Comparative Study of Management Control Systems in Software Companies at Bangalore

Abstract

The Management Control Practices in the software industry differs significantly from other industries in the economy. In most companies other than software, capital is regarded to be the most critical resource. However, in software companies, the critical resource is not capital but the people. Hence the performance measures and levers used by leaders in software companies to achieve their strategic objectives differ significantly from those in traditional companies. Through this project I have compared the management control systems of five well-known software companies operating in Bangalore. The information about management control systems and processes at each company was obtained by interviewing a Senior Manager at each company. Of the five selected companies, three are subsidiaries of publicly listed multi billion dollar companies out of which two do not compete with other subsidiaries or third parties for business, while the third company competes with other subsidiaries of the parent for business. The other two companies are owned privately and entrepreneur managed. These two have annual sales of about 10 million dollars and are partly funded by venture capital. The factors found to be exerting a significant influence on Management control systems at the five companies were Board of Directors, Growth phase of the subsidiary, Organization Structure, Ownership Pattern, Parent-Subsidiary relationship and Strategy. Through the project it was found that the Board of Directors of the company have significant influence on the management control practices within the firm. In smaller firms the actions of the Board were found to a direct impact on the day to day activities of the company. The ownership pattern of the companies included in the study ranged from 100% subsidiaries of publicly listed foreign companies to privately owned, domestic, entrepreneur managed companies. The nature of ownership was seen to have a significant effect on management control processes particularly in the area of Strategic planning, output control and cost management. For subsidiary companies the focus of control was on strategy execution whereas for other companies, the management control systems focussed on strategic planning and performance review in addition to strategy execution. The companies included in the study had representation from both aspects of competitive strategy - Cost based competitor and Differentiation based competitor. The competitive strategy was found to have a significant impact on the management control systems within the firm only in the case of Cost Based competitors. As expected cost based competitors had very tight control processes to control and monitor expenditure whereas Differentiation based competitors had fairly loose control in the area of cost management. Differentiation based competitors were observed to have aggressive variable compensation processes to promote innovation among employees whereas such practices were found missing in cost based competitors.Four of the five companies included in the study were subsidiaries of foreign entities. Even within the general class of subsidiary companies, the Management control practices varied significantly based on the competitive practices within the corporate entity. For companies that did not compete in the market for business it appears that once the choice of a subsidiary location is made then the Management control is driven more by output control rather than continuously improvising the strategy of the subsidiary. But in companies exposed to market based competition, management control is exerted by market mechanisms and by fine-tuning the strategy on an on-going basis. I have also speculated that the management control practices may be contingent on the growth phase of the subsidiary. In the subsidiary companies that have reached a stable state of operations, task control via project management appears to be the main tool for management control. But in subsidiaries going through a rapid growth phase, strategic planning and review of performance against plan had a significant role in management control in addition to project management. The Organization structure is not only a pre-cursor to the design of the management control system, but it has a significant influence on the performance of the management control system itself. In couple of the companies it was found that the Managing Director was only a figurehead with only administrative responsibility. But in other companies the Managing Director controlled all aspects of the organization. The manifestations of differences in management control were observed in the following aspects across the five companies - Task control vs. management control, Role of Quality Department, End of Period financial controls on expenditure and usage of Balanced Scorecard. In two of the companies Quality Department was found to be weak and the control over the headcount was external to the subsidiary. These practices are used as levers for achieving goal congruence at the corporate and the SBU level but are in direct contrast with practices at the other three companies. In the subsidiary that competes for business, competition within the corporate entity is used to achieve goal congruence. In the two smaller Companies, the span of control of senior management extends to most decisions within the company and goal congruence is thus ensured across the company. All five companies tackle the measurement and control of output by fairly similar project management practices. But when it comes to achieving goal congruence, the techniques used by the Managements vary significantly. While hierarchical control is used as a tool to achieve goal congruence even across the parent-subsidiary boundary in some companies, at other companies competition between subsidiaries is used to ensure goal congruence. At some subsidiary companies, stricter end of period (financial quarter end or year-end) controls is occasionally put in place to limit expenditure and improve short-term financial performance. But such controls were missing in other companies. In subsidiaries that did not compete for business the hierarchical management control is very tight even across the parent-subsidiary boundary. In critical aspects like Headcount and choice of projects, the managers at the subsidiary have very little discretion and managers at the parent company very tightly control these aspects. Through project I have been able to understand the key factors that influence management control systems in software companies. It has also been found that at certain subsidiary companies, where the discretion available to the subsidiary managers is limited, many of the aspects of a traditional (elaborate) management control system becomes superfluous and task control via project management becomes the key component of the control system.