gérard naulleau, 2006 1 management control management control systems and procedures mba 2006...
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Gérard Naulleau, 2006 1
Management Control
Management Control Systems and Procedures
MBA 2006Gérard Naulleau
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Session objectives
1. Get familiar with key management planning and control procedures
2. Discuss current trends and developments in management control
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• 2 years as a junior consultant : KPI for productivity analysis and Management Information Systems Implementation
• 10 years as a trainer in the banking sector for profitability analysis and implementation of planning, budgeting and reporting procedures
• ESCP (1984 -1991) + EAP (1992-1999) + ESCP-EAP (2000 …)
• Consultant for the French Ministries of Finance and Defence on the implementation of performance contracts (Implementation of the new law on resource allocation) • Academic Director of ESCP-EAP MS “International Project Management”
Current fields of interest : (1) inter-organizational collaborative performance (2) implementation of performance driven cultures
Gérard Naulleau
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“Provide information to support decisions and guide managers and employees behaviour towards the organization’s strategies and goals “ Kaplan, 2002
Management Control ?
“Process by which managers ensure that resources are used effectively and efficiently to attain organizational goals” Anthony RN & Dearden J, 1976
Defining the scope of Management Control
What Gets Measured Gets Managed !
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“ A management planning and control system can be defined as the set of processes and practices used to align and control an organization”
Management planning and control systems include the procedures for :
• aligning strategies between business units and corporate level, • setting goals and objectives, • setting capital and operating budgets, • forecasting financial expenses, revenues and results • measuring and rewarding performance • reporting progress to senior management• conducting performance review meetings
Kaplan, Harvard Business Review, 2006
What Management control systems should cover …
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• Strategic Planning
• Financial Budgeting
• Performance Review/Analysis
• Reporting
Management Control Support Key Processes
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Resources OperationalProcess
Outcome
Measurement
Feedback Analysis
References : Objectives
Past performances Comparable performances
Objectives
Influence on resources allocation
Influence onprocess
Influence on planning
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The management control loop
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1880/1920Division Profitability Divisional
Costing and Ratios
Divisional Costing and Ratios
Decentralization Profit Centres andDirect Costing
Profit Centres andDirect Costing
Resource Allocation Process
Planning and budgeting
Planning and budgeting
1930/1940
1950/1975
Phase 1 : The Foundations
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1980 …Total Quality Management
Business Process Reengineering
Key Performance Indicators
Key Performance Indicators
Balanced Scorecard
Activity Based Costing / EVA
Activity Based Costing / EVA 1995 …
2000 / Strategic Control
Phase 2 : The “Add-ons”
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1) A relevant Management Control Information System
2) Clear Areas of Accountability : “Profit Centers / Cost Centers / Processes ”
3) Well understood / accepted “Planning, Budgeting and Reporting Procedures”
Management Control : What it needs to be effective
3 Requirements
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(1) The fundamentals of a
Management Control Information Systems
1) Profitability Calculations2) Key Performance Indicators
3) Quarterly and Monthly Reports and Scorecards including Planned / Actual Comparisons
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• SALES
• EBITDA : Earnings Before Interests Tax Depreciation and Amortisation (+- French EBE)
• EBIT : Earnings Before Interests Tax (+- French RBE)
• Operating Margin (EBIT/Sales)
• NOPAT : Net Operating Profit After Tax
• Net Result
Reporting Structure of Profitability Calculation
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Business Unit …..
Sales
Operating Margin : (EBIT / sales)
ROA : (EBIT/Assets)
ROCE : EBIT / Capital Employed ²
EVA : NOPAT * - (WACC x Capital Employed)
• * For internal reporting, EBIT or EBITDA more relevant than NOPAT (Net Operating Profit After Tax) • ² Capital Employed = Fixed Assets + Current Assets - Current Liabilities • WACC : Weighted Average Cost of Capital (between cost of equity and cost of loans/debt)• Value is created when ROCE > WACC
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Key Economic Ratios
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Key Performance Indicators
• Customer Satisfaction• Churn Rate
• Revenue per Mile per Seat • Average Capacity Utilization Rate
• Quality Indicators (number of incidents …) • Productivity per employee • Revenue / Cost per Unit Sold• Time to Market• Employee Absenteeism• Employee Turnover• Social Climate
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Reporting Additional Information
Typical BU indicators required for corporate reporting
• Period Key Points (faits marquants)• Orders• Sales • Work Load • Inventories • Activity (Production, R & D, Investments) • Headcounts
• Finance (cash position, working capital) • Working Capital • Free Cash Flow (Cash flow – (Capex + increase in WC)) • Currency Position
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An integrative framework to support Management Control
Information : The Balanced Scorecard
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Objectives Measures Targets Results
Balanced Scorecard model
• Green : on target
• Yellow : below target but better than last period
• Red : below target and worst or not better than last period
Strategic Focused Metrics
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The challenge of Management Information : Seven functions attached to Management Control Information !
Look aheadand prepare
Look backand understand
Cascade down goals and targets
Compare and Learn
Motivate and Align Compensate
Source : M W Meyer Rethinking Performance Measurement, Cambridge University Press, 2002
Roll up initiatives and action plans
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(2) Clear Areas of Accountability
• Are measurement in line with delegation ?
• Cost Centers ? • Profit Centers ? • Investment Centers ?• Processes ?
• Are compensation in line with strategic objectives and budget results ?
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Cost Centers
• Accountability on Costs :
either in VALUE (Expenses Budgeted) or linked to VOLUMES (Cost per Unit)
Where
• Support Centers (Back Office / Logistics …)• Structure Centers (Administration, Public Relations …)
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Profit Centers
• Accountability on Margins : ROS (Return on Sales)
Delegation on COSTS (Volume of Inputs/Resources) Delegation on REVENUES (Volume and possibly Price)
Where
• Business unit
• Regional Sales / Retail unit• Manufacturing or servicing unit selling at transfer prices (market or price less based)
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Investment Centers
• Accountability on ROA and or ROCE
• Delegation on COSTS • Delegation on REVENUES• Delegation on INVESTMENTS (Assets)
Where • Business Units
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Processes
• Accountability on Costs + KPI or ROS + KPI
• Delegation on COSTS • Delegation on REVENUES• Delegation on Operational Performance Criteria (KPI)
Where
• Companies organized with Processes/Programs • Examples : Procurement, Customer Support, Product Development
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Accounting methods for transfer price calculation
Actual costsActual costs
Cost plus (cost + margin)Cost plus (cost + margin)
Standard costsStandard costs
Price less (Market price - discount) Price less (Market price - discount)
Market priceMarket price
COST
PRICE