CONTROLLING AND MANAGEMENT FUNCTIONS

Introducing Controlling and Management functions

Global research dealing with profitability of controlling applications’ own deployment versus buying finished and standardized solutions are very rare and are mostly concentrated on enhancement of table calculators in controlling processes.

Table calculators cannot be adequately used for complete business information of controlling processes mostly due to lack of non-structured data. There are many areas where information with specialized applications could bring significant improvements. The result of many recent mergers and acquisitions on the BI market (IBM and Cognos & Avaya & Aplix, Oracle and Hyperion, and many other specialized software producers for DWH and controlling). Support for controlling by the vendors is stronger than before.

The main goal of this article is to present controlling processes and to suggest application characteristics as an integrative support to the controlling process.

Analysis does not have intention to favor ways to store data (relational, dimensional), platform / database for storage (Oracle, SQL server…) nor deployment concepts, making IS for controlling better or worse (.NET / Java). Ways of characteristics implementation is not the theme for this book. Each company has its own different starting point during cost calculation in buying new, finished solutions, like the number of already used software licenses, the IT education level of employees, and relationships with vendors of current applications.

1.Historical development of controlling

The first elements of controlling can be spotted during the building the Egyptian pyramids where persons in charge were needed for material calculation. Considering size of the venture and, for that time, an enormously big number of workers/slaves, it was necessary that this person existed to coordinate the complete project. Cosidering project size and the number of years it was necessary to calculate needed number of workers, this person need to periodically check the situation of materials on stock and workers and to compare them with plans. Accordingly, new materials or workers could be added based upon calculation. For named processes, certain elements of controlling as known today were needed. Much later, during the 15^thcentury at an English court, for the first time person a ”Controllor“ was hired. This person had the task to receive money and certain goods. During the 16th century, for persons who were in charge of similar tasks, the following term was used ”Comptroller“. The term describes a person dealing with cash flow related to the court. The word etymology comes from the French word compte (account).  The term comptroller stays in the English court, even creating a working place like  ”Comptroller General“ – the main and responsible person in the Government Accountability Office (GAO), an organization established in 1921, with the goal to insure responsibility of federal government.

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The first company who opened a controller working place was ”Atchison, Topeka & Santa Fe Railway Systems“ in 1880 to take care of the financial business in the company, mostly with bonds, stocks, and other financial derivates.

Other authors state the first controlling working place was opened in the company General Electric in  1892. After all, it is the first workplace in industry to introduce controlling. During the 1920s, controlling in the USA experiences a significant takeoff. The result was, more and more controlling departments were introduced, and many companies recognized problems in internal communication and coordination.

During the crisis after 1929 in the USA, controllers handled revisions in companies, and many financial aspects, and received a new important task, the planning process.  With new tasks controller roles gained more importance.

In 1931 was established the Controllers Institute of America, changed after some time into the Financial Executive Institute (FEI). During that time the Institute published lists of protocols, norms, and publications helping to establish standards in reporting and planning in controlling processes. In 30 years of the last century, a specialized magazine for controllers was founded. In English-speaking countries the term ”Controlling“ is rare but not the term ”Controller“. Instead, controlling, like many other terms, is in  usage, like  cost accounting, management accounting, cost management, but neither of them gathers all controlling functions like the German term ”kontroler“.

2.   Regional development of controlling

In different countries the controlling process development did not proceed equally. First it started in the USA as a result of strong industrial development. While in the 1920s controlling development was slow, during the crisis it improved significantly. In 1919,the chemical corporation DuPont starts the oldest-known controlling instrument, so-called DuPont KPI system. The system was a result of the fact that the corporation lost big markets after WWI as a huge munitions manufacturer and due to the fact it had tremendous amounts of financial resources. Since DuPont had to choose quality investments DuPont developed a KPI system that measures quality of investments, to be more precise, Return on Investment (1).

Strong development of controlling known under the term ”Controllership“, is a result of global economic crises from one side and industrialization on the other. Later controlling development in the USA contributed to  a growing number of international companies that have very diversified portfolios of products and services. The next important fact was, accounting systems became too rigid and too historically burdened in trials to satisfy management’s need for information in decision-making processes. The share of fixed costs is growing over time as a result of industrialization and the next higher level of automation of cost accounting systems based upon history. They became more and more inefficient and of poor quality. That’s why the need for a different approach for planning cost calculation was needed.

3.    Controlling in Germany and Europe

In Germany controlling experienced its first major improvement in the first half of the 20th century. Controlling in Germany compared to the USA was not known for a long time, and as a result of strong economic relations after WWII, controlling enters slowly into German companies. The first places where controlling was implemented were American offices in Germany. Through ”Controller Magazine“ in the ‘70s and through the Institute ”Controller Institute“ gathered most of German controllers, formalized their jobs, and exchanged experiences. A similar situation happened in Italy where controlling penetrated through companies connected with the USA.

In the rest of Europe can be mentioned some Switzerland companies, like Nestle introducing for the first time, marketing controlling, then Swissair used controlling in core business like flight service and technique. Later in the ‘60s in Europe, controlling develops, receives new tasks, and strengthens its position in big companies.  In the ‘60s, controllers’ focus in Germany was on division (business units) of business and resulted in the introduction of new instruments. In the ‘80s focus was primarily on solving and predicting company insolvency.

A different approach from the Anglo-American method was the German concept. Controlling becomes an independent working place. Actually the department clearly separated from accounting. Controlling is equally important as accounting while Anglo-American approach controlling is inside accounting or functions directly under a CFO. In Germany concept controlling penetrates much deeper into company strategy while in Anglo-American countries the approach to controlling is not so active in a leading company.

For illustration, it is good to use a definition from English-speaking territories:

Controller – manager is important for accounting activities. (2)

4.   Definition of controlling

There are several controlling definitions, and different authors have different opinions and definitions of controlling, but basically the idea is based upon controllers’ tasks in a company.  Jackson, in a book from 1949, states: ”The basic function of controlling is to present data from accounting in shape management and can use it as a basis for decision making“ (3).

Currently the main expert in the controlling area, P. Horvath, defines it as, ”A management system focused on results and with tasks of coordinating planning, control, and informing“ (4). An unambiguous controlling definition is hard to find in books. Looked at from the perspective of tasks in a controlling department, the term controlling is a common name for a set of tasks controllers in a company do. Although, it should be pointed out, it’s necessary to skip literally an understanding of controlling in a company.

Control is one of tasks of the controlling department but not its definition!

In one of the first companies where controlling was developed, General Electric, Ameen P. (one of the directors) for controlling states, “… adamant obligation with value-added elements for customer satisfaction, efficiency, and integrity“(5).

5.    Need for controlling in company

The need for controlling emerged especially from the need of companies to be more successful. Also stronger needs for controlling emerged in more diversified companies and with goals to measure and compare systems efficiency in different parts of the company. The main goal of controlling is to increase system efficiency of leadership. Controllers operate many different tasks during a working day.  Read more about Controlling in Management functions in the articles: Controlling and Management.

6.    Controller tasks

The tasks of a person in controlling are: planning, managing, and controlling if a company is on the right track to fulfill committed goals. Managing should not be understood in active meaning, but more in advising shape through which controllers indirectly realize managing. A controller role is to alert and suggest, and a manager’s role is to act according to suggestion. This concept actively includes both parties and, in process of management, cannot be done alone or independently since they are not sufficient. In the role of controlling, the controller takes management goals and elaborates them into details for departments and shapes them into time-defined tasks.

Latest research also indicates the active role of controllers positively correlates with company success. (6)

The daily tasks of controllers are good starting points for evaluation of job automation and proposals for consideration information characteristics in controlling. Automation and information should start with the most standard, common, repetitive, tangible daily tasks that are easy to be formalized. In this case, it’s desirable to analyze the daily tasks of controllers.

The controller holds regular contact with accounting and accounting IS, like ERP, with the goal to refresh data sent to boards and management. The controller in this case regularly refreshes data and compares it with planned figures and makes reports from them. The controller, as already mentioned, converts accounting data into usable daily and monthly reports.

In a certain period of year, the time of operative planning of next-year’s controller coordinates work of all persons that contributes to the company plan. The controller is the one to take care to translate management language into many elementary plan details. the controller is a project leader that splits projects into many pieces, dedicating pieces of project and time to other persons with permanent control of the overall project and to be framed as wished by the management.

Besides mentioned tasks, planning and Capex accounting, and development of KPI systems also belong to a controller’s daily tasks.

Within management, information should be mentioned and make a difference between regular  reporting, consuming most of the controller’s time, and so-called adhoc queries mostly concentrated on details and coming from management. Ad hoc reports could also be an analysis of a smaller part of business made once, and it serves to support decisions with several alternatives. Regular reports do not provide enough level of details and therefore help ad hoc reports.

The controller in the rest of the time significantly helps the company with finding deviations, and spotting strange facts and hidden knowledge behind information as a result of specific market trends. A controller adds value to the company. In the research of Professor N. Osamanagić Bedenik are listed the following controller tasks:

Table 1. List of controllers tasks in controlling(7)

Based on listed tasks can be made three categories of tasks, having in mind analysis of Information System, that authors see as processes candidates for informatization and that could definitely make value add into everyday work of system users.

(1) Osmanagić Bedenik N. (2004) Kontroling, abeceda poslovnog uspjeha.Zagreb: Školska knjiga

(2) Harvey C. R.(2007) Hypertextual Finance Glossary. http://www.duke.edu/~charvey/Classes/wpg/bfglosc.htm [5.11.2007.]

(3) Controllingportal (2005) Was ist Controlling. http://www.controllingportal.de/Fachinfo/Grundlagen/Was-ist-Controlling.html [4.11.2007.]

(4) Horwath P., (2002) Controlling., 8. Auglage. Verlag Vahlen

(5) Parker A. R.,(1998) The Company He Keeps. http://www.businessfinancemag.com/magazine/archives/article.html?articleID=4322 [5.11.2007.]

(6) Zoni L. i Merchant K. A. (2007)  Controller involvement in management: an empirical study in large Italian corporations. Journal of Accounting & Organizational Change; Volume: 3., Emerald Group Publishing Limited., pages. 29-43

(7) Osmanagić Bedenik N. (1998), „Kontroling, abeceda poslovnog uspjeha“. Zagreb: Školska knjiga., page. 55.

(8) Meaning, some of collaboration systems like e-mail or similar. In multinational companies on this communication channels should be paid special attention (Žilnik V.  (2005) Building information system for controlling operative requirements Magister work. Ljubljana: Ekonomski fakultet, page. 31)

Related article: Controlling and Management