Small Dreams Inc. is a service company that provides administrative guidance and support to small businesses. It was started five years ago by Amanda Yee, who is an entrepreneur with a vision. She began working out of her apartment, and barely five years later, she has a downtown office and 145 employees. She incorporated two years ago when the business started its rapid expansion.
Last year, you (as her accountant) explained the need to develop a management control system that would work without her direct involvement. Amanda laughed. "I have an excellent management control system. When an employee makes contact with a potential new customer, I meet with them, assess their needs, determine the cost of meeting those needs, assess their ability to pay, and set them up with a business ally (that's what we call the person responsible for client contact). When the ally has a problem, they let me know and I solve it. When a client isn't satisfied with advice from their ally, I review the situation and make suggestions for change.
I approve all expenditures and do all the banking. I know things are running smoothly when there is money in the bank. When I'm getting too many phone calls from clients or too many questions from staff, I know I have problems. So I solve them."
But the demands on her time were taking their toll. She had her eye on another exciting business opportunity, and her family was starting to complain that she was never available.
Amanda finally took your persistent advice and hired Sam Williamson as CEO after a chance meeting at a business networking function. She created his job description and crafted his compensation scheme on her own. Amanda would limit her involvement in the day-to-day activities of the business but provide oversight and guidance as president and chair of the board of directors.
Sam Williamson had recently retired from an executive position at PipeLink Inc., a large, national plumbing supply company. Sam saw this as an opportunity for a change of focus and a challenge. Amanda thought Sam could help the company through its expansion phase over the next few years and implement an organizational structure that would distribute decision-making rights to various levels of managers.
Amanda crafted Sam's compensation package, which consisted of a base salary equal to 70% of his total compensation at PipeLink. Sam could earn a bonus (up to 50% of his salary) based on financial statement net income exceeding the budget. Sam was responsible for implementing a budgeting process.
At the end of Sam's first year, you asked Amanda how things were going.
"Oh pretty good, I guess. Net profits exceeded our budget by more than 50%, and Sam earned his maximum bonus. However, I have no idea if that was the result of Sam's efforts or just part of our continued growth. I think I was too generous with Sam. After all, the allies self-motivate without a bonus. They are professionals - accountants, lawyers, HR specialists, and IT specialists.
I don't spend as much time in the office as I used to, but I don't feel I am working any less. Last week I had to contact Marise in accounts payable to explain to her that she needed approval before any cheques could be issued. It seems that Sam had told her she could authorize all expenditures under $500. That just won't work. She needs to have Sam approve them - the way I used to. It's a good thing I went in on Sunday to look over the payables list or I wouldn't have even known she was doing that."
Amanda sighed. "And clients still call me to complain. It seems Sam has set up some policy that allows certain managers to make decisions regarding customer service. Maybe it works, but when an old client phones me up and asks for more time to pay or for a better price - well, that's what I do.
And Sam wants to fire two of my long-time employees. He says they spend too much time with clients and we end up having to write down the invoices. But I want happy clients. I built this business on client satisfaction. No; I'm just not sure this is working."
Required
As the MMM for Small Dreams Inc., you have been asked to address Amanda Yee's concerns. Based on your knowledge of agency theory, develop a recommendation for a management control system for Amanda. Analyze the case using the standard case method and present your solution using the following section headings:
- Identify the main problem and issues. Identify the main problems with Small Dreams' management control systems and operations.
- Analyze the data: Evaluate the problem using the mixed motivational view of agency theory and your understanding of management control system design.
- Generate alternatives: Organizations can be classified as organic and mechanistic. Identify the management control systems (also known as "levers of control") that work best for each of these types of organizations. These will be the two alternatives you will evaluate for a potential recommendation in part (e).
- Select the decision criteria: Identify three criteria that can be used to assess the management control system.
- Analyze the alternatives and make a recommendation: Evaluate the alternatives based on the criteria determined in step (d). Make a recommendation for the appropriate management control system.