Management Control Systems in
Organizations in Prigogine’s “Far From
Equilibrium Conditions”
Bruce Gurd
University of South Australia
Introduction
• “mechanistic, non-interactive and
linear”. Hines (1992, p.324)
• Management researchers willing to
explore organizations on the edge of
chaos (Brown and Eisenhardt, 1997,
Davis, Eisenhardt and Bingham, 2009)
• “Change must not be thought of as an
emergent property of organization.
Rather, organization must be
understood as an emergent property of
change.” (Tsoukas and Chia, 2002,
p.570).
MCS using Simons definition
• “MCS are the formal, information based routines and
procedures managers used to maintain or alter
patterns in organizational activities” Simons,
Levers of Control, 1999, p.5
Some reflections from the literature
• Dermer and Lucas (1986, p.471), is the ‘illusion of
control’; “that conventional controls … accurately
and validly measure, and thereby help determine,
behaviour. … management can intervene when
necessary and successfully effect change. … To
those managing with an illusion of control, negative
consequences of managerial action often signify the
necessity for more controls”.
MCS in turbulent conditions
• Used concepts such as environmental
uncertainty (Chapman, 1997; Hartmann,
2000), environmental difficulty/hostility
(e.g.Khandawalla, 1972; Otley, 1978) and
drawn from complexity theory (e.g. Hines,
1992; Jermias and Gani, 2004).
• Dynamic environments more central to
MCS (Bjornenak and Kaarboe, 2012)
• Chenhall (2003) raises the question of
how organizations face conditions of
uncertainty, turbulence and hostility
Prigogine and Stengers
Management researchers using Prigogine
• Hints in Prigogine and Stengers
especially the Introduction by Alvin
Toffler
• Burgelman (B, 1983; B and Grove,
2007, B, 2009)
• Human Relations Gemmill and Smith
(1985) and Leifer (1989).
• More recently Anderson, 1999; Tsoukas
and Chia, 2002; McKelvey, 2004;
Meyer, Gaba, and Colwell, 2005;
Stacey, 2007
• “An equilibrium structure requires little effort to retain
its structure and great effort to change it, while a
dissipative structure requires great effort to retain its
structure and relatively little to change it.” Stacey,
2007, p.193
Research method
• Identified two existing longitudinal studies that
included far-from-equilibrium positions one that went
to greater success and one that disintegrated
• Both included many interviews, significant
observation of meetings, and substantial
documentary analysis
• Both used NVivo as a data analysis tool
The Illustrative Cases
• ETSA, an electricity utility company in
South Australia, came to the bifurcation
point in mid 1994 and while it had made
significant adaptation it disintegrated as
an organization around 1997. Large
investment in MCS and changes saw no
benefit.
• EuroFinance went through several
phases of crises. The GFC was around
a time of a large internal fraud.
EuroFinance used its MCS to be able to
bring change and hold off financial loss
ETSA
1988 – Major change but not a bifurcation
point
• Outside CEO from international company
• National Electricity Grid – end of monopoly
• End of the build stage of the electricity distribution in
South Australia
• Zenith of staffing – around 6,000
Change in belief systems in late 1980s
• End of the “bottomless bucket of money”
• End of the “family” culture with the end of work for
life and training
• End of the networked environment with strong
horizontal relationships
Change in diagnostic systems from a
public sector to commercial culture
• Inter-departmental charge rates
• Full attribution of cost
• Managers charged for the floor space
and other resources they needed
• Devolution
• Market test of efficiency
• Belief that market test and commercial
orientation would bring about survival
Failure of MCS
• New belief systems within organization but new
belief systems in the public sector
• Diagnostic systems which were devolutionary
replaced by command and control budget vv actual
EuroFinance
Bifurcation point
• GFC/collapse of Lehman Brothers Q.3
2007 + significant internal crisis early 2008
with large losses
• New energy - Board created a special
committee of independent directors to
enhance operational control and
operational risk management, and promote
culture of accountability discipline and
mutual respect.
• Reorganizing the business lines worldwide.
Changes in strategic presence and
organization structure
• Late 2008 re-aligned worldwide to better
manage capital and resources (closed 4
foreign business units in Asia and
centralized some ops to the RO.
• New division in 2008 to reduce risks
• Reorganized its support functions. All
Foreign Business Units were required to
align with the global framework.
• Align with the global framework.
• Responsibility of regional CEOs for
business strategy, risk etc.
Changes in the design of the Management
Control System
• Belief systems appear to have been used to
try and change the culture to overcome the
crises. (May 2008) Values such as personal
accountability, discipline, rigor and
transparency around a lasting people
focused value.
• Boundary systems through internal controls
– handbook with compliance rules. Measure
unauthorized transactions and identify
fictitious deals.
• Interactive control - an increase in
communication, more visits to Asia by CEO
Diagnostic control systems
• New performance appraisal (late 2009)
focus on actions and behaviour employed to
achieve the results.
• Increments and bonuses based more tightly
on annual objectives e.g. career
management dashboards monitored on a
quarterly basis.
• New standardized performance
measurement system based on regional
rather than business line performance.
Track daily regional results with quarterly
meetings. More centralized HO control.
Budgets and cost controls
• 2008 tighter top down approach with
stringent control on both headcount and
costs. HO decided cuts and allocated by
location without discussion.
• 2009 top down budget process but used
meetings for arbitration to give some
power to Regional Offices.
Cost control
• Cost optimization project - accountability for
project expenses.
• Cost containment project in 2009 - Strict
controls on travel etc.
• Quarterly meetings to monitor the progress
of cost savings
• Report standardization and streamlining
project 2009
Informal controls very strong
• Knowing the right person - open
positions filled immediately by
candidates recommended by the
manager at the top of the hierarchy.
• Less formalized structure and detailed
procedures empowered staff to find the
best way to carry out the tasks, which
enable the organization to react
effectively and efficiently upon urgent
request.
External crisis in 2011
• EuroFinance survived GFC – still profitable.
• Not able to meet forecasts by the end of
2011 – profitability
• Focused on controlling its expenses,
defined a cost control policy, and pushed
outsourcing to achieve the targeted cost
and headcount.
• Budget 2012 targeted drastic cost reduction
Voluntary redundancies.
• HO worried about first headcount cut in
France after French president election.
Changes
• Change top management and org.structure as
the Global CEO left end 2011.
• No change to belief system
• Diagnostic control systems - Cost controls were
tightened.
–
–
–
–
New policy to stop reimbursement of some expenses
Approval by exception by top management
Reports tracking the expenses incurred by staff.
Meetings for information sharing and interactive use
of accounting data, and these included decisions on
how to control the expenses.
• Project management system
Some conclusions
• Accounting research tends to ignore far
from equilibrium conditions
• Management control systems may be very
useful in relatively stable situations, up to
the bifurcation point – how useful beyond?
• Leifer’s circle suggests that the alternative
of destruction comes through denial, this
is not always the case. Impossible to
change? Enough energy? An
organization?
Conclusions
• The heat source from outside may be so
intense that disintegration may be the
result. Denial may not feature – there may
be active attempts to recognize the
change.
• MCS, subsequently abandoned, as at
ETSA, are not necessarily wasted
resources. Smooth external turbulence.
Not provide the impetus to more dramatic
changes needed in the organization.
• Periods of dramatic change are not
necessarily destructive.
Conclusions cont
• Used early shocks to draw energy
• More formal control systems for risk
• Strong organizational learning through Leifer
circle.
• Different responses across the organization
cf. Bénards cell
• Yet organizations can fail because of
disorder at a single point, especially financial
institutions. Shifting the whole organization to
a higher level and using management control
systems to do it is highly problematic.
Conclusions
• EuroFinance used diagnostic control systems to
bring about immediate reductions in the use of
resources in order to survive
• Lack of interactive control systems
Limitations
• From European perspective using
complexity as a metaphor
• Unit of analysis as organization leads to
reification cf. Simon, 1962
• Longitudinal cases with data collected
NOT for this purpose.
A future direction
• “given the right container, and the right liquid, and
the right process of heating, the Bénards convection
cells will emerge, and their patterns will be quite
similar to those observed in previous experiments”.
(Goldstein, p.72).
• Identify the patterns from typical emergence “far
from equilibrium”