Digital business transformation is the introduction of automation and system support in your business. To quickly adapt and make good decisions as a manager you need a holistic and dynamic management control system (MCS) to support your decision-making. With SAP you have all the tools you need for such a system. This will be explored further in the blog post.
The Role of SAP in a Modern Management Control System
A MCS is a system that gathers and uses information to evaluate the performance of organizational resources. In 1987, Johnson and Kaplan wrote the book “Relevance Lost” stating that today’s MCS’ were driven by reporting cycles, too aggregated and not relevant for a manager’s planning and control decisions. The systems do not provide enough information to make decisions. Because of that, MCS’ have been focusing on creating more dynamic in the control.
Today, Management Accounting Research focuses on a package of cultural control, planning, cybernetic control, reward & compensation, and administrative control. We have many tools in such a system, budgeting, balanced scorecard, bonuses, policies, and procedures amongst others. But to have all this data and make the right decisions you need system support, and this is where SAP comes in.
The topic of having a MCS as a package was introduced by Malmi and Brown in 2008, in their article “Management Control Systems as a Package”. Here, they explore five types of management control:
- Cybernetic Controls
- Administrative Control
- Reward & Compensation
- Cultural Control
Management Control starts with planning, the ex-ante form of control. That defines goals of the business to drive effort and behavior, as well as setting the standard in terms of how to archive these goals. Planning is done in two parts, action planning to plan your activities, and second, we have the more long-term planning to reach your strategic goals. To achieve these goals with SAP-software, we have Integrated Business Planning (IBP). This gives you the tool plan through your entire value-chain and plan your sales and operations, to match and optimize the supply and demand in your business.
Cybernetic control has four components, the first one is the budget. In S/4HANA (an ERP system that enables integrated management of your main business processes) and SAP Analytics Cloud we have cost planning amongst others. This can be used to follow up Sales and Operation Planning, and the cost of your planned activities, and forms the final part of your planning cycle to conclude on cost. That enables you to determine the variance when the actual activities have been performed.
The other part of cybernetic control is financial, non-financial and hybrid measuring-systems. SAP combines it all in S/4HANA. From a financial point of view, it records all your transactions, and supports in holding employees accountable for e.g., their profit center or preparing statutory reporting for accounting purposes.
From a non-financial point of view, SAP records all kinds of business transactions, so we can follow up production and maintenance amongst others. We can track and follow up on the production plan, variance, and understand the performance of your production. SAP makes sure that you are following up on all KPI’s from a non-financial point of view.
The hybrid approach combines financials and non-financials. In a modern business, the balanced scorecard is used to see the cause-and-effect of KPI’s and combines these to understand the performance of your business. As S/4HANA has both financial and non-financial transactions for all types of areas, it is very easy to create a good hybrid approach and use that as a control mechanism to evaluate and drive behavior against your defined goals.
Reward and Compensation
Reward and compensation focus on motivating and increasing the performance of your employees. The basis is that compensation will lead to an increased effort. SAP has SuccessFactors to find the right blend of performance management to inspire employees to perform at their best. It has the benefits of empowering managers to clearly communicate goals and align them with business objectives, assess workforce performance objectively and accurately to ensure fair compensation and recognition.
“Administrative control systems direct employee behavior through the organizing of individuals and groups, the monitoring of behavior and who you make employees accountable to for their behavior, and the process of specifying how tasks or behaviors are to be performed or not performed.” In SAP the governance or the enterprise structure is a key design to set up this control. It is used to define divisions, responsibility, who should approve invoices amongst others. As SAP is a configured system with defined processes it supports in setting up and following the policies and procedures of a company. However, it can only support the administrative control, as there are many soft-factors as meeting-rules and so on. But from a business process point-of-view, SAP enables you to have administrative control, and making sure you do things right.
The cultural control is “the set of values, beliefs and social norms which tend to be shared by its members and, in turn, influence their thoughts and actions”. This is not the core of SAP, but training can be seen as a cultural control, and enables employees to be trained in how things are done, e.g., in an SAP-system. It is not a typical control mechanism but a prerequisite for proper work.
In conclusion, we see that a modern management control system consists of many elements to provide relevant information for controlling and making the right decision for your enterprise. SAP has all the tools for a dynamic MCS and at NTT DATA Business Solutions, we have more than 30 years of experience of designing SAP systems and integrating this as a core aspect of your management control system. If you are interested in discussing how we can support you to create your new management control system, please get in touch for a meeting.