MCS- 04 In Service Organization

Syllabus requirement:

 Management Control Systems in Service Sector vis-à-vis in Manufacturing Sector

MCS in Service Organization

“Characteristics of Service Industry determines the nature of MCS to be followed and the strategy to be used to implement the said MCS.”

 Characteristics:

Service Industry differs from Mfg. Industry in the following characteristics.

         I.            Absence of Inventory buffer

- In Manufacturing sector an inventory of  Goods can be built up. This   diminishes  the Impact of fluctuation in sales volume on production. Thus Manufacturing sector can earn Revenur in the future  from products that are on hand  today.  A service company on the other hand  cannot afford  to store the product. Its products, be it an airplane seat, a hotel or hospital operating room, hours of a professional, if not used  today  are gone forever. It must therefore try to minimise its unused capacity.

       II.            Extent to which current capacity is matched with demand

Costs of many service departments are fixed in the short run. For instance a hotel cannot reduce costs substantially  by shutting down some of its rooms. Nor can Professional firms lay off their personell  in the face of low demand, because of the impact on the morale, and the costs of hiring  and training.

     III.            Different resources requirements - labor intensive

Manufacturing companies add equipment and automate production lines, thereby replacing labour and reducing costs. Most service companies are labour intensive and cannot do this. Expensive equipment may be introduced to better the quality of service rather than to replace labour.

     IV.            Quality of product – Difficult to control- (Relative concept and Professional Dependent)

Timing: Quality of service cannot be ensured until it is rendered as against goods that can  be inspected  before it is delivered.

       V.            Objectivity:

 Customer satisfaction depends upon to a large extent on the background, culture and prejudices of  customers, which are subjective in nature and can be evaluated relatively. The measurement of quality is generally difficult to gauge.

     VI.            Multi-unit organization setup –  as in fast food chain, Coaching centres.

The similarity of the separate units provides a common basis for analysing budgets and evaluating performance not available in the manufacturing sector. System-wide or regional  averages can be used as benchmarks for evaluating individual units. Judgements in these cases must allow for the differences that may exist in the mix of services they provide, in the resources they use  etc.

Special Characteristics of Service Industry:

Goals: The professional organisation has relatively few tangible assets. - Its principal assets being the skill of its professional staff.  ROI may be meaningless. Instead providing an adequate compensation to the professional is the financial goal of a professional organisation.

A related goal  may be to scale up. This may be to reap the economies of scale in engaging local offices to service clients throughout the world, while using the efforts of the centralised staff responsible for keeping the units up-to-date. Also larger firms are generally associated with success.

Focus on skills enhancement rather than on Management: Professionals tend to give inadequate weight to financial implications of their decisions. They would want to do the best job they can regardless of its cost and implications to the other stakeholders in the organisation. This special class of labour generally seeks more autonomy in working.

 Output of a professional is incapable of being measured in physical terms.

No. of hours spent by the lawyer with the client or in the courtroom, or the no, of pages in his brief are only a measure of his input. Output, on the other hand, is the effectiveness is the lawyer’s work and as such, cannot be measured in physical terms.

Revenues earned is one measure of output in some professional organisations. But these monetary amounts at most relate to the quantity of services rendered, not to their quality. Poor quality is reflected in the reduced revenues in the long run, however.

-          Non  repetitive work

-          Attitude to time booking

-          Literature  review  in case of researchers

  Usually of small size – Professional organizations are generally small, barring a few exceptional law and accounting firms, and operate at a single location. Senior management in such organizations can personally oversee the operations and personally motivate the employees. Thus, there is less need for an elaborate Management Control Systems.

Marketing of the services is usually informal: A clear dividing line between marketing activities and production operations as in a manufacturing company, does not exist in most professional organizations. The marketing activities are conducted by professionals, usually by professionals who spend much of their productive time – with the clients themselves.

-          Through acquaintance in a company

-          Reputaion of the professionals through speeches or articles

-          Rewarded subjectively through promotions and compensations. Also explicitly, by way of a percentage of a projects revenue.

Management Control Systems:

Pricing:

The Selling Price of work is set in a traditional way in many professional firms.

-          The hourly billing rate  typically is based on the compensation of the grade of the professional

-          In investment banking the fee typically  is based on the monetary size of the security issue

-          Fixed Price for the project, as in the case for setting up of a company or for that matter a simple cosmetic surgery.

-          Prices vary among professions. Relatively low for Research Scientists and high for accountants, solicitors and medical practioners

Profit Centers & Transfer pricing:

Support units, such as maintenance, information processing, transportation, telecom etc. charge consuming units for their services, based on established transfer pricing principles.

Strategic Planning & Budgeting:

The greater emphasis on formal strategic planning in manufacturing companies is due to long term effect on costs and capacity, which once committed are irreversible. In professional organizations though, the principal assets are people, and there is more flexibility in this regard. Changes to the size and composition to the staff are easier to make and decisions in this regard are more easily reversed. However professional organizations avoid short term fluctuations in personell levels.

Control of Operations:

1. Attention is to be given to scheduling the time of the professionals.

The ratio of the hours billed to the total of the professional hours available is known as the billed time ratio. This ratio is to be monitored closely.

2. Certain activities are billed at a rate lower than normal in the following cases:

-          To use otherwise idle-time

-          Marketing tactic

-          Public service reasons

The resulting Variance is to be analyzed for effectiveness.

3. Problems of associating professionals as a team, for instance in a project

-          Problems of dual reporting as in managing a matrix organization. The professional needs to report to the Project leader who is the Line head,  and is also answerable to his functional head.

Control is exercised through project management tools such as in terms of cost, schedules and quality

Performance Measures & Appraisal:

General Performance Measures

1. Recommendations of investment banker V/s Stock Market indicators.

2. Closeness of Diagnosis & Actual findings.

3. Judgments made by superiors. Numerical ratings are used  for specified attributes and the system may  provide for a weighted average of those ratings.

 5. Appraisal by peer professionals/ self appraisal.

 6. Client reports by way of expressions of  satisfaction or dissatisfaction is the ultimate measure  of performance

7. Budget to measure the cost/time performance.

8. Professional’s quantity and quality of work – which is largely subjective and may be assessed in terms of Clients referrals, Time taken to complete the task etc.

 9. Internal audit procedures are also used to control quality and quantity.

Issues Involved:

 1. Pricing – Usually linked with time spent.

 2. Transfer Pricing

(When service providing unit is defined as Profit center)

3. Strategic Planning and Budgeting – usually long range staffing plan.

 4. Control of operations – Crux is in scheduling the professional time.

Hours Billed

5. Billed time ratio = -------------------------                             

Professional Hours Available

Industry –wise Performance parameters

Insurance Industry

1. Time and cost budgets

2. Revenue generated (to rank performance)

3. Quality control trough – Metrics such as Client Satisfaction, Number of complains and    average complains received, Complain disposal rate, Claim settlement period (average)

 4. Client profile of a branch/center

 5. Product range sold/promoted

 6. Client relationship and dealer relationship

 7. Promotional campaigns undertaken

8. Number of defaulting Clients and Amount overdue

 9. Number of policies revived

10. Number and amount of claims settled

 Hospitality Industry:

1.Occupancy rate, spread over a period

2.Revenue generated out of main activity

3.Revenue generated out of allied activities – cousin, bar, shops, parlor, boutique

4.HR budget

5.Cost per customer/per day – for cost control Promotional efforts undertaken

 6.Quality control through – customer feedback, customer referrals, repeat customers, 7.Booking register position, No of tie-ups, corporate clients

10. Number of complains received and resolved

 11. Time to taken to attend and render the desired service

 Transportation Industry

1. Average plying/idle time, spread over a period

 2. HR cost and fuel cost budget

3. Maintenance cost budget

4. revenue generated per vehicle/per employee

5. Number of customer complains

 6. Cost of complain redress (Average and Total)

7. Number of breakdowns, accidents, insurance claims, average recovery period

8. Employee relationship/loyalty build

 9. Average waiting time/loading/unloading

10. time schedule, fleet schedule management

 11. Average load carried V/s Ideal load capacity

 Tourism Industry

1. Number of customers, Revenue generated and spread over a period

2. Quality control through – Customer referrals, repeat customers

3. Time taken to attend and render the desired service

4. Cost and revenue per package/tours

 5. Package mix

6. Allied services provided – pick-up, drop, food, beverages

7. Promotional campaigns undertaken

 8. CRM and Liaison maintained

9. Average number of customers or revenue per package V/s Ideal numbers

 10. Discounts offered and revenue spurred

11. Number of complaints received and average time taken to resolve the same

Financial Service Organization:

1. Monetary assets – primary resource

 2. Time period for transaction may range from hours, days to number of years – unsound base for input assessment

3. Risk and Rewards based trade – therefore knowing the risk component of transaction one can decide the reward.

 4. Technology plays significant role – Automated teller machines -, Electronic market places for securities.

 Organizations taking up Projects Characteristics

 Single objective – “ to built a flyover or supercomputer”

 Project organization and project management Management’s focus is project.

Need for trade off is vital - scope, schedule and cost.

 Less Reliable standards

Frequent changes in plans.

Different rhythm in implementation of project

Greater external Environmental Influence

 Health Services Organization-Characteristics

1. Availability & Cost is primary concern ,the performance efficiency comes latter

 2. Wide variety in Service Mix of facilities – many options are in offing. (Polyclinics, Total Health Care Centers)

 3. Third party payers – the costs have being subsidized by govt., NGO institutions.

 4. Professional’s loyalty is primarily to his profession rather than organization.

5. Quality control possible through peer review or through outside review agency.

Non Profit Making Organization-Characteristics

1. Absent of profit performance measure

2. NGO’s have contributed capital

3. Fund accounting

4. Governance – Usually NPO are managed by trusts