Controlling the situation

To many people, controlling sounds like a rather dry and possibly threatening concept. What exactly are its goals?

Well, I know this prejudice — that employees see controlling first and foremost as a control mechanism for their job performance. This rumour is a very stubborn one. It is, therefore, essential for managers to ensure that the implementation or enhancement of a controlling system is combined with appropriate communication about its purpose. All stakeholders, including the employees, should be convinced that the continual monitoring of the company’s current and future financial performance is essential — not as a way of controlling people, but to ensure that the company will remain a successful business — and employer.

In order to survive — and to assess opportunities for growth of revenues and profits — companies need tools that provide information about key performance indicators (KPIs) such as profitability, liquidity, financial stability and efficiency. This requires a combination of financial accounting, cost accounting and cash flow accounting.

But controlling is not an end in itself. You can have a good controlling system, but if there is insufficient demand for your products — for example because management have failed to recognize early enough a disruptive change in the market — then the company will fail.

The management board must first decide on the quality and quantity of products, their prices and their distribution. In other words, managers must first solve all the logistical problems, because the appropriate equipment has to be provided before a company can strive for profit. And with the extensive use of IT systems, companies can use controlling systems to monitor the current and future expected impacts on their financial situation in real time. Future impacts are estimated on the basis of expected or assumed market changes in order to reduce the threats caused by competition, market disruptions and economic downswings such as the present one.

Why is controlling so important for organizations?

The Austrian economist Joseph Schumpeter described market economies as a form of “creative destruction”. Companies that fail will be removed mercilessly from the market, and companies with up-to-date strategies and competitive new products will replace them. This mechanism may seem cruel to the stakeholders (employees, shareholders, etc.) of the failed companies, but it leads to capital — the savings of households and companies — being directed to growing markets and products. And better products with enhanced possibilities enrich the lives of us all.

Now, there are two main reasons why all medium and large companies use and need an extensive controlling system. First, the management board is responsible for immense amounts of invested capital, for workplace stability and so on, and they need reliable information. Second, professional investors such as the investment funds of banks (UBS, Citigroup, etc.) require firms such as Nestlé to have controlling systems and to check their quality regularly. We hear and read more and more about “active shareholders” such as BlackRock, the world’s biggest investor, with a total of invested capital of $8.7 trillion (€7.2 trillion) at the end of 2020. BlackRock uses its own tailor-made controlling system called“Aladdin”. This processes a gigantic number of facts, such as international transport activities, and already uses artificial intelligence.

If the professional investors are not content with the activities of the management board, they will enforce personnel changes. For example, earlier this year, the long-time CEO of Danone, Emmanuel Faber, was fired because the professional investors regarded his future plans for the Danone group as inadequate. The majority of the other shareholders supported this view. In short, although the quality, extent and acceptance of controlling systems can cause real headaches, without them, the headaches would be much worse.

Is controlling purely concerned with financial topics?

Definitely not. Profitability, liquidity and the financial stability of the balance sheet are, of course, all financial aspects. But the efficiency of a company is measured by logistical factors such as using the minimum number of inputs — time,energy,raw materials and so on. Modern applications such as the Internet of Things (IoT) help to optimize manufacturing processes. Integrated chips in components and machines can tell the production management team precisely when it is necessary to replace a part of the component or machine before it fails. In this way, organizations can avoid interruptions to the manufacturing process caused by waiting for spare parts.

Also, the big players, such as BMW and Emmi, will increasingly provide information on additional, non-financial topics such as sustainability measures, the share of female employees, how they want to reduce their carbon dioxide emissions, the extent of in-house education or their support for welfare organizations.

How can organizations ensure that they have effective controlling mechanisms in place?

International consulting companies such as the Boston Consulting Group (BCG) have specialized departments with considerable knowledge and experience. Relying on in-house employees can often lead to “organizational blindness”. In principle, controlling has to be a continual feedback loop. The implementation or improvement of a controlling system involves four steps:

• First, we make sure that the accounting system is interlinked with the manufacturing or service processes. Interfaces are then installed, such as the perpetual recording of any material flows.
• Second, based on this, key indicators of the current financial performance can be provided.
• Third, we compare these indicators afterwards with the targets for our own strategy and with the key indicators of our main competitors. When necessary — which is very often the case — we have to change the organization of the processes or the organizational structure.
• Finally, we calculate the expected key figures as a result of our change management. This is called bottom-up budgeting. The measurement of the output — current products and services — is called “feed-forward”. And all measures to improve the feed-forward are called “feed-back”.

Reorganizational activities (or change management) take place frequently. Professional controllers can benefit from a huge toolbox developed by BCG and other consulting companies, such as Roland Berger. Some examples of these tools are activity-based costing, overhead-value analysis, new business re-engineering, lean production, just-in-time production and so on. Then we measure the next current financial performance, again make a comparison and so forth. Ideally, all controlling measures are integrated into an enterprise resource planning system (ERP), such as Cisco or SAP. Though ERP systems were developed originally to optimize the logistical challenges of companies, the systems provide more and more tools that support the demands of financial controlling. For instance, imagine that an injection-moulding machine needs maintenance, which is executed by a service company. Soon afterwards, the invoice of the service company comes in and has to be recorded in the financial accounting system, and because the cost accounting system is integrated, the costs for the maintenance will be passed through the cost accounting system to the cost centre where the maintenance was necessary. Moreover, the payment will be passed through cash flow accounting and listed there as a cash-out as a result of an operating activity and not as an investment or financing activity. At any time, all the current results of the accounting tools are available. Moreover, because current results are always the basis for planned results, the planned figures will immediately be adjusted.

How has the coronavirus crisis affected the world of controlling? What have been the main challenges for corporations?

Although the market downturn has been worse than in 2007–08, there is one remarkable difference: whereas the financial crisis hit all industrial sectors, the coronavirus crisis has primarily hit the service sector. And many companies in this sector have survived only because they have received government support. For these companies, lockdowns are disastrous. Their hope of survival depends not only on their controlling systems but also on a fast and successful programme of vaccination.

For manufacturing companies, a combination of government support and the rapid economic recovery in Asia will hopefully bring them back to profitability soon. And, of course, their controlling systems are a big help, because they can monitor on the basis of their parts lists and work schedules how the fall of demand affects their need for production capacity. And this makes it possible for them to make adjustments to their workforce and their procurement of supplies. And, of course, they know their financial status exactly, for example the level of free cash flows they achieved in more successful periods. Lufthansa is one example. It needed an interim loan to ensure that it could operate this summer, but refused to accept direct government investment. Other airlines have not been in such a comfortable position.

You teach accounting and controlling to different groups of students in Switzerland. How do students react to these subjects?

To understand how a controlling system can be implemented and how to run such a system requires basic knowledge of the tools that are needed. Students studying international management (IM) need the competence to assess and, if necessary, enhance and improve a controlling system immediately after their studies. A rigorous education in financial accounting, management accounting and cash flow accounting is therefore obligatory, and their curriculum usually includes two semesters of accounting. Students studying business information technology (BIT) are more likely to develop the IT support in companies, so one semester of accounting is enough. But their companies have controlling systems, too. Therefore, having fundamental knowledge of how the systems work makes sense. But it is not essential for these students to know how to calculate precisely planned balance sheets, planned income statements and planned cash flow statements.

I have to admit that accounting is not the most popular course in either IM or BIT. But the course on controlling is a highlight for both groups. The students learn to think in logical cycles, which is very useful for handling controlling processes.

The exam results show that part-time students cope better with controlling than full-time students, both in IM and BIT. And they report back that the things they have learned about controlling on the accounting courses are true in their companies. It’s a pleasure for me to share my experience with them. Controlling is definitely not a dry subject, and enthusiasm for the subject is not the result of insanity. Companies gain enormous advantages from implementing effective controlling systems.

Looking five to ten years ahead, what do you see as the main changes that will affect controlling?

I am not a mentalist, but some predictions are possible. The integration and application of artificial intelligence (AI) have already begun, for example with an application for ERP systems. A best practice memory database is available for almost all industries with specific challenges, and this provides proposals on how to improve the current use of the controlling system. And in future, every single activity in a company will be linked to the ERP system and automatically linked to the controlling system.

Another development will be the linking of the entire supply chain. The current crisis has shown how vulnerable supply chains can be. If almost all suppliers are linked with their customers, then a company can immediately replace a supplier that is no longer available — or no longer in business — with another one that has enough free capacity to deliver.