Service
Organizations
2
Service Organizations in General
Management control in
service industries is
somewhat different from
management control in
manufacturing companies
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Service Organizations in General
Characteristics :
• Absence of inventory
buffer
• Difficulty in controlling
quality
• Labor intensive
• Multi unit organizations
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Service Organizations in General
a. Absence of inventory buffer
• Goods can be held in inventory but services
cannot be stored
• Although a manufacturing company can earn
revenue in the future from products that are on
hand today, a service company cannot do so. A
service company must try to minimize its
unused capacity
• The cost of 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.
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Service Organizations in General
b. Difficulty in Controlling
Quality
• A manufacturing company can
inspect its products before they
are shipped to the customer, and
their quality can be measured
visually or with instruments
• A service company cannot judge
product quality until the moment
the service is rendered, and then
judgments are often subjective
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Service Organizations in General
c. Labor Intensive
• Manufacturing companies add equipment
and automate production lines, thereby
replacing labor and reducing costs.
• Most service companies are labor intensive
and cannot do this
d. Multi Unit Organizations
• Some service organizations operate many
units in various locations, each unit
relatively small.
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Professional Service Organizations
Special
Characteristics :
a. Goals
b. Professionals
c. Output and Input
Measurement
d. Small Size
e. Marketing
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Professional Service Organizations
a. Goals
• A dominant goal of manufacturing
company is to earn a satisfactory
profit, specifically a satisfactory ROA
• A professional organization has
relatively few tangible assets, its
principal asset is the skill of its
professional staff, which does not
appear on its balance sheet
• In many organizations, a related goal
is to increase their size.
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Professional Service Organizations
b. Professionals
• Professional organizations are labor
intensive, and the labor is of a special type
• Professional tend to do the best job they
can, regardless of its cost
c. Output and Input Measurement
• The output of a professional organizations
cannot be measured in physical terms.
• Revenues earned is one measure of output,
but these relate to the quantity of service
rendered, not to their quality.
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Professional Service Organizations
d. Small Size
• With a few exceptions, such as some law firms and
accounting firms, professional organizations are
relatively small and operate at a single location
• There is less need for sophisticated management
control system
e. Marketing
• In a manufacturing company there is a clear
dividing line between marketing activities and
production activities.
• Such a clean separation does not exist in most
professional organizations
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Professional Service Organizations
Management Control Systems :
a. Pricing
b. Profit Centers and Transfer
Pricing
c. Strategic Planning and Budgeting
d. Control of Operations
e. Performance Measurement and
Appraisal
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Professional Service Organizations
a. Pricing
• The selling price of work is set in a
traditional way in many professional
firms
• Fees generally are related to professional
time spent on the engagement.
• In manufacturing companies, the profit
component of the selling price is
normally set so as to obtain, on average,
a satisfactory ROA employed
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Professional Service Organizations
b. Profit Center and Transfer Pricing
• Support units, such as maintenance,
information, processing, transportation,
telecommunication, printing and
procurement of material and services,
charge consuming units for their services
c. Strategic Planning and Budgeting
• In general, formal strategic planning
systems are not as well developed in
professional organizations as in
manufacturing companies of similar size.
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Professional Service Organizations
d. Control of Operations
• Much attention is, or should be, given to scheduling
the time of professionals.
• The billed time ratio, which is the ratio of hours billed
to total professional hours available
e. Performance Measurement and Appraisal
• Judgments made by superiors are the most common
• Appraisals by a professional’s peers, or by
subordinates, are sometimes part of a formal control
system
• The budget can be used as the basis for measuring cost
performance, and the actual time taken can be
compared with the planned time.
• Internal audit procedures are used to control quality
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Financial Service Organizations
Financial service
organizations include
commercial bank and
thrift institutions,
insurance companies and
securities firms
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Financial Service Organizations
The Financial Service Sector
General observations can be made about the financial
sector :
a. Financial services are very important in the overall
performance of economy
b. 30 years ago, financial services, existed as distinct and
separate industries.
c. Financial services firms have used the IT revolution to
innovate new products and discover new methods of
trading
d. The need for controls in the financial services sector
has become paramount.
e. During the 1990s, new form of financial instruments
(such as derivatives) designed by financial service
firms sometimes resulted in millions of dollars of losses
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Financial Service Organizations
The Financial Service Sector
The corporate scandals during 2000 have created a huge
push for investment banks to spin off their Research
Department. The arguments for spin off are many :
a. This separation will ensure objective research data.
b. At present, cost of research is being subsidized by
investment banks
c. Investor confidence will improve if they are convinced
that research is unbiased.
On the other hand, arguments against such a spin off, are
a. The cost of research will go up if they are set up as
separate firms
b. To keep costs down, research departments may issue
short reports instead of a rich.
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Financial Service Organizations
Special Characteristics :
While the general principles and concepts of
management control systems apply, they need
to be adapted to the following special
characteristics of the financial services
industry :
a.
b.
c.
d.
Monetary Assets
Time Period for Transactions
Risk and Reward
Technology
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Corporate Strategy
Implications for Management
Control
Strategic planning
• Conglomerates tend to use
vertical strategic planning
systems
• Related diversified firms tend
to be both vertical and
horizontal
• Single industry firms tend to
be both vertical and
horizontal
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Business Unit Strategy
Mission
• The mission of existing
business should “pure
build” at one end and
“pure harvest” at the other
hand.
• To implement the strategy
effectively, there should be
congruence between the
mission chosen and the
types of controls used.
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Business Unit Strategy
Competitive
Advantage
A business unit can
choose to compete
either as a
differentiated
player or as a low
cost player.
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Top Management Style
Implications for
Management Control
• The various dimensions
of management style
significantly influence
the operations of
control systems
• Style affect the
management control
process
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Top Management Style
Implications for Management Control
Personal versus Impersonal Controls
• Some managers are “number oriented”,
and they deriving tentative conclusions
from it.
• Other managers are “people oriented”,
they usually arrive at their decision by
talking with people
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Top Management Style
Implications for Management
Control
Tight versus Loose Controls
• A manager’s style affects the
degree of tight versus loose
control in any situation.
• The manager of a routine
production responsibility center
can be controlled relatively
tightly or loosely.
• The actual control reflects the
style of the manager’s superior
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Summary
 Business units have missions that
can be classified as “build”, “hold”
or “harvest”, and their managers
can also decide to build competitive
advantage based on low cost or
differentiations.
 Control systems should be designed
in the context of each
organization’s unique, external
environment, technology, strategy,
organization structure, culture and
top management style
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The End