TO SUCCEED IN TODAY'S HIGHLY UNCERTAIN ENVIRONMENT
According to Otley (2016) over-reliance on setting qualitative targets while disregarding other aspects of business performance and operations as an approach of motivating subordinates would lead to undesired outcomes. In the modern business environment, one cannot ignore the fact that a wide range of factors both internal and external influence overall business performance. The business environment has been come highly uncertain and hence a holistic control system incorporating both the financial and non-financial targets is preferred. Contingent approach to business management and measuring performance is increasingly becoming popular. This paper provides an argument based on research in support of the statement by Otley (2016). In bringing out the perspective, a range of concepts is introduced and covered. First, the role of organizational design and structure in influencing overall business performance is discussed particularly the need for the development of workable systems the existing business structure. The second aspect set of the concept discussed is based on AGES framework bringing forth the architecture, governance, entrepreneurship and stewardship aspect in business operations and performance. Thirdly, a detailed discussion about uncertainty as a determinant of performance measurement and compensation systems is provided. The Last concept discussed is the balanced scorecard model¬ in its meaning and application to the topic.
Organizational Design and Structure
Business organizations in the contemporary are typically larger compared to firms in the past. In some cases, the organizational structure has evolved significantly, as firms integrate their operations along value chains constituting of several independent entities. Therefore, apart from the internal organizational design, the operations and performance of firms are influenced systems outside the control and authority of management (Otley, D 2016; Jakobsen 2017). Multinationals are facing with an additional complexity because systems and strategies that work well in one country may not be relied upon in other countries. The aspects including the legal, social, cultural, economic and political differences influence the operations and performance of subsidiaries in their respective countries. Furthermore, mergers and acquisitions affect the performance of a business combination due to the differences in the structures and cultures of the two organizations. Apart from the focus on quantitative performance and reward system, Malmi and Brown (2008) hold that the organization design and structure adopted should also consider the context of the business operations. In particularly, Malmi and Brown state that only some elements of the management control systems are related to accounting, hence the need for a broader control beyond the quantitative and financial perspectives. The administrative and business culture facilitating innovation and creativity are critical components of the integrative management control systems. The administrative aspect of control is largely influenced by both the governance and organizational structure. In addition to compensation and reward based on qualitative performance, intentionally designed control systems in line with the existing organization design are required. According to Mundy (2015), the dynamics in the business environment may render the existing system ineffective. Mundy suggests that there is the need for a deliberate move to make the systems workable through necessary reforms or overhaul change to match the operations to the operating environment.
Architecture, Governance, Entrepreneurship and Stewardship
Quinn and others (2018) integrate the concepts of organizational design to managerial accounting and controls, using the AGES framework regarding four aspects including architecture, governance, entrepreneurship and stewardship. Architecture as elaborated by Craig and Moores (2015) and supported by Johnson and others (2017) regards the structures and systems adapted to define the roles, responsibilities and reporting schemes. Management accounting and related control systems are an integral part of the architecture aimed at influencing people's behavior and collaboration for the purpose of the realization of corporate objectives. Sticking to qualitative goals and objectives may, therefore, lead into a static architecture hence reducing the chance for building robust internal and external interpersonal relations. Regarding governance, Craig and Moores (2015) consider it as initiatives of providing oversight, direction and accountability. For effective governance, managerial accounting and systems should be part of the source of information to assist the management in incorporating both the financial and non-financial aspect of control, decision-making and accountability.
Entrepreneurship concerns the overall capability to assist an organization in building competencies and outstanding performance to survive in the market. The government and architecture adopted by a firm should enable both the management and subordinate employees to develop innovative ideas that are implemented to enhance the effectiveness and capability of the firm. Stewardship regard to the reasons and motivation influencing the commitment of the individual in pursuing their roles and responsibilities. In addition to compensation and rewards based quantitative performance, business managers need to incorporate other stewardship strategies. As outlined by Nguyen and others (2016), a comprehensive performance measurement system (PMS) and reward system in which both the quantitative and qualitative factors are considered is considerably strong in influencing positive performance. Both the monetary and non-monetary incentives applied to facility extrinsic and intrinsic motivation.
The Influence of Uncertainty on Performance Measurement and Compensation Systems (PMCS)
Under the traditional business management approach, managers set qualitative targets and apply them in assessing performance while disregarding other factors. The contemporary management has increasingly incorporated the contingency-based approaches in consideration to existing uncertainties. According to Abernethy and Mundy (2014), designing a PMCS under uncertainty is a complicated undertaking. Six fundamental types of uncertainties identified include environmental, competition, strategy, risk, Interdependencies and Information Asymmetry. Environmental uncertainty arises from exogenous events or circumstances affecting the effectiveness to which one can establish whether an outcome arose from internals actions or external factors. As some measures, succeed in capturing managerial performance, others lead to an ambiguous conclusion. In this regard, HassabElnaby and others (2005) state that some specific factors in an industry influence the use of non-financial performance measures. On the same perspectives, Choi and others (2012) state industrial regulations under uncertainty may require firms in developing and using PMS that are not purely intended to push for accountability.
Competition is an external environmental factor directly influencing the performance of an organization. A firm does not have control over the competitive landscape therefore of strategies adopted other players in the market. As a result, managerial efforts and strategies may not lead to the intended outcomes. Based on this aspect, Evans III and (2010) advocated for the inclusion of both financial and None Financial Performance Measurements (NFPM). The combination, in this case, lead to reduced reliance on quantitative data and budgets in performance evaluation. as Abernethy and Mundy (2014) put it, competition leads to the need for liberalization and the use of objective and comprehensive performance measures.
A strategy adopted in designing and application of PMCS plays a dominant role in influencing the effectiveness to which a firm predict the desired outcomes. According to Abernethy and Mundy (2014), apart from facilitating effectiveness in the prediction, a strategy adopted influences the means of achieving the envisioned outcomes. Dekker and others (2013) infer that differences in the strategic choices lead to diversity in the PMCS adopted in evaluating and rewarding managers. In a similar version, van Veen-Dirks, 2010) holds that the strategy adopted determines whether PMCS is inclined to non-financial measures, financial measures, or a combination.
Under uncertainty, risks are inevitable due to unforeseen factors and incidences that are not controllable by managers. Abernethy and Mundy (2014) consider the application of quantitative and financial based PMCS to be ineffective in measuring the performance for managers operating under a high-risk environment. It may imply that the managers are likely to bear the cost of risk alone yet they have done what it takes given the circumstances. Pizzini (2010) advocate for group-based incentives such that the cost of risk is shared across the board. In support to this point of view, Bol and others (2010), a flexible, PMCS has advocated such that in case uncontrollable events affect the intended outcomes; the performance targets are adjusted downwards.
Interdependencies are witnessed in an organization as the performance of individuals depends on the interrelations among the players in persons or in groups. In other words, the performance outcomes associated by an individual may not be precisely objective in measuring performance. Hansen (2010) and van Veen-Dirks (2010) advocates for incorporation of non-financials measures in PMCS to incorporate the aspect of interdependences. Group-based incentives are highly recommended in an operating environment where individuals are influenced significantly interdependences (Pizzini, 2010).
Information asymmetry hinders the realization of performance potential for particular managers or the organization at large. For instance, information asymmetry occurs when the managers do not access information possessed by the subordinates. Lack of access to this information implies that the quality of decisions made and in measuring performance. Abernethy and Mundy (2014) infer that decentralization of information sharing and controls can assist in addressing information asymmetry and streamline performance evaluation and accountability (Bol & Smith 2011).
Balanced Scorecard Model
According to Khomba (2011), a broader perspective is required to avoid over-reliance on quantitative performance targets while neglecting other important factors. Subsequently Khomba advocate for the adoption of the balanced scorecard in measuring the overall performance. The model advocate for four fundamental perspectives including financial, internal processes, learning and growth and customer perspectives. The four elements are interlinked and would be collectively adopted in setting targets, strategy development and in measuring performance. The financial perspective is used in measuring the quantitative outcomes of the strategies and action taken in the operation. Aspects including growth in revenue and income, as well as productivity are used in evaluating the financial performance of an organization. The desired financial outcomes would be achieved through efficiency in the internal processes in supporting business learning and growth, and in fulfilling customer needs (Perramon et al. 2016). Learning and growth are the key pillars for quality improvement and in sustaining; require changes in line with the dynamic business environment and customer needs. Research, development, and a culture of accepting change and innovation are therefore critical. Flexibility, in this case, cannot be realized in organizations where the focus is to remain focused on the realization of fixed quantitative targets.
Fulfilling customer needs through quality goods and services, appropriate price and relationship leads create a positive image about the firm attractive supportive revenue growth and profitability, which are key parameters of financial perspective performance (Khomba 2011). Creation of a unique marketing mix would depend on the growth and learning, and effectiveness to which growth and learning are upheld in an organization. Based on balanced scorecard, it is evident that reliance on motivating subordinate behavior through quantitative targets and performance measures is likely to lead to unappealing outcomes.
The purpose of the research and the paper was to analyze the validity of the state by Otley (2016). Otley (2016) states that over-reliance on setting qualitative targets while disregarding other aspects of business performance and operations as an approach of motivating subordinates would lead to undesired outcomes. The discussion reveals that there are significantly many other factors related to performance other than quantitative financials targets. The organization structure and design adopted influences how business undertakes its operations. Before focusing on measuring performance based on quantitative targets, business management must first ensure that the organization structure facilitates operations through well-defined systems, roles and responsibilities. AGES framework associated business performance with four elements including architecture, governance, entrepreneurship and stewardship hence disabuses the tendency of over-reliance on qualitative targets in measuring performance. The discussion on the influence of uncertainty as a PMCS shows that performance can be influenced by uncertainties including competition, strategy, risks, interdependencies and information asymmetry. Conclusion based on this section is that managers and subordinate employees are likely to fail in meeting qualitative targets for issues beyond their control, hence the need for elaborate PMCS approach. Similarly, Balanced Scorecard Model¬ advocates for an elaborate approach by incorporative financial, customers, growth and learning, as well as internal processes in strategy formulation and performance evaluation.
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