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Essay: Management Control Systems (MCS)

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Nonprofit organizations are representing the third most important sector of society, however, it is receiving the majority amount of criticisms from public for their struggles to achieve the balance of fiscal, economic, effectiveness and legitimacy goals. Management Control Systems (MCS) is the often-studied topic by researchers with the intention to understand why organizations can/ can’t maintain the sustainable growth.  In this paper, start with the MCS definitions as a stepping-stone to show how MCS is used and changed overtime and its relationship with organizational strategies. The inspection of the inter-relationships is further studied by conducting a case study from Yellowstone Park Foundation (YPF).  The study is aiming to test and answer the question about the connections between MCS and strategies for YPF to achieve the goals in a continuing, sustainable basis.  The conclusion is that MCS help to ensure that YPF stays true to its strategies and the efficiency in resource allocating, while strategies is also serving as a form of control in the organization to attain the expected results.

Keywords: Nonprofit, MCS, organizational strategies, sustainable growth, core operations, inter-relationships, effectiveness, organizational resources, case study

Section One: Introduction

i. Why we care about nonprofits?

The nonprofit sector contributes valuable support to the community structures along with business and government sectors that make up the three – legged stool to achieve balance and stability in society (De Vita & Fleming, 2001).   Nonprofits function in three ways: 1) operate independently as supplements to government; 2) work as complements to government in a partnership relationship, 3) engage in an adversarial relationship of mutual accountability with government (Young, 2000, p.149).   The role of the nonprofit sector is important and supplemental to the other two because the business sector is aiming to make a profit that is not motivated to meet social needs, and the governmental sector is not organized to provide efficient and effective services.  Therefore, it is left to the nonprofit sector to gather monetary capitals at a grass-root level to meet societal needs (Colley, Stettinius, Logan & Doyle, 2002).

ii. What went wrong with NPOs?

The current crises faced by NPOs, according to Salamon (1999) are fiscal, economic, effectiveness, and legitimacy.  The fiscal crisis was caused the government withdrawing grants that created problems for the NPOs as they were unable to meet their funding goals and lacked a strategy to develop self-sustained funding Salamon (1999). The economic crisis issue resulted from insufficient funds collected from society to meet the public needs.  According to the Nonprofit Finance Fund (2009) survey responses received from 4607 organization, 2008-2011, more than 30% of organizations experienced operational deficits, about 30% of organizations were operating at breakeven and less than 50% had a surplus (Nonprofit Finance Fund, 2009).  With limited funds available for the growing demand of NPO services, NPOs failed to meet the public needs.

De Vita and Fleming (2001) specified that organizations lack capacity building – the ability to fulfill their mission in an effective manner.  According to Salamon (1999), the NPOs are “always vulnerable to charges of inefficiency and ineffectiveness” (p. 12).  Capacity building in the nonprofit sector is not a simple task.  However, organizations can learn to adopt changes and grow to their full potential (De Vita & Fleming, 2001).  Besides the lack of creativity in increasing their capacity, the upsurge in fraud and scandals in the nonprofit sector has put public trust at risk and the NPOs’ legitimacy is questioned as a result (Gilkeson, 2007).  Legitimacy refers to the perception of the key stakeholders that the existent activities and impacts are justifiable and appropriate in terms of the central social value and institutions (Brown& Jagadananda, 2007). The legitimacy crisis is a serious issue that can affect the nonprofit sector’s accountability (Kearns, 1994).  Fremont-Smith and Kosaras (2003) conducted research on wrongdoing by officers and directors of charities by examining nonprofit fraud as reported in newspapers between 1995 and 2002. There were 152 incidents that entailed criminal activity of self-stealing, fraud, embezzlement, and misuse of funds.  These wrongdoings resulted in losses of over $7 million (Fremont-Smith and Kosaras, 2003).  From the above discussion, it can be concluded that breakdowns in management control systems resulted in the failure of NPO’s to attain their individual goals and organizational objectives.

iii. Purpose of the paper?

With a case study, I will explore how YPF uses MCS and strategic planning as key management tools to accomplish their organizational goals. While limited studies have been done and used in park foundations previously, many have been conducted for NPOs. The information about YPF is based on personal experience and a survey of the key employees.  The purpose of this paper is not to evaluate how strategies and MCS work individually to achieve organizational goals, but how they have been incorporated with each other to help the Foundation grow sustainably.  A suggested framework is developed from this study to present the connection of the two management tools.

iv. Layout of the paper

Section two is a literature review, which will address MCS research progress and its relationship to strategic planning. Section three will summarize the literature review outcome to assess YPF’s current management control systems, the staff’s view of the strategies and how the correlation of the two impact its operational effectiveness. A framework is presented to help view the Foundation’s dual management process visually.  Lastly, followed by the findings, a contribution and summary will be presented at the end of the article.

Section Two: Literature review

i. Progress of MCS in research

Management control system is designed and used for goal congruence in all organizations 1(Cugueró-Escofet & Rosanas, 2013).  The earliest MCS was focused mainly on accounting information systems through cost accounting and budgeting.  2 Langfield-Smith (1997) argues that MCS heavily influences management activities, accentuating financial information may lead to damaging strategic consequences.  Later studies were gradually expanded to human relationships, leadership, motivation and organizational culture 3(Carenys, 2010).

4 Robert N. Anthony (1965) revolutionized MCS with the following definition of MCS: “it is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives.”  Anthony’s definition emphasizes controls in the areas of strategic planning, management controls, operational controls, information handling, and financial accounting. In this definition, Anthony treats strategic planning as a component of the MCS.

A more contemporary definition of MCS comes from Ferreira and Otley (2009), and they describe MCS as:

“ The evolving formal and informal mechanisms, processes, systems, and networks used in organizations for conveying the key objectives and goals elicited by management, for assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and broadly managing performance, and for supporting and facilitating organizational learning and change” 5 (P. 264).

Ferreira and Otley (2009) defined MCS as a wide array of organizational activities. However, the definition was overwhelmed with layers of information by addressing all the key elements about MCS, rendering the definition ambiguous with a lack of focus.  To be specific, Ferreira and Otley’s definition can be organized by using Simons’ (1995) Four Levers of Control (FLC). These controls include belief systems, interactive systems, boundary systems, and diagnostic systems 6(Simon, 1995).  The FLC will be the main concept used to evaluate the relationship between Yellowstone Park Foundation’s MCS and its strategy.

In the case of YPF, the belief system is the most important.  7 Dunn and Pooley (2010) indicates that “Without the appropriate belief system in place, complete with effective grounding pillars of reference, chances for fulfillment of any dream or goal are seriously imperiled” 7 (2010, p.76).  The YPF Director of Finance, Jeff Augustin, estimates that 70% of the organization’s top-down decision-making process is based upon its belief systems that are reflected in the mission statement and staff actions, which carry out the strategic plan.  In the article, Park Foundations: New Challenges, New Models, it emphasized that a successful fundraising foundation requires all board members believe in and support the foundation’s mission (Lynn, 2012).   Simons (1995) indicates that belief systems were used to convey organizational directions and values through empowerment.  Therefore, participants from all parts of the organization need to understand the company’s purpose and mission.  The interactive systems are relying on internal communication between staff to guide project progress, and external communications through forms of social media or direct mailing.  Even though nonprofits are fully aware of the impact of relationship building by using social media, they still skeptical about its ability to advance the organization, and do not fully utilize it 8 (Hill & White, 2000).  To better use social media, organizations should implement strategic virtual communication to cultivate relationships with key stakeholders by increasing openness and transparency activities 9(Kelleher, 2006).  To track the effectiveness of different forms of interactive tools to engage external parties, the YPF Communication and Social Media Manager, Matt Ludin, monitors the effectiveness of different forms of social medias, such as Facebook, Emails, etc. Resources are directed to the most effective communication platform. This effort is leading the capacity building of the organization. The rest of Simons’ levers of controls and its use in YPF will be discussed in Methodology section.

ii. Define strategy and its relationship with MCS

Understanding strategy is the first step before evaluating its relationship with MCS.

10 Johnson (1987) defined strategy as different levels of activities that match the organization’s environment, the resource capacity and the value created for stakeholders with a long-term focus.  The organizational belief systems are reflected in its mission and vision statements from the strategic plan, and the plan is considered as a sustainable way to adopt the strategic orientation in all activities undertaken in responding to the increasingly competitive environment (Weerawardena, McDonald & Mort, 2010).  An effective mission statement helps define the organization’s scope of its operations, the fundamental value why the organization exist, and helps maintain fiscal financial health as well as accomplish its mission through developing and adopting innovations (McDonald, 2007; Pearce & David,1987; Mittenthal, 2002).).  However, Lanfield-Smith (1997) argues that the key to strategies does not exist solely in the document of mission statement and strategy development, but resides primarily in the minds of key managers.

So what is the relationship between MCS and strategy? In Anthony’s (1965) definition of MCS, strategic planning is not only a component of the full scope of MCS, but also a form of control.  In Ferreira and Otley (2009), informal and formal MCS is part of the strategic process, which assists the organization in achieving its goals. Hopwood (1987) and Dent (1990) recognized that MCS is proactively affecting strategy. Alternatively, Simons (1995) indicates that in the relationship between the two, it is not the identification of controls allied with particular strategies that is important, but the distribution of management attention among controls.  11 Kober and Paul (2007) discovered that MCS is shaped by organizational strategy, and there might be a “two-way relationship between strategy and MCS.  That is, MCS both shapes and shaped by strategy”  (2007, p. 448). This inter-relationship, which was also supported by 12 Macintosh (1994) and 13 Kloot (1997), means that any change in strategy will result in a matching change in MCS.

iii. How does MCS and Strategy bond?

Organizational strategies define the organization’s goals and articulate how the organization is going to achieve those goals (Anthony, 1965).  Strategic planning precedes MCS, but MCS helps to modify the strategic plan when necessary.  Strategic planning and controls can occur as inseparable components or can also occur at different levels of the organization and may be evaluated separately.  The different types of organizations will have different strategies and control systems tailored to their needs 15 (Camillus,1986).  For YPF, the strategies and the management controls are inseparable. In the Methodology section, I will provide additional information to show how this interrelationship is used throughout the organization.

Section Three: Methodology

My methodology to understand the MCS and its strategic activities in operation was based on a case study for Yellowstone Park Foundation through the lens of the staff members, previous Finance Director, and my personal observations.  I drafted the questions, and interviewed the staff at their offices.

i. Personnel interviewed:

• Senior Director of Finance and Administration – responsible for quarterly and annual financial reports, annual expenditure budgeting, review, monitor, and compare the budget to actual results, allocates short-term investment funds, collects pledge receivables, and other financial related tasks.

• HR and Office Administration Manager – A wide array of responsibilities including human resources, manages employee benefit plans, payroll, provide approvals for daily cash inflow and outflow transaction, and other administrative tasks.

• Communication and Social Media Manager – Communication of YPF’s mission to the public as well as updates YPF news and events in social media, acting as backup Park photographer beside Tom Murphy to add visual aids to better telling YPF stories.

• Director of Annual Giving and Donor Relationships – Manages donations that range from $1,000 – $9,999, and related donor relationship maintenance as well as cultivating new donors for the Park projects.

• Opinions were also gathered from our school accounting assistant instructor, Kristena Mills, who was previously working as the Director of Finance at YPF for over 10 years.

ii. Questionnaire:

The information was collected directly from responses to my questionnaire.  Some of the key questions asked were:

1) What is YPF’s current MCS?

2) What are their views of the relationship between the strategic plan and MCS?

3) How do they measure success at YPF?

4) How effective is their MCS and board of directors?

5) What are the strengths and weakness of their current MCS in relationship to their strategic plan?

6) How their innovative thinking has brought results to support the organization as a whole?

Section Four: Contribution

The intended contribution from this paper is to evaluate how Yellowstone Park Foundation’s MCS and its strategic activities interact together to help achieve the organization’s goals to “protect, preserve and enhance the natural and cultural resources and the visitor experience of Yellowstone National Park” (YPF strategic plan 2012-2016, 2012).   From the YPF strategic plan and the staff members’ descriptions of their MCS, I developed a framework combined with Simons’ four levers of control.

Framework Interpretation:

1. The interactive system shows how the organization uses innovative methods to bring in funds that are needed for the park projects;

2. The boundary systems is used to see how the organization is setting standard procedures for build capacity with a long-term focus;

3. The diagnostic systems examine the effectiveness of governance and management to oversee the organizational operation;

4. The belief systems are used throughout the organization from the funds in (visibility, fund resources, and sustainability funding) to the funds out processes.

i. Interactive systems through innovative actions

YPF’s mission statement is serving as the interactive system mechanism to express the organizational mission, legitimacy of its existence, and engage the external parties through the use of social media. The effective interactive control systems require every person in an organization to communicate periodically about the progress made and actions needed in order to meet organizational objectives following the mission.  Based on Simon’s article, when an organization is small, it is much easier to maintain the internal interactive systems (Simon, 1995).  Since YPF only has 15 employees, it is sufficient to communicate internally through periodic staff meetings and board meetings to evaluate the organization’s future plans as well as review current progress to ensure that future plans will be attainable.

The external forms of communication, according to the Communication and Social Media Manager, Matt Ludin, used to keep donors engaged and updated are the emailing of newsletters and the publication of progress reports, as well as updating social media visual attractions on Facebook, Twitter, Instagram and Vimeo.  The use of social media aims to increase the exposure of YPF’s mission and vision to call for help.  For example, the five-year project of the Yellowstone Forever Campaign is to raise $40 million between 2014 and 2018. The mission of the campaign is to preserve the 2.2 million acres of wilderness, wildlife and natural wonders for the next generation (YPF project guide book 2014-2015, 2014).  The project is at the half waypoint, but it has already collected more than half of the overall fund budgeted.

(Start from here with Brett) Social media is helpful, however, researchers criticized that social media is under-utilized by today’s organizations compare to the capacity that social medias can potentially offer ((Hill & White, 2000).   Based on the statistics Matt Ludin gathered for 2014 to 2015 fiscal year, the report shows that Yellowstone Park Foundation has increased utilization from Facebook to promote the organization within the limited budget constraints.  The YPF Facebook Likers were increased tremendously from 25,433 in September 2014 to 42,547 on the date of November 21, 2015 (YPF Digital Dashboard Report, 2015).  Besides using social media, the Foundation is also using professional advertising service through Google Grant /Ad to increase the funding for YPF projects.  The add clicks was increased from 294 in March 2013 to 27,082 in October 2015.  This service has also brought monetary increase from $246 to $39,498 for 2013 and 2015, respectively (YPF Digital Dashboard Report, 2015).  However, while YPF has experiences more Facebook Likers, the dollar donations associated with it were unknown.  In its most recent years of audited financial statement, the contributed revenue has grown from $7.15 million in 2013 fiscal year to $10.3 million in 2014 (YPF Financial Statement, 2014).  The effectiveness in using social media to solicit the actual funds still need to be reevaluated, but data tracking can help allocate resources to the most effective funding area, which would have a higher opportunity for the contribution revenue increase.

While merging is not considered a norm for nonprofits, YPF is undergoing a merger currently in order to increase the efficiency in resource sharing with the Yellowstone Association (YA).  Yellowstone Association is a partner with the Park and YPF, which is a membership-based organization to provide “educational materials for park visitors and to supporting educational, historic and scientific projects within its park area”. YA’s goal is to inspire, educate and preserve the park resources (Mission and History, n.a). YA has less revenue stream that currently operates at above breakeven point compared with YPF, but it has closer access to park visitors that can increase potential donors, according to Jeff Augustin. With YPF’s name recognition, YA is hoping to increase class sales and gift shop revenues.  The merger would help both organizations to share resources in the park and help achieve cost leadership strategy, as well as increase the operational capacity.

ii. Boundary system through capacity building

The boundary systems are used to set the limits of freedom and procedures to control the courses of actions within an organization.  There are two major rules set by YPF.  Number one is the informal rule to ensure the donor information confidentiality and timely service from donor requests; second is the formal control that the annual activities conduct for capacity building within the strategic plan of the organization.

According to the Director of Annual Giving and Donor Relationships, Olesja Hoppe from YPF, the first rule requires the improvement and maintenance of the database management software to keep track of new and existing donor lists, both for adding and removing at timely manners.  The basic code of conduct is to keep donor information confidential including all employees involved in the process from donor information research, soliciting, cultivation and disposing.  The stewardship involves timely and personal response to $500 plus donations for donor appreciation.  I also include fast responses to donor requests, inviting donors in the appreciation events and adding their names in the financial reports to show the organization’s gratitude. To ensure the timeliness of the responses to donors, YPF has a policy of replying to emails as soon as they receive it, and answering phones right after the first ring instead of other service industries’ three-ring-rule.  Even though this seems like small gestures, it shows the organization’s attention to details when interacting with donors.

The second limit, besides the informal rules mentioned above, the organization has a written document, the Annual Work Plan, to serve as a control mechanism and benchmark the progress in a daily operational level.  In the plan, the annual goals are specified and closely followed the organization’s long-term strategic plan.  The plan includes the overall cultivation target for the organization from difference areas, and the detailed personal responsibilities under each area.  In order to avoid ambiguous values, the staff used specific value or a specific range of values that are benchmarked from previous year’s plan or staff experiences, such as “Solicit at least 10 five figure gifts including multi-year pledges ($100K+)”, “ Solicit major cash grants ($50K) from five current corporate partners”, or “Visit in person by president to all $100,000+ partners” (FY15 Annual Work Plan, 2015).   Within the plan, there are plan for staff technical skill trainings and cross trainings between departments to increase staff capability in handling different tasks to fully utilize the available human resources.  Finally, employee appreciation events are written into plan to enduring employee motivation and organizational culture building.

The keys to successful boundary systems are set limits to course of actions with formal or informal rules, the explicit and attainable values within well-defined goals, and assign tasks to specific personal(s) to achieve the traceable results for evaluation purpose.

iii. Diagnostic systems through Board of Director governance

Board of directors should focus on strategic direction, policy, oversight and evaluation (Dorger, 2013).  As nonprofits compete in a competitive environment, there are increasing needs for governance effectiveness (Wellens & Jegers, 2014).  However, researchers criticize the effectiveness of nonprofit board of directors, due to the failures in meeting the high public expectations of good financial performance (Holland, 2002).  Lynn (2012) claims that to successfully operate a park foundation, finding the right executive directors is crucial due to their roles in directing the organization to the right path as well as open doors for more funding by expanding social networks.  Jeff Augustin, the YPF finance director, states that the YPF board of directors is playing an important role to YPF’s governance and its financial success. Yellowstone Park Foundation has 17 BOD members and 32 advisory council members all at a volunteer basis (Board & Council, n.d.).  Their roles are to elect new board members from the advisory council, expand the social network to increase funding opportunities, as well as oversee and deliver rejection or approval for project funding proposals that meet criterions such as importance, urgency, and compatibility with the foundation mission (YPF FAQs, n.d).  Augustin  the board members, their networks, and the stewardship throughout the years resulted most of the funds collected for 2015 fiscal year.  At the same time, the approval of the projects were also attracted many interested parties in supporting YPF needs.  One of the most costly and significant projects currently underway includes the $15 million trail improvement for the Grand Canyon of the Yellowstone. This project aims to increase the accessibility for all park visitors, improve the safety of the trails and enhance visitor experiences.  The second project that provides symbolic meaning to most of the Park visitors is the North Entrance of the park – the Roosevelt Arch.  The cost to complete the Arch is estimated to be $2.7 million.  The board believes these projects, even though costly, are truly following the mission of increasing the park visitor experiences.  Mr. Augustin declared that many years of donor stewardship has paid off because of the increasing number of past donors supporting these projects.

In Augustin’s opinion, YPF board of directors is effective and their dedicated networking has provided YPF a sustainable funding results.  However, according to MSU accounting instructor, Kristena Mills, who worked as the finance director for over 10 years, stated that although the board members were effective, they were lack of acknowledgement to the management team changes in YPF.  Mitch Dorger (2013) explained that nonprofit board members should stay out of operations to save time and energy from matters other than governance.  In the case of Ms. Mills, she claimed that when more than 50% of the employees left the organization when she left her position, the information and impact should have reached the board members.  For any high level governance, board members shouldn’t ignore this incident because it could result in the organizational hardship, for any governance without the daily reliable operation is castle in the air.  As for my own experience, Mary Fisher is the only manager conducting the daily administrative operations, providing approvals for cash inflows and outflows.  However, with her senior age at late 60s and health condition, board members should acknowledge the impact of her future leave, for she is familiar and ethical with the operations, without a set standard of policy in place to indicate the management change procedures, how long YPF can enjoy this stable and sustainable operation?

Evaluation is a significant portion of board governance responsibilities.  YPF has several board meeting each year, and each meeting is aiming to review the current progress in order to evaluate the attainability of the long-term plan.  The long-term plan usually include a 5-year plan including the long-term goals in specific amount of funding needed, projects that are considered urgent and important, as well as the short-term plans,

Section Five: Conclusion

This paper studies the interactive effects of management control systems and strategies in Yellowstone Park Foundation to show how this interaction is helping YPF achieve its objectives followed by the strategic planning.  The result is that organizational control is easier to maintain with a well-defined strategic plan that is also acting as a control mechanism. The level of control needs is depending on the type of operations.  The course of actions conducted should be within its mission.

As Dent (1990) indicated that the dynamic nature of MCS and strategic changes would be increasingly fascinated and researched by scholars.  Due to the limited time and resource, the case study questionnaire is constrained without other related parties such as the Yellowstone National Park staff who worked closely with YPF, and the National Park Services – a government entity that provides additional resources for the park along with YPF.  The other limitation of this paper is that the relationship between MCS and strategies is solely based on personal opinions, and there has no difference comparisons between other nonprofit organizations.

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