Module 7
Controlling Costs and Monitoring Performance
Even in an organization that functions as well as
Southwest, managers must diligently monitor
employee activity to insure that it continues to
meet company guidelines and is appropriately
goal-focused. Should deviations be spotted,
managers need to correct and refocus workers.
We call this monitoring process control.
There are three main ways that organizations
choose to control their members: Bureaucratic
Control, Market Control, and Clan Control.1 With
bureaucratic control, workers are subject to a
large number of rules and regulations and are
closely supervised. For this kind of control to be
effective, work must be highly standardized so
that any deviation from expectations can be
quickly identified and dealt with. In this kind of
environment, very exact performance standards
are set so that employees know what is
expected of them at all times.
In market control, people are controlled by the
amount of profit-based compensation they earn.
Workers’ rewards are strongly tied to their level
of sales or production, and since they are
motivated to receive those rewards, they act in
ways that further their employer’s interests.
Certainly, we can see elements of market
control in Southwest’s human resource
management system. As we saw in Module 4,
when workers’ compensation is tied to company
profits, they are likely to engage in behaviors
that ultimately benefit the company. In fact,
most companies use some form of market
control in addition to one of the other two kinds
of control because of the motivating power of
monetary rewards. However, on a day-to-day
basis, Southwest provides a stronger example of
the third kind of control: clan control.
1
Ouchi, W. G. (1980). Markets, bureaucracies, and clans.
Administrative Science Quarterly, 129-141.
SIDEBAR: Fast Facts from
Southwest’s 1998 Financial
Statement:
+ Net income: $433.4 million
+ Total passengers carried:
52.6 million
+ Total operating revenue:
$4.2 billion
SIDEBAR: Southwest is one of
America’s most effective users
of technology. The company
was included in
Computerworld magazine’s
“Premier 100” list in 1998.
Clan Control at Southwest Airlines
In clan controlled systems, employees’ behavior
is controlled by strong rules and norms that exist
within the company’s culture. When workers
share values, traditions, and beliefs, they set
performance standards that are consistent with
those beliefs. They are guided by the culture
articulated by the leader. As we noted in
Module 6, Herb Kelleher’s strong leadership at
Southwest helps those who work for him
understand and identify with the company’s
mission and goals. Once people have
internalized a goal, they will generally work very
hard to achieve it on their own. If everyone in a
group shares the same goal, and understands
the behaviors necessary to achieve it, then it is
likely that they will act consistently in ways that
benefit the organization as a whole. Rather than
being explicitly controlled by money or strict
rules, these individuals are guided by a shared
vision and common values.
Southwest’s culture contributes to its productivity
by encouraging peer and self-monitoring
behaviors. As we’ve noted, many Southwest
employees develop personal relationships at
work. They care about one another and about
the company, and they want to succeed both as
individuals and as an organization. Remember,
too, Southwest’s “hire for attitude, train for skill”
philosophy. The company is careful to bring
aboard only those employees who seem to have
the propensity to work well in their system.
Peers are involved in the hiring process, and
their input insures that new employees are hired
because they will “fit in” with the work team.
Control Mechanisms at Southwest Airlines
Despite their reliance on self-monitoring and
peer-based control, Southwest has also
implemented some other policies that
demonstrate the company’s understanding of an
effective control system. Like most companies,
most of Southwest’s controls are related to
money. Southwest has been cost conscious
since its inception, so most of their control
mechanisms are designed to limit the company’s
spending on unnecessary items.
Strategic Placement of Controls
In an effective control system, checkpoints are
placed strategically across the organization.
Typically, each person along a chain of
command has “approval authority” for a
particular kind of purchase. Sometimes
authority levels dictate the amount of money
someone can spend on a single purchase. Line
supervisors may be able to approve
expenditures of, say, $50, while middle
managers can authorize purchases for $250,
and so on. Often this authority is related to
types of expenditures rather than the dollar
amounts associated with them. For example, a
flight attendant supervisor would not have the
authority to purchase vacuum cleaners to use on
a plane, but a ground crew supervisor who has
responsibility for cleaning planes could authorize
that purchase.
Spending controls at Southwest are of the latter
variety, with one exception. CEO Herb Kelleher
personally approves every expenditure over
$1,000. Why does he do this? “Not because I
don’t trust our people,” he says, “But because I
know if they know I’m watching, they’ll be just
that much more careful.”2
Labich, K. (1994, May 2). Is Herb Kelleher America’s
best CEO? Fortune, v129#9, p. 44+.
2
Kelleher knows that expenditures over $1,000
are significant for Southwest. When this much
money is being spent, it is likely in conjunction
with a strategically important decision, and
Kelleher can use this checkpoint as an
opportunity to monitor his manager’s decisionmaking skills.
Controls and Corrective Action
Routine expenditures over $1,000 may reflect
areas where the company could save money by
doing something differently. Here, were
Kelleher to recognize a potential area for cost
savings, he could either act himself or ask his
employees to look into the problem. Examples
of this kind of corrective action are prevalent at
Southwest. Kelleher says, “We’re always very
cost-conscious and we’re constantly looking for
ways to be more productive. We recently cut
costs in our maintenance program by, for
example, doing more work on a plane when it's
in for a check instead of brining it in three
different times. We have also come up with a
purchasing program that lets us get discounts on
everything from cleaning supplies to airport
security.”3
Southwest also uses technology to help it
control costs. Like most companies, its
inventory and accounting programs are
computerized and updated daily. Top managers
receive regular financial reports that tell them
how the company is doing, and they use these
reports to implement new cost-control programs
or to make decisions about future plans.
SIDEBAR: Southwest’s
purchasing department was
reorganized in 1996 to
increase its emphasis on
serving internal customers at
the airline with their
purchasing. A “Procurement
Process Implementation
Group was established, and
was quickly dubbed “PPIGS”
within Southwest. VP of
Purchasing Mike Golden noted
that the PPIGS have started to
deliver healthy PPIGlets, such
as developing an office
supplies partnership with a
major supplier and starting a
program to rebuild, rather than
replace, ground support
equipment. Current PPIGlets
are expected to save
Southwest $20 million
annually. Golden says, “We
hope that’s just the
beginning.”4
4
“How Herb keeps Southwest hopping.” (1999, June).
Money, v28#6, pp. 61-62.
3
Henderson, D. K. (1997,
September). Winning ugly.
Air Transport World, v34#9,
pp. 66-68.
When and Where is Control Necessary?
One dilemma faced by many companies is
deciding when they should do something
themselves and when they should buy a service
from someone else. Consider, for example, the
cleaning and maintenance crew that takes care
of the gymnasiums at your college or university.
For these individuals to do their jobs right, they
need specialized equipment and training to
insure that the gymnasium floor is smooth and
painted appropriately.
However, the equipment and knowledge
necessary to prepare the floor properly is highly
specialized. If you are at a relatively small
school, there may not be enough work to keep a
full-time maintenance staff busy. If you have
only one gymnasium that is rarely used, it does
not make sense to buy expensive equipment to
wax the floor every year. In this situation, it
might make more sense for your school’s
officials to hire an outside company to clean and
maintain your campus. Because this company
handles the many gymnasium floors, it regularly
uses the equipment and knowledge needed for
this task. Because contractors use their
equipment more often, they make more money
on their investments.
Yet this situation can cause some difficulty for
an organization. When an outside company is
providing a service, the contracting organization
has relatively little control over when and how
the service is performed. While this may not be
too important when we consider a gymnasium
floor, think about companies that decide to
outsource their human resource functions.
Short of legal action (such as suing the provider
for breach of contract), the company has no
recourse if their employees’ paychecks are not
delivered on time or prepared properly.
Moreover, if they have outsourced their human
resource expertise, it is likely that no one on
their staff will be able to fix
SIDEBAR: Unlike other
companies, who often hire
outside experts to solve their
problems, Southwest uses
consultants only rarely. The
company’s culture allows
employees to be creative,
readily identifying ideas and
opportunities from within.
Moreover, any consultants
who do become part of the
Southwest team must
demonstrate that they share
the company’s values and
understand its vision.
SIDEBAR: The principle of
profit maximization is similar to
Southwest’s philosophy. Says
Gary Kelly, Southwest’s Chief
Financial Officer: “Our whole
approach is to optimize the
productivity of our employees
and assets. An airline is a
high fixed-cost business. 90%
of our assets are tied up in
aircraft, and you can either
use that asset a lot every day,
or a little. The seat is our
inventory, and that spoils the
second the plane takes off.
We try to get as many ASMs
[miles flown times the number
of seats] per airplane per day
as its safe to do. We’re by far
the most productive airline in
the industry.”5
5
Fisher, L. (1998, July).
Success in a nutshell.
Accountancy, v122#1259, pp.
28-29+
problems that do occur. The risk of
uncontrollable problems is one reason that
companies may choose to keep technical
services in-house even when the cost of doing
so is prohibitive.
One of the most popular services to outsource is
data processing. Both computer equipment and
data entry clerks are resources that can be more
profitably used by a company that has a lot of
data entry to do, whereas a relatively small
company may not generate enough work to
keep their staff occupied and profitable. We
learn a lot about Southwest’s need for control
when we learn that they maintain an internal
data management center. The company
believes its system is sufficiently different from
other airlines’ so that no outsider would be able
to do the job. Southwest also wanted to see
daily figures from the system in order to respond
quickly to any problems.
The bottom line: Control costs money.
Managers must routinely decide what activities
they need to control internally and what they can
assign externally.
SIDEBAR: Southwest
monitors its internal database
with Web-based management
software. Only 2 employees
are needed to monitor the
network.