Quiz 4: Organizational Architecture
The AIMES system illustrates a key point: "What you measure is what you get." By adopting the ten metrics, CCF will focus the organization on these ten outcome measures. There are reasons for and against using the AIMES metrics. These are discussed below. Strengths: • The AIMES project forced CCF to think about what their mission is and how best to achieve that mission. In terms of Figure 1-3, it forced CCF to better link their strategy to at least one part of their organizational architecture (performance evaluation). • Program directors use the AIMES data as a tool to monitor and manage their programs. • The ten metrics make project managers more focused and better able to concentrate resources in areas that make a measurable difference in children's health. • CCF uses the information to make program and resource allocation decisions. • The family card has promoted better nutrition via appropriate feeding and child care practices because there is now more direct contact between CCF staff and volunteers and families. • CCF is now more accountable to their donors. Weaknesses: • While the AIMES project better linked CCF's strategy to one piece of its organizational architecture, it did not address the other two legs of the stool (decision rights assignment and performance rewards). AIMES, by only attacking one leg of the stool might cause the three legs to become unbalanced.• Because the ten metrics are in fact used to assess program effectiveness and to allocate resources, this creates incentives for the community managers who oversee the collection of the data via the family cards to game the system. This gaming can be outright fraud by giving individual families better scores than they actually achieved. CCF, in describing the AIMES system does not mention the internal audit procedures used to insure the accuracy of the reported data. Some of the metrics such as "access to safe water," "practice of safe sanitation," "families know how to manage diarrhea or respiratory infection," inherently require the local staff to make subjective evaluations. Knowing that future funding or their performance is being judged based on these subjective evaluations creates incentives for CCF's data collectors to bias their subjective evaluations. • CCF does not report the aggregate AIMES data on their web site or in their annual reports. Requests for these data were declined. Hence, CCF's claim that AIMES makes CCF more accountable to its donors is incorrect. • The chapter's discussion of organizational architecture argues that performance measures and compensation schemes should be linked to the decision rights assigned to the managers. In CCF's case, program managers have decision rights to design programs that improve children's welfare. Certainly, the ten AIMES metrics capture many important aspects of children's welfare. But, an individual program manager's impact on any of these metrics is very small relative to factors a CCF manager cannot control. For example, suppose an earthquake or civil war occurs. Despite the local manager's best efforts, all ten indicators will likely fall. The CCF manager cannot control most of the external factors driving these ten metrics. This exposes the local manager to enormous risk. Decreases in metrics will cause the local manager (who has more knowledge of the local conditions) to argue that events outside of his/her control caused the decline. But these same managers are less likely to explain improvements in the metrics are not the result of their effort. Hence, CCF senior managers will spend a lot of time sorting out the real causes of changes in the metrics. (Chapter 5 on responsibility accounting expands on this discussion.) FIGURE 1?3 Framework for organizational change and management accounting
Organizational Architecture: Organizational architecture refers to the whole structure of an organization. It contains the hierarchy of management levels, their roles and responsibilities and the infrastructure facilities of the organization. It is the whole architecture of an organization which enables it to accomplish its goals and objectives and also enable to make a vision. An organization with proper segregation of duties and powers can survive better. If the whole controlling and decision-making power passed on to the workers of the organization then this may lead the organization towards the huge problematic situation. So there should be proper power distribution between management and workers. The managers of the organization should keep analytical decision-making powers with them and should provide production related powers to the workers as they are also playing a key role in the functioning of an organization. The managers are the higher authorities of the organization and they should not blindly follow the decisions of their subordinates rather make decisions their own.
a.(i) Dr. Weisbrotten's approach is fundamentally contrary to the suggestions of the chapter. Basically, by introducing Weisbrotten, Harold seeks to alter the preferences of his employees. While it is possible to lower agency costs by convincing agents that working harder on the job is desirable in itself, the text is pessimistic about such a strategy. Normally self-interested people's preferences are not easily altered. However, the firm can reduce the agency problem, if not goal incongruence, by structuring agents' incentives that when agents maximize their incentive-based payoffs, the principal's utility (or wealth) is also maximized. In other words, the agent's and the principal's goals become congruent through the agent's incentive scheme, not by a change in the agent's preferences. (ii) The idea of hiring harder-working mechanics appears to have some merit as a means of reducing agency costs in that it eliminates conflicting interests of agents and principals by limiting the set of agents to those who already have the same goals as the principal. However, there is something naive about this notion. Is there such a condition as "hardworkingness?" Is this condition common enough in the population that Harold can expect to find mechanics out of work who possess it? Furthermore, how would one go about testing for hardworkingness? Mechanics looking for work are not likely to be the most hard working. b. Harold thinks that Woodhaven's lack of bottom-line success in repairs is due to his mechanics' lack of productivity. He also believes that incentive-based compensation for the mechanics will help this problem. Two kinds of plans are suggested, commission and flat rate. The commission plan is designed to boost profits by boosting revenues. Assuming that the price of each service is above the marginal cost of performing that service, offering mechanics a percentage of revenues should work to increase profits. The flat rate is designed to boost profits by cutting costs. Whereas revenues from labor charges are always derived from standard rather than actual times, paying mechanics by the hour makes the labor costs incurred depend upon the actual time they spend on the job. Given more demand than capacity, and given the likely propensity of workers to prefer leisure over toil, the mechanics may very well be spending too long on each job. If they were paid only for the "just right" amount of time, subsidized leisure would disappear, giving mechanics an incentive to lower labor costs. However, nothing occurs in a vacuum, and changing compensation schemes could be expected to have other effects as well. Most importantly, both compensation plans induce behavior that is divergent from Harold's desires. If he paid mechanics a percentage of the sales they generate, many mechanics would likely generate revenue that should not be generated. Suddenly, Woodhaven would "specialize" in $2,000 engine rebuilds, whether the staff had the technical knowledge for this kind of repair or not. In a worst-case scenario, mechanics would simply cheat customers by selling expensive services that were not necessary and might not even be performed. If mechanics are paid a standard number of hours for a job, they will simply work faster. So fast, indeed, that a drop in quality is likely. Since Woodhaven is a neighborhood shop, it is likely that many customers know one another. This would cause the rapid and easy transfer of information about any problems among Woodhaven's client base. Because of Woodhaven's small size and lack of recognition outside of the neighborhood, it would probably be difficult to continually replace alienated clientele. We may, therefore, conclude that the relative cost of cheating and/or lowering quality would be unusually high for Woodhaven Service. One would be inclined to reject any plan that would not tightly control acts that might alienate the present customers. (i) Intuitively, one can see that Honest Jack's plan would generate more dysfunctional behavior than Harold's. By paying a minimum salary of $300, Harold's commission plan would likely reduce the quantity of unnecessary services performed. First, since it is easier to meet one's financial obligations with $300 than with nothing, the mechanics would feel less of a "need" to cheat the customers. Also, since an average volume of business would earn each mechanic the same amount of money under either plan, the marginal benefit from each additional sale would be less under Harold's commission plan than under Jack's. (ii) Placing an upper bound upon potential weekly earnings would further diminish mechanics' incentive to cheat customers. It is likely that there would be diminishing marginal returns for cheating customers due to factors such as the increasing probability of getting caught, guilt feelings, or simply lack of capacity to perform further repairs. At some point, it would no longer be profitable for the mechanic to cheat. If this point occurs at a figure below the dollar figure that is set as the upper bound, then the quantity of dysfunctional behavior is the same with or without the upper bound. However, if the point at which cheating is no longer profitable is above the upper-bound dollar figure that is set, the upper bound will actually reduce the quantity of cheating. Since the upper bound, in all cases, either reduces cheating or does not change it, we would expect the upper bound to tend to lessen cheating. c. This question is related to the celebrated 1992 case in which Sears auto repair departments were accused of overcharging customers for unnecessary work. For Woodhaven Service, the cost of cheating would be very high. Indeed, one would suspect that very little cheating would be profitable for Harold, a fact that would heavily influence any decision on incentive-based compensation. However, if Harold owned the mall franchise described above, the price of cheating would be much lower. Location, brand recognition, and other factors would all make cheating cheaper. Promotion would bring in new customers to replace alienated ones. Mall shoppers would likely give the shop a try and would be unlikely to discuss their auto service experience with a large proportion of the shop's potential market. It would appear that Harold at the mall would reap all the same benefits as Harold in the neighborhood, but without the costs of cheating. We would therefore think it far more likely that Harold would install one of the incentive compensation plans described above at the mall than at Woodhaven Service. It is difficult to assess how being manager at a company-owned store would affect Harold's outlook. We need more information on the compensation plan used for such managers. On the one hand, increasing sales would be less beneficial for an employee than an owner. Lower rewards would indicate less desire to use an incentive compensation plan. On the other hand, differences in the cost of cheating for the owner and the manager are unclear. Losing your franchise may be more expensive than losing your job, but losing your job is more expensive than a letter of reprimand from the parent company. d. Another way to reduce the risk of dysfunctional behavior by mechanics is to strip them of their decision rights. Since the approval of a supervisor would be needed to perform some or all services, the mechanics would find their ability to cheat severely curtailed. However, this increased control comes with a cost. Skilled supervision would be required and knowledge would have to be transferred to the person who now has the decision rights. Indeed, the person with the decision rights would likely have to duplicate much of the mechanic's diagnostic work to confirm the mechanic's conclusions regarding service requirements. In the case of Woodhaven Service, the cost of separating knowledge and decision rights should be low. Due to the small size of the facility, there is simply not that much to supervise. After 20 years, Harold should know enough about cars and repairs to be able to decide whether or not a major service is warranted and whether it would be best to do it in-house. However, in the mall shop, there is a lot more to watch and a lot less reason to care. Therefore, it would seem that the collocation of knowledge and decision rights makes more sense at the mall than at Woodhaven. e. There are many approaches Woodhaven could take to better itself financially. One that leaps out: Raise prices. Demand is so strong that it outstrips supply, indicating that the price of regular service is too low. Furthermore, the profitability of gasoline operations suggests loyal customers who are willing to pay a premium for what is essentially a commodity item. Obviously, there is something at Woodhaven that the customers like and that Harold is not charging them for in the service end of his business.