialized director to manage their respective functions. This decentralized structure enabled senior managers to concentrate on long-term strategies rather than day-to-day operations. However, it was this very organizational setup that prompted DuPont to acknowledge the necessity of implementing a performance measurement system.

Introducing a more precise accounting metric called return on investment (ROI), Dupont and General Motors emerged as pioneers in this field. They believed that the traditional metrics, which measured profits and earnings as a percentage of sales or costs, were less accurate. Additionally, these companies played significant roles in the establishment of decentralized organizations, budgeting, and planning cycles (Kaplan, 1984). In an article published in 1984, Kaplan discussed the advancements made from 1925 until that point. Surprisingly, he concluded that progress had not been as substantial as anticipated over the years. Many of the new ideas presented were nothing more than academic theories with minimal impact on actual organizations who should have benefitted from them.

According to Kaplan in 1984, the opposite job to what he said can now be observed. Currently, there are numerous options available in accounting and management control, but they may not be as well-researched as the older theories and tools (Malmi and Granlund, 2009). Another issue arises with the new theories and tools as companies and organizations excessively rely on them without critical evaluation. They are seen as the ultimate solution to all management problems.

Examples of these new theories and tools include activity-based costing (ABC), business process reengineering (BPR), balanced scorecards (BSC), and total quality management (TQM). These systems can be costly to acquire

and use, and companies may not fully comprehend the relationship between costs and benefits or the rationale for their implementation. Are they embraced solely because they are contemporary and competitors employ them, or do they genuinely enhance the company's value (Siverbo and Akesson 2009).

Contribution of the Study The banking sector plays a critical role in mobilizing resources in developing economies. Commercial banks have a significant influence on economic development. Today, and particularly in the future, companies, organizations (such as banks), and other decision-making entities, whether profit-oriented or not-for-profit, will confront substantial management challenges.

Regardless of whether the main objective of the organization is to generate profit or not, it is necessary to establish a mechanism to control the activities of directors so that they align with the established management guidelines. To keep the organization's activities on track, a management control system is crucial (Rijal S., 2006).

With this context in mind, it is intriguing to observe how a company like commercial bank XY, which started its banking operations on November 1st, 1997 as a public limited company, currently operates a large network of 223 branches in Pakistan. The registered office is located at B.A.

Situated in I.I. Chundrigar, Karachi, this bank has emerged as a leading financial establishment in the area by delivering superior products and services to its clientele. It has effectively fulfilled the requirements of its customers and strives to maintain this success going forward. The bank places great importance on exceptional customer service by providing comprehensive training to its team members in banking, customer service, and MCS.

The portfolio of the company includes both conventional banking services and the financial needs of the corporate sector. This

includes a wide range of products such as Car Financing, Home Financing, Rupee Travelers Cheques, Credits Cards, Debit Cards, Online Banking, ATM, and consumer Durables. Additionally, the company has recently launched an Islamic Banking Division, which operates as a separate subdivision. With the significant expansion of the company's network, having a well-functioning management control system is crucial for success. However, managing a diverse workforce with different beliefs and goals can be challenging for the company's management. In this case study, the writer aims to describe the management control systems of a commercial bank named XY from Pakistan. XY is experiencing rapid growth compared to other banks due to its effective MCS system (www.scribd.com).

Problem Formulation

Bank XY, a commercial bank in Pakistan, is rapidly expanding its branch network across the country. The bank has achieved great success and employs similar control systems in all of its branches (Telephone Interview, 2010). This makes it intriguing to analyze and describe one of these branches. The main research question is: What management control systems are utilized at different levels of Bank XY in Pakistan?

Purpose of Study

The primary objective of this study is to analyze and describe the management control system of commercial Bank XY in Pakistan. Additionally, the study aims to explain how different management control systems are employed within the bank.

Restriction of the Study

This study focuses on describing the management control systems utilized by directors to guide employee behavior.

Sing the size of Bank XY, its organization, and the time I have considered for this study, it makes sense for me to limit the survey

to include a few bank subdivisions and the management control systems overseeing these divisions from higher levels of the organization. I will also focus on the internal environment, disregarding most of the external factors that are not relevant to understanding the management control system within the bank subdivision.

Data and Methodology

This case study will adhere to the qualitative school of thought since the author's intention is to understand the management control system of the specific company they have chosen. The author does not aim to make any general assumptions based on this single study, unlike if they had chosen to conduct a quantitative research study on several companies.

The chosen type of instance survey is the abductive ase survey. This type was chosen because the researcher wanted to have the opportunity to return to the theory even after empirical materials had been collected (alvesson & Skoldberg, 1994). The paper is based on both primary and secondary data. Primary data was collected through phone interviews conducted with subdivision directors and employees from different subdivisions. The responses were received from 12 directors and supporting employees of 12 bank subdivisions. Secondary data was collected from the web site of Bank XY, Pakistan. The data collected from various sources was analyzed using previously developed theory.

Theory

The main theories of direction control will be analyzed in this chapter. Before explaining the definitions of management control systems (MCSs), the author will attempt to clarify direction and management control.

Management and Management Control

Literature on the topic defines direction in various ways, but all relate to the process of allocating resources and directing activities to achieve the

organization's overall objectives. Management is a broad subject that can be divided into smaller elements such as operations, finance, marketing/sales, and product development. The management process can also be broken down into smaller parts including objective setting, strategy planning, and management control. Objective setting is a necessary process for defining and sometimes reconsidering the company's direction and goals.

Setting goals is crucial for determining resource allocation and ensuring that the right activities are being carried out. Strategy planning involves using resources effectively to achieve these goals. The processes of goal setting, strategy planning, and management control are continuous (Merchant and Van der Stede, 2007).
Management Control Options by Merchant
According to Merchant and Van der Stede (2007), organizations have four options for management control: result control, action control, personnel control, and cultural control.
Result Controls
In result controls, employees are not instructed on how to do things but instead informed about desired outcomes and the benefits they will receive upon achieving them.

The concept of consequence controls is illustrated by a director instructing an employee to produce 10 units per week, with the promise of a $50 reward for success. This allows the director to achieve his desired outcomes without interfering too much in the employee's work habits. The process of consequence controls involves four steps: defining the desired dimensions of results, measuring performance on these dimensions, setting performance targets for employees to strive for, and providing rewards to encourage behaviors that lead to the desired results. Results controls tend to be used for professional employees who are expected to work effectively without detailed instructions, but instead work efficiently towards targets (Merchant and Van der Stede, 2007).

Action Controls

Action controls, on the other hand, involve telling employees what to do and how to do it, often through rules and procedures.

The issue with this situation is that the regulations and processes must be optimized. Otherwise, despite being instructed by their directors (Merchant and Van der Stede, 2007), employees will make mistakes.

Personnel Controls

Personnel controls imply that employees have a natural inclination to be self-directed. Directors do not need to constantly instruct and monitor employees to ensure they are performing the tasks as intended. The assumption is that employees are motivated to do well for themselves, resulting in a high-performing company. However, unlike consequence and action controls, personnel controls require careful selection of employees who are fully qualified for their positions within the organization in order to effectively implement personnel control.

Motivating employees is an important aspect of management, as managers must continually keep their employees motivated. This can be achieved through training, providing additional work-related education, or offering various types of rewards (Merchant and Van der Stede, 2007).

Cultural controls

While personnel controls rely on individuals' performance abilities, cultural controls depend on the group's ability to uphold the organization's values and approaches. In a group-based organization, everyone is expected to take responsibility for each other and peer pressure plays a significant role. The concept revolves around self-motivation within the group; in this scenario, managers guide the group on what they should be motivated to accomplish. Managers can use tools like codes of behavior or group rewards to assist them in this process. If the group performs well, they will receive a reward.

If employees are given only group wages, they will strive to perform well as a group

rather than just caring about themselves (Merchant and Van der Stede, 2007).

Control System Tightness

Having a well-functioning management control system (MCS) increases the likelihood of the company achieving its goals. The stringency of the MCS, or how tight it is, determines the probability of employees taking actions that align with the organization's objectives. Managers often use multiple types of control options to tighten control. These controls may overlap or complement each other, allowing for a combination that ensures tight control over all critical factors for the organization's success (Merchant and Van der Stede, 2007). Whether a results control system is tight or loose depends on the characteristics of desired outcome areas, performance measures, and the provided support or incentives.

According to Merchant and Van der Stede (2007), for a tight control system in management control, the dimensions of the outcomes must align with the organizational objectives, performance goals must be specific with frequent feedback, the desired outcome must be effectively communicated and internalized by those being controlled, and if solely focused on a specific performance area, the measures must be comprehensive (PP 118 - 119). Problems with congruity may arise if management doesn't understand the true objectives of the organization or if the measurement dimensions don't reflect those objectives (Merchant and Van der Stede, 2007). Additionally, for a tight control system, performance measures must also be precise, objective, timely, and comprehensible. If these characteristics are absent in the performance measures, behavioral issues are likely to occur.

Furthermore, if wages (or penalties) are directly and strongly tied to the achievement or non-accomplishment of the desired goals, the Management Control System (MCS) is more likely to be stricter (Merchant and

Van der Stede, 2007). Action control systems can only be considered strict if it is likely that employees will consistently perform the desired actions to achieve the company's objectives and avoid any unwanted actions. The strictness of the action accountability controls depends on factors such as the definitions of desirable and unwanted actions, the effectiveness of the action-tracking system, and the incentives and penalties provided. An effective action tracking system is one where employees can be certain that their actions will be observed relatively quickly.

Punishment is more prevalent in action control environments compared to consequence control environments due to the frequent violation of regulations and processes by employees (Merchant and Van der Stede, 2007). Tight personnel and cultural controls are commonly observed in charitable and voluntary organizations where employees derive satisfaction from doing good, as well as in family businesses where the involvement of household employees mirrors that of the organization (Merchant and Van der Stede, 2007). The first section of this chapter provides historical and essential information about Commercial Bank XY in Pakistan. The subsequent section presents empirical data obtained through telephonic interviews conducted by the author with the bank's managers and employees.

History and facts about Commercial Bank XY

Commercial Bank XY was established on June 21st, 1997, and commenced its banking operations on November 1st, 1997.

The bank is involved in commercial banking and related services with 223 subdivisions. Bank XY assesses the capital of individual clients and the number of business organizations. It segments the market based on demographics, psychology, and behavior to cater to various segments with different product assortments. Bank XY offers dynamic and high-value products such as Car Financing,

Home Financing, Rupee Travelers Cheques, Credit Cards, Debit Cards, Online Banking, ATM, and consumer Durables.

Furthermore, the Islamic Banking Division is a newly established subdivision that operates independently, allowing for a focus on innovation and collaboration with clients and service providers to ensure seamless service. The bank understands and meets the needs of its customers by offering high-quality products and services. Over the past five years, the bank has become one of the leading financial institutions in the region, striving to meet both present and future demands.

To improve the quality of service for clients, special attention was given to preparing team members in all areas of banking, client service, and MCS (Management Control System) at Bank XY. The information in this section was gathered through telephone interviews with directors at various levels within the company, including those involved in personnel, sales, finance, and business-related areas. The author also conducted a phone interview with an employee at Bank XY's head office.

MCS in Commercial Bank XY

Each new employee is carefully chosen to fit the desired profile that the bank wants and they must understand the importance of the bank's core values.

The instruction and banking experience hold significant importance in the selection of new employees. Additionally, the individual's personality and values are also pivotal. Therefore, the selection process aims to identify candidates who possess the appropriate values and beliefs that align with the company culture. Moreover, having a genuine interest in a banking career is considered important by the organization.

They believe that if the applicant has visited their own website to search for employment, they have taken the first step to demonstrate interest in a bank job. When a

new individual is hired, they undergo an introduction training and preparation for a few days. The overall strategy of commercial bank XY is divided into two main areas of business, deposit and lending. The various branches of the same commercial banks in different geographical locations adhere to result, action, people, and culture controls collectively. In the case of lending, most branches use both result and action control simultaneously.

The majority of commercial bank divisions effectively promote their products and services through the use of consequence and action control. While most of these divisions focus on retaining clients, only a few compete for acquiring new clients. The commercial bank sets specific targets for their divisions in order to plan and control their activities. In most divisions, targets are set based on the number of clients, total deposits, and amount of loans.

Individual marks are also established and effectively communicated to employees in the commercial banking sector. The commercial bank regularly compares the actual performance of its branches with predetermined targets. In this sector, benefits, rewards, salaries, and promotions are mainly determined by performance, followed by education, experience, new client relationships facilitated for deposits or loans, and other factors such as benefiting from volume for improved performance. Some employees did not receive performance benefits. Additionally, the commercial bank offers bonuses to its employees based on the amount of salary they earn.

The commercial bank encourages employees to improve their performance and enhance their education and training. Many employees are allowed to take leave from the bank to attend job-related training. This demonstrates the bank's support for employees' acquisition of new skills and knowledge. Additionally, most employees feel that they receive

full cooperation from their coworkers, indicating a positive working environment that promotes better performance.

Analysis

In this chapter, the writer has analyzed the empirical information collected at the interviews based on the theories described in the theory portion.

The Combination of Merchant's Control Alternatives at Bank XY As described by Merchant and Van der Stede (2007), the benefit from a MCS (Management Control System) can be expressed by the stringency or looseness of the MCS. According to them, a stringent consequences control system should include consequences dimensions that align with the organization's true objectives, specific performance targets, frequent feedback, effective communication of the desired outcome, and complete measures if the consequences control system is used alone. The writer concludes that all these factors are met at the Bank branch.

Firstly, the steps taken by the subdivision are in line with the organization's goals as they carefully assess progress, loans, deposits, and various costs such as labor, administrative expenses, and operational costs. Additionally, they also incorporate non-financial performance measures like the customer satisfaction index to overcome the limitations of financial performance indicators. By considering customer satisfaction, they ensure that any improvements achieved do not come at the expense of decreasing customer satisfaction, which aligns with their organizational objectives. Secondly, the indicators used by them are specific as they employ detailed measures to evaluate their performance, for example.

The number of borrowers and depositors, as well as the amounts they borrow and deposit, are closely monitored. Specific targets are set for the percentage of clients who should be satisfied with various aspects of the banking services, such as the time it takes to process loan applications and the waiting time at

the counters. Regular feedback is provided to employees, with performance evaluations conducted on a daily basis and more detailed feedback given weekly during meetings. Annual evaluations also take place.

The study on mark achievement indicates that effective communication of desired outcomes is done through regular meetings and the process of setting business and action plans. According to Merchant and Van der Stede (2007), a tight results control system should also include performance measures that are precise, objective, timely, and understandable. They further argue that the control system becomes stricter if rewards or penalties are directly linked to achieving or not achieving the desired targets. In my opinion, Bank Alfalah's performance measures align with the characteristics outlined by Merchant and Van der Stede (2007).

The bank's salary system is tied to their performance on desired targets. This indicates that the bank's control system for results can be seen as strict. A commercial bank's control systems do not have as many rules, but they have a strict organizational structure. They also utilize daily, weekly, and monthly performance tracking sheets and manuals to regulate employee actions. According to Merchant and Van der Stede (2007), examples of action controls include behavioral restraints, preaction reviews, and action accountability.

According to their argument, action control systems are considered tight when there is a high likelihood of employees consistently carrying out the actions. In the bank subdivision, physical restraints may not be used as heavily, but instead administrative restraints like limiting some decisions to higher levels of the organization are employed. However, overall, both bank subdivision directors and supporting employees have significant influence over their own department in the subdivision and can make many decisions

independently. The actions of employees are supervised by their immediate manager, and given that the bank has multiple organizational levels with each having its own manager, it is probable that managers can closely monitor the actions of their subordinates.

Furthermore, the consequences control system is judicious to assume that undesirable actions will be promptly detected. The bank provides group rewards, such as one or two basic wages, for employees who meet their targets. In summary, the bank employs action controls and action control systems that can be characterized as moderate or average, according to Merchant and Van der Stede (2007). It is rare for personnel/cultural control systems to be tight, except in organizations with strong corporate cultures.

Bank civilization stresses the significance of client service, fairness, financial services, and deposits. These values are evident in their overarching goals and activities. Moreover, the bank places importance on all employees embracing these values. This indicates that their corporate culture is robust, suggesting a considerable level of personnel and cultural control.

Decision

The Pakistani commercial banking sector is highly competitive, with banks competing primarily through their service offerings. The main objective of these banks is to establish a competitive position in order to retain and prioritize customer satisfaction. Result control systems are commonly used in the majority of commercial bank branches. These branches employ a management control system by setting targets for both the branch as a whole and for individual employees, which are then compared to actual performance. The targets for each branch are determined based on factors such as the number of customers, amount of deposits, and lending activities.

For the majority of employees, the target

is set. Performance of both divisions and individual levels is constantly assessed. The managers of the various divisions in the commercial bank aim to evaluate each division's performance. According to the individual employees' feedback, their financial and non-financial rewards are determined based on performance, followed by education and training, and experience respectively. However, the yearly bonus relies on their salary.

The directors of various bank subdivisions encourage employees to actively participate in the decision-making process. They also encourage employees in the commercial bank to enhance their knowledge and skills, offering benefits based on education and training performance. The bank provides paid leave for employees to attend training and further education. The working environment in the commercial bank is highly cooperative, as most employees feel that they receive ample cooperation from their colleagues. However, future research should examine the relationship between the management control system and the effectiveness of commercial banks in Pakistan.