Management Control System of a Commercial Bank XY

vigilance go through System of a Commercial depone XYThis paper attempts to examine the circumspection rule musical arrangement in a Pakistani mercantile believe. The commercial believeing orbit in Pakistan is very competitive. The majority of commercial beachs moderate customer retention on its top priority. Commercial fixs ar support employees to upgrade their knowledge and skill. The functional environment is also congenial in Pakistani commercial banks. Management control systems are inseparable prick to help management to steer an organization towards its strategic objectives. Designing and implementing an appropriate management control system based on Pakistani national gloss atomic number 50 improve both the trivial and long term trans activity of commercial banks. This will make commercial banks to a greater extent efficient and cost rough-and-ready in extending banking services to any the customers. However, the future research take to examine the r elationship between management control system and effectiveness of the commercial banks of Pakistan. mental homeThe insane asylum part begins with historical background of management control and management accounting. This leads further to an establishment of the purpose of the workplace and its limitations.1.1 Historical Background The Management carry and Management AccountingThe need for management control arose after the Industrial Revolution and gave companies the opportunity of greater growth and expanding upon than what had been possible earlier. Larger separate of the value chain were situated within these new-sprung(prenominal) and greater companies instead of being spread on disparate locations in smaller companies or individual(a) persons. After these great changes, companies started to require monetary measures as business ratios and transfer pricing, and from that point the development of different types of management controls and accounting controls began ( Ka plan Johnson 1987).The Dupont Company is often considered to be the inventor of the modern management control (Kaplan 1984). In the early 1900s, DuPont decided to organize itself by dividing the organization into separate functions, e.g. manufacturing, sales and purchasing. Every single bingle of these functions had their own theatre director who could be very specialized in how to manage the specific function. Hence, the senior managers did not capture to be involved much in those activities and could fully focus on things as long- term strategies. It was this type of decentralized organization that made Dupont realizes that they needed a exercise measurement system. They launched a new accounting measure, return on investment (ROI), because they thought it would be much accurate to use than the old measures which measured earnings and profits as a percentage of sales or costs. Dupont along with General Motors are considered as the pioneers in this area and were also involve d in creating different types of decentralized organizations, budgeting and planning cycles (Kaplan, 1984).In an article from 1984, Kaplan discussed what had happened in the development of the area from 1925 to that point. He considered that not as much as expected had happened between 1925 and 1984. Of those new ideas that had been presented, many were unspoiled academic theories which had little or no influence on the real organizations, who should be the beneficiaries.As of today the opposite problem from what Kaplan said in 1984 discount be spotted. straight off there are almost too many choices in accounting and management control, and they are not as well apprizevas as the older theories and tools (Malmi and Granlund, 2009). There is also another problem with the new theories and tools, companies and organizations seem to create too much faith in them and use them in an uncritical way. They are considered as the solution of all management problems. Examples of these new theories and tools are, activity- based-costing (ABC), business run reengineering (BPR), balanced Score cards (BSC) and total look management (TQM). These systems are often expensive to acquire and use, and companies perhaps, do not evaluate the relation between costs and benefits of the systems they use, or why they use it at all. atomic number 18 they utilize just because they are modern and all the competitors use it, or do they really create value for the company (Siverbo and Akesson 2009).1.2 Contri neverthelession of the StudyThe banking sector serves as the briny source of resource mobilization in developing economies. Commercial bank play significant role in the economic development. Today and more precisely in future, companies, organizations (banks) and other decision making entities whether profit making or not, will face major management challenges. Irrespective of whether the main goal of the organization is to make profit or not, it becomes necessary to institute a mechanism in those entities to control the activities of managers so that they remain on incubate of the proper routes as established by management. In order to keep activities of the organization in track a management control system is essential (Rijal S., 2006). With the background just proposed I find it filling to see how a company like a commercial bank XY has commenced its banking operations from November Ist, 1997 as a public limited company is currently operating a large ne bothrk through 223 branches in Pakistan, with the registered office at B.A. Building, I.I. Chundrigar, Karachi. The bank perceived the requirements of customers and matches them with persona products and service solutions. During the past five years, bank has emerged as one of the foremost financial institution in the region endeavoring to meet the needs of tomorrow as well as today. To continually upgrade the quality of service to the customers, training of team members in all the integral aspects o f banking, customer service and MCS was specially focused. The portfolio concentrates on all aspects of conventional banking as well as the financial needs of corporate sector. Dynamic and eminent value product includes Car Financing, Home Financing, rupee Travelers Cheques, Credits Cards, Debit Cards, Online trusting, ATM and consumer Durables. In addition to this, Islamic sticking Division is a recent initiative, which operates as separate branch. With such a huge expansion of branches network, the importance of a well-functioning management control system becomes crucial for their success. People have different beliefs and goals that they want to achieve, which makes it challenging for the management of the company to make all(prenominal) employee take actions in line with what is desirable(www.scribd.com).In this case cogitation author aim to describe the management control systems of a commercial bank with its virtual(prenominal) name XY from Pakistan, since it is expandin g and growing with good speed as compared to other banks due to its good MCS system.1.3 Problem FormulationBank XY is a commercial bank in Pakistan that is growing rapidly and expanding its branches network in the country. Bank XY has had a huge success and uses almost the same control systems in every branch all over the country (Telephone Interview, 2010), which makes it interesting for me to describe and analyze one of them. My principal research question is that,What management control systems are used at different levels of the commercial bank XY in Pakistan?1.4 Purpose of StudyThe main objective of this study is to analyze and describe the management control system of commercial Bank XY in Pakistan. I shall also try to explain how the different management control systems are used in the bank.1.5 Limitation of the StudyThe focus of this study is to describe the management control systems used by managers to direct employees, behavior. Considering the size of Bank XY,s organiza tion and the time I have deliberated to this study, it is liable for me to limit the study to include few bank branch and the management control systems controlling these branches from higher levels of the organization. I shall also focus on the internal environment, which means I shall not consider most of the external environment that is not crucial to the understanding of the management control system within the bank branch.Data and methodological analysisThis case study will be written by the qualitative school of thought, since author aim is to understand the management control system of the reliable company he has chosen. Author has no ambitions to make any general assumptions based on this single study, in contrast to if he had chosen to do a quantitative research study on several companies. The type of case study he has chosen to use is the abductivease study, since he wanted to have the opportunity to return to the theory even after empirical materials had been collected (alvesson Skoldberg, 1994). The paper is based on both primary and entropyary selective information. Primary data have been collected by phone interview developed for branch manager and employees at different branches. The responses were suckd from the 12 managers and supporting employees of 12 bank branches. Secondary data have been collected from the website of Bank XY, Pakistan. The data, collected from various sources have been analyzed with the support of previously developed theory.TheoryIn this chapter, I shall examine the main theories of management control. Before explaining the definitions of management control systems (MCSs), Author shall try to explain management and management control.3.1 Management and Management Control belles-lettres written on the subject, management is defined in several ways, but all have something to do with the procedure of allocating resources and direct activities to fulfill the organizations overall objectives. Management is a broad subje ct and can be divided into smaller elements such as operations, finance, marketing/sales and product development. The management process can also be separated into smaller parts that are objective setting, strategy formulation and management control. Objective setting is a necessary process to formulate and sometimes reconsider the direction and destination of the company. If the objectives are not set it is impossible to determine if the resources are allocated in the properly way and if the right activities have been performed. Strategy formulation is the process where organization finds out how to use their resources to meet their objectives. The management processes of objectives setting, strategy formulation and management control is a process of continuum (Merchant and vanguard der Stede, 2007).3.2 Merchants Management Control AlternativesAccording to Merchant and Van der Stede (2007) companies and other organizations have four management control alternatives i.e., event co ntrol, action control, personnel controls and ethnical controls.3.2.1 Result ControlsThe basic idea of dissolvers controls is that you do not tell your employees how to do things but what you want them to achieve and how they will benefit if they achieve it. For example, a manager tells an employee that he wants him to produce ten units a week, and if he succeeds he will receive a reward of $50. By these actions the manager may control his employees to do what he desires without interfering too much in their work practices. The process of result controls include four steps, the first is defining the dimensions on which results are craved, the second is measuring public presentation on these dimensions, the third is setting performance targets for employees to strive for and the last is providing rewards to encourage the behaviors that will lead to the desired results. Results controls are usually used on professional employees who are considered to be able to work effectively with out being told how to do things, but instead work efficiently towards targets (Merchant and Van der Stede, 2007).3.2.2 action at law ControlsAction controls are somewhat the opposite of results controls, employees are told what to do and how they should do it, e.g. by rules and procedures. The difficulty with this is that the rules and procedures must be optimized, or else the employees will do everything wrong, contempt their doing what they were told by their managers (Merchant and Van der Stede, 2007).3.2.3 Personnel ControlsPersonnel controls refer to the assumption that employees by nature want to control themselves. Managers do not have to tell employees what to do and then monitor their every moves to be sure that they do the tasks that that where intended. The assumption is that employees like to perform well for themselves and this should result in a well perform company. Unlike, or at least not as much as results and action controls, these types of controls require more careful selection of employees. Everyone have to fully pendent for the position they occupy on the organization to make it possible to use personnel control. Motivation is another important aspect to make this work managers have to keep their employees constantly motivated. This may be achieved by training, further work related program line or different types of rewards (Merchant and Van der Stede, 2007).3.2.4 Cultural ControlsWhen personnel controls blaspheme the ability that people want to perform well, heathen controls rely on the ability that gathering to keep up the values and approaches the organization aims at. In the gathering organization everyone is supposed to take responsibility and care of everyone else and the peer pressure is important. The idea is that the group should motivate itself the assignment of the managers is in this case to instruct the group in what to be motivated to do. To their help managers can use things as codes of conduct or group rewards and if the group performs well the group will receive a reward. If only group rewards are provided the individual employee will try to do his/her best to make the group perform well, instead of just compassionate about themselves (Merchant and Van der Stede, 2007).3.2.5 Control System TightnessThe benefit from any well functioning MCS is that the likelihood that the company will achieve its objectives increases. This benefit can be described in terms of MCS sloppedness (or looseness), where a tight MCS increases the probability that the employees will take actions that is desirable by the organization. Managers often use more than one kind of management control alternative to tighten control. Sometimes these controls overlap and sometimes they are complementary, which enables the combination of them to create tight control over all of the factors critical to the organizations success (Merchant and Van der Stede, 2007).Whether a results control is tight or loose depends on the charact eristics of the definitions of the desired result areas, the performance measures, and the reinforcement or incentives provided. According to Merchant and Van der Stede (2007), for management control to be considered tight in a results controls system, the results dimensions must be appropriate with the rightful(a) organizational objectives, the performance targets must be specific, with feedback in short time increments, the desired result must be effectively communicated and internalized by those whose behaviors are being controlled, and if results controls are assumption exclusively in a given performance area, the measures must be complete (PP 118 119). Congruence problems can exist because the management does not understand the organizations true objectives or the measure dimensions do not reflect the organizations true objectives (Merchant and Van der Stede, 2007).For a results control system to be tight, the performance measures also have to be precise, objective, timely and understandable. If the performance measures used do not possess these characteristics the control system cannot be considered tight since behavioral problems are liable(predicate). Furthermore, if rewards (or punishments) are directly and emphatically linked to the accomplishment or non-accomplishment of the desired targets, the MCS is more likely to be tighter (Merchant and Van der Stede, 2007).Action control systems can be considered tight only if it likely that employee will consistently perform the actions desired to achieve the companys objectives and not take any unenviable actions. The tightness of the action accountability controls depends on characteristics of the definitions of desirable and undesirable actions, the effectiveness of the action-tracking system and the reinforcements (rewards and punishments) provided. An effective action tracking system is where employees can be certain that their actions will be noticed relatively quickly. Punishment is more common in action control contexts than in a result control context, since they often include employee violation of rules and procedures (Merchant and Van der Stede, 2007).Tight personnel/cultural controls are most likely to be found in charity and voluntary organizations where employees feel some kind of satisfaction by doing good, in family businesses, where the interest of the family employees are same as the organizations (Merchant and Van der Stede, 2007).Empirical DataThe first section of this chapter includes history and other essential facts of a commercial bank XY, Pakistan. The bordering section includes the empirical information author obtained during his telephonic interviews with the managers and employees at Bank.4.1 History and facts about Commercial Bank XYBank XY was founded in June 21st, 1997 its banking operations started from November1st, 1997. The bank pursue in commercial banking and related services. The bank is currently operating through 223 branches. Bank XY targ et market conceits of individual client as well as number of business organization. Bank XY has segment the market on demographic, psychological and behavioral style to target maximum number of segments with different varieties of products suitable for for each one segment. Dynamic and high value product includes Car Financing, Home Financing, Rupee Travelers Cheques, Credits Cards, Debit Cards, Online Banking, ATM and consumer Durables. In addition to this, Islamic Banking Division is a recent initiative, which operates as separate branch. This facilitates their commitment to a culture of innovation and seeks out synergies with clients and service providers to ensure interrupted services to its customers. The bank perceived the requirements of customers and matches them with quality products and service solutions. During the past five years, bank has emerged as one of the foremost financial institution in the region endeavoring to meet the needs of tomorrow as well as today. To co ntinually upgrade the quality of service to the customers, training of team members in all the integral aspects of banking, customer service and MCS was specially focused (www.scribd.com)4.2 Telephonic Interviews at Bank XYAll the empirical material in this section was obtained during the telephonic interviews. Author interviewed managers at different levels with involvement in personnel, sales, financial and business related areas at Bank XY. Author also made phone interview with an employee at the Bank XY Head Office.4.3 MCS in Commercial Bank XY4.3.1 MCS for Selection of EmployeeEvery new employee is carefully selected to fit the profile of how Bank wants them to be and the employees need to know how important the core values are for the bank. The education and banking experience have important consideration during selection of new employees. The personality and which values you have are also important. Hence, selection of employees is important and tries to employee people that already have the right values and beliefs to fit the culture. They also think it is important that the applicants have an interest for bank job. They believe that if the applicant has visited their own website to look for employment, they have taken the first step to show to show interest in bank job. When a new person is employed he or she undergoes an introduction education and training for few days.4.3.2 Generic Strategy of Commercial BankThe generic strategy of commercial bank XY is divided for two main areas of business, accommodate and lending. The different branches of the same commercial banks at the different geographical location are adopting result, action, personnel and culture controls jointly. In case of lending majority of branches uses result and action control simultaneously.4.3.3 Marketing of New ServicesMost of the commercial bank branches promote their products/services very aggressively by using result and action control. The majority of the commercial bank bra nches are concentrating in maintaining customers and only some branches are competing for customer acquisition.4.3.4 Target setting PracticeThe commercial bank set target for their branches for the purpose of planning and controlling the activities. In most of the branches target is fixed in terms of number of clients, tot up of deposit and the mensuration of lending. Individual target are also set and properly communicated to them.4.3.5 Performance MeasurementThe commercial bank compares actual performance with predetermined target of their branches frequently.4.3.5 settle with SystemIn commercial banking sector, benefit/reward/salary/promotion is mostly determined by performance followed by education, experience, new relationship/ customer marketed in deposit or lending and factors respectively like majority get benefit for part performance and some did not get performance benefit. The commercial bank provided reward to their employees out of profit. The meat of bonus is bas ed on the amount of salary the employees are getting. Some bonuses are related to neat performance also.4.3. 5 Encouragement to employees to learn new SkillsThe commercial bank is encouraging his employees to discharge better performance and enhance educational qualification and expose trainings. The majority of employees working in the bank get leave sanctioned from their bank to attain training related to their jobs. It also supports that the commercial bank is encouraging employees to learn new skill and knowledge.4.3.6 CooperationMajority of the employees feel they get complete cooperation from their coworkers. It indicates the working environment is very conducive in the bank to discharge better performance.AnalysisIn this chapter author has analyzed the empirical data collected at the interviews on the basis of the theories described in the theory part.5.1 The Combination of Merchant,s Control Alternatives at Bank XYAs described by Merchant and Van der Stede (2007) the benef it from a MCS can be expressed by the tightness or looseness of the MCS. As specified, a tight results control system must include results dimensions that are congruent with the organizations true objectives, performance targets that are specific, feedback in short time intervals, effective communication of the desired result and complete measures if the results control system is used exclusively (Merchant and Van der Stede, 2007). As author shall argue below, he thinks that all these factors are met at the Bank branch.First, the measures that the branch working seem to be congruent with the true organization objectives since they measure advances/loans, deposits and costs such as personnel, branch office and operational cost very carefully. They also use non-financial performance measures such as the customer satisfaction index which enables them to overcome the fault of the financial performance measures. Since they take customer satisfaction into consideration they decreased the possibility of increasing result at the expense of decreasing customer satisfaction, which is congruent with their true organizational objectives.Secondly, the targets they use seem to be specific since they use detailed measures to evaluate their performance, e.g. they not measure the number of borrower and depositor, but also borrowed and deposited amount per each customer. Furthermore they set specific targets of how high percentage of customers should be satisfied with their services e.g. the turnaround time for loan application, the waiting time in the counters. Thirdly, the employees get feedback in short time intervals since performance is communicated on a daily basis as well as more detailed feedback hebdomadal at meeting, and yearly when they e.g. see the target achievement report. Lastly the desired results are communicated effectively through their regular meetings and the process of setting the business and action plans.According to Merchant and Van der Stede (2007), a tight results control system also have comprise performance measures that are, precise, objective, timely and understandable. Furthermore they argue that the results control system is likely to be tighter if rewards or punishments are directly and definitely linked to the accomplishment or non-accomplishment of the desired targets. I think that the performance measures of Bank Alfalah meet the characteristics described by Merchant and Van der Stede (2007). The salary system used by the bank is also linked to their performance on the desired targets. Hence, it seems like the results control system of the bank can be considered as tight.The action control systems of a commercial bank does not include as many rules, but instead they have a quite strict organization and governance structure. They also use daily, weekly, monthly performance follow up sheets and manuals to control the actions of employees. According to Merchant and Van der Stede (2007) examples of action controls are be havioral constraints, preaction reviews and action accountability. They further argue that the action control systems can be considered tight only if it is likely that employees will consistently perform the actions. Bank branch does not use as many physical constraints but rather more administrative constraints such as restricting some decisions making to higher levels of the organization. However, in general, the bank branch managers and supporting employees have quite a high influence on their own department of the branch and can make many decisions on their own.The employees actions are supervised by their closest manager and since bank has many different organization levels and each has their own manager it is likely that the managers can track their subordinates actions quite carefully. Furthermore, since the results control system is tight it is also reasonable to believe that undesirable actions will be discovered fairly quickly. Reinforcements used are group rewards such as one basic or two basic salaries that will be paid if the bank employees have achieved the targets. To sum up, there is no doubt that bank uses action controls and action control systems but I would not consider them either tight or loose, but rather moderate or average.As concluded by Merchant and Van der Stede (2007) the personnel/cultural control systems are rarely tight, except in organizations whose corporate cultures are strong. Bank culture includes customers care-consciousness, equality, advances/loans and deposits target focus. These values are swelled and present in their vision, mission as well as in everything they do. They also emphasize the importance that every employee should share their values to fit in. This implies that bank corporate culture is strong which enables me to conclude that their personnel/cultural control is tight or at least moderately tight.ConclusionThe Pakistani commercial banking sector is very competitive. The commercial banks are competing mai nly in services in order to put in competitive position, to retain customers services at top priority.The majority of the commercial bank branches have been using results control system. All the commercial bank branches are applying the concept of management control system by setting targets for their branch and at individual and comparing it with actual performance. The target for a branch is fixed in terms of number of clients, amount of deposit and lending. Target is also fixed for the majority of the individuals employees. The target of the branches and individuals level is frequently monitored against their performance. The manager of the different branches of the commercial bank desire to evaluate the performance of the branch. According to individual employees responses, their financial and non financial benefit is based on performance followed by education and training and experience respectively. But the yearly bonus is based on salary they are getting. The managers of diff erent bank branches encourage employees to participate in decision-making process. The commercial bank encourages employees to upgrade their knowledge and skill as the benefit is based on educational qualification and training after performance, they provide paid leave to participate in training and for further education.The working environment in commercial bank is very congenial as the majority of the employees felt that they get very much cooperation from their coworkers. However, the future research needs to examine the relationship between management control system and effectiveness of the commercial banks in Pakistan.