RESEARCH PROPOSAL CENTRALIZATION VS. DECENTRALIZATION OF ACCOUNTING AND CONTROL FUNCTIONS IN BUSINESS SCHOOL OF INDUSTRIAL AIMINISTRATION

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1 I -.* ^ ^~ - 1 RESEARCH PROPOSAL CENTRALIZATION VS. DECENTRALIZATION OF ACCOUNTING AND CONTROL FUNCTIONS IN BUSINESS SCHOOL OF INDUSTRIAL AIMINISTRATION CARNEGIE INSTITUTE OF TECHNOLOGY

2 RESEARCH PROPOSAL: CENTRALIZATION VS. DECENTRALIZATION OF ACCOUNTING AND CONTROL FUNCTIONS IN BUSINESS This research project arose out of the interest of controllers in securing farther knowledge of the consequences that might be anticipated from centralizing or decentralizing the organization of controllers 1 departments in large and medium-size companies. The findings of such research should bei of practical value to companies and their controllers in reaching decisions as to what kinds and degrees of centralization or decentralization might be advantageous under particular circumstances* x A preliminary proposal for research on this problem was drawn up and discussed with an Advisory Panel appointed by the President of the Pittsburgh Control. The present memorandum is a development and expansion of that preliminary proposal, based upon the discussion of the research staff with the Advisory Panel and upon the suggestions offered by the panel members. I. OBJECTIVES AND SCOPE OF PROJECT The project will explore particularly one important organization problem confronting controllers in companies of medium and large size the problem of deciding how controllership functions should be organized within the controller's department. The aim of the project is to develop criteria to help management decide to what degree, under what circumstances, and at what organizational levels accounting and control functions should be centralized or decentralized. This focus of research is designed to keep the project aimed primarily at one comparatively concrete, practical problem area centralization versus decentralization within the controller's department. Often the term "centralization" is conceived more broadly, referring to (l) the transfer of "control" functions from operating departments into central, specialized control units, and (2) the collection of these independent control units into a single, central control department. The decision to focus instead primarily on the critical, but narrower, problem of centralization-decentralization within the controller's department reflects the suggestions of the Controllers Institute. This does not mean that the larger aspects of centralization will be ignored. When the controller's task includes forecasting responsibilities, for instance, one allocation of functions within his department may be most effective; when his work only includes the checking of past performance against standards, another arrangement of functions may be more satisfactory. Consideration will necessarily be given to these broader aspects of centralization, but only as

3 they have a bearing upon the organization of the controller's department itself. This procedure should promote economical use of the project's resources and provide a focused, integrated investigation. Ai Criteria for Evaluating Control Procedures Specific criteria will be developed for judging the consequences of operating in a centralized or a decentralized manner, It appears, tentatively, that the possible consequences of centralizing or decentralizing fall under three major heads: Economy, One method of organization may be more economical than the other. For example, it may be possible to secure economies in the use of clerical staff through centralization of accounting work. It will be one task of the project to assess the size and importance of such economies under different organizational arrangements, 2) Effectiveness, One method of organization may lead to more effective top management control of operations than another, or to better service by the data-gathering and data-analysing units to the operating executives at the departmental level. Changing from a centralized to a decentralized scheme, or vice versa, may change materially the scope of the functions of the controller's department, the effectiveness with which their functions are carried out, and the kinds of problems on which the department provides assistance to operating departments, 3) Personnel Development, A change in organization may have important long-range consequences for the development of executive personnel, in the controller's department and elsewhere. For example, one scheme of organization may expose members of the controller's staff to a wider range of experience, closer acquaintance with operating problems, closer contact with top-management problems, or greater supervisory experience than others. Organizational changes may also alter career lines, and the amount of interchange of staff between the controller's organization and other units, Bo Relation of Control Functions to General Organization Structure The Advisory Panel emphasized that the centralization or decentralization of control functions cannot be considered apart from the centralization or -decentralization of executive functions in the organization as a whole. In an organization that delegates broad discretion to operating department managers, the consequences of centralizing or decentralizing the controller's operations may be quite different than in an organization where the department

4 managers operate under close central supervision. This project will not attempt to evaluate the desirability of centralization or decentralization in the organization as a whole, However, it will be necessary, in order to reach reliable judgments about control functions, to pay attention to the over-all organizational pattern, the location of important decision-making responsibilities, and the types of standards and controls (supervision) imposed on departmental and branch-plant managers. It is clear that a study of the scope proposed here cannot aim at an exhaustive survey-type investigation of all of the questions raised above. Instead, the objective of the project will be to throw light on these questions by careful, very thorough case-type investigation in three carefully selected companies, together with a less intensive survey of some others. II. SPECIFIC PROBLEMS TO BE ANALYZED Specific problems that the project will investigate can be divided into the following categories: A. The optimum degree of centralization and decentra-> liisation of the actual data-gathering and recordkeeping operations of the controller's department. B. The degree of usefulness of reports that are developed in a central unit, as compared with those prepared at the departmental or branch-plant levels. C, The development of effective organizational and operating relationships between the controller, departmental or branch-plant accounting units, and departmental or branch-plant managers. D. The dependence of optima} arrangements for centralization and decentralization within the controller's department upon the way in which functions and responsibilities are centralized and decentralized in the organization as a whole. The remainder of this section outlines for purposes of suggestion some of the questions that will be studied under each of the major headings listed above.

5 J A. Organization Levels at Which Records are Located (1) What records should be maintained in the individual operating departments and branch plants, and what records in the central controller's office? (2) For the records that are decentralized, how should the necessary amount of uniformity in classification and accounting treatment be maintained? (3) How can decentralized records be audited or testchecked for accuracy? (4) For records that are centralized, how can the accuracy and reliability of the basic accounting documents best be assured? (5) What is the effect of permitting duplication of records at more than one level? When more than one set of records is kept of certain data, how can consistency between them be maintained? (6) To what extent does centralized or decentralized location of records encourage the department manager to maintain duplicate informal records? (7) How does centralization or decentralization of records affect economy in the use of clerical help and equipment? Conversely, does the use of certain types of accounting machines encourage centralization or decentralization of record-keeping? Example: Records for the control of materials placed into production may be located at the operating level where they are used, or the records may be kept by a central control unit that receives its information from the operating units. The above questions would be applied to such situations. B. Organization Levels at Which Reporting Functions are Performed (l) What are the reporting functions for which the controller's department and its branches should be responsible? For example, are budget forecasts included in these functions? Are reports comparing actual with standard costs included?

6 (2) When reporting is centralized, what steps can be taken to see that adequate reporting service is provided to departmental and branch-plant managers? What steps to see that information is reported in form that is related to specific departmental needs? That information is reported back to branchplants and departments with sufficient speed? (3) When forecasting functions (e.g., budget forecasts) are centralized, how can the information available at the departmental or branch-plant level be brought into the forecasting process? (4) When reporting is decentralized, what steps can be ^ taken to see that reports will adequately serve the control and policy requirements of top management in the central office? What steps to see that reports are available promptly in the central office? (5) How can the controller determine if his reports are useful and used? Examples; (a) A branch-plant manager may turn to a plant accounting unit for a report on the profitability of certain lines, or such reports may be prepared by the controller's central organization. (b) The balance sheet for each branch plant may be prepared by the plant accounting unit, or all balance sheets may be prepared in the controller's department of the central organi zation. C. Relations Between the Controller. Plant (or Department) Manager and Plant " - WMMVMMMMWMMV^MMMW Accountant 1. Who designates what records and reports are to be made bv the plant accountant? 2. hat is the effect upon a decentralized control organiz-ation of requirements by the central controller 1 s department for uniformity in records and reports? 3. If the plant manager is to have responsibility over the plant accountant, to what extent can the controller exercise authority over the plant accountant?

7 4. If the controller is to have responsibility over the plant accountant, to what extent can the plant manager exercise authority over the plant accountant? 5. What effect does the dally association between the plant accountant and plant manager have on their relation to the central organization? 6. What effect does the background, training, and experience of the plant accountant have on his relations with the plant manager and controller? 7. What effect does the location of responsibility for the plant accountant's promotional opportunities have on these relationships? Example: A plant accountant (with an engineering or accounting background) may be responsible to the plant manager (also with engineering training) for his performance, discipline, and promotion, but may be under the functional supervision of the controller. D«Dependence of Controller's Organizational Arrangements upon Company Organization Structure 1. To what extent should the controller's organization parallel the organization of the other departments? 2. How far down the organization can the controller parallel the structure of other departments without creating an unwieldy structure? 3. What will be the effect if the controller's department centralizes its functions and the other departments are decentralized, or vice versa? 4«To what extent and in what situations are regular written reports more useful or less useful than other methods of communication? 5» If the controller's department is organized primarily to perform its function of control over a department by reports to top management, how can it still provide service to departments, by giving the departmental manager the information necessary to carry out his functions?

8 6. How does centralization or decentralization of other control departments (e.g. the time study department) affect the feasibility of decentralizing the controller's operations? Examples: (a) A company may operate a number of district sales offices which require some information available locally to help the sales manager in his daily operations as well as provide customer information, but the company may wish to maintain a strong centralized controllership organization, (b) A plant manager located away from the company offices may have complete autonomy for the operation of the plant and reports directly to the president, while the controller's organization is centralized. (c) The time study department may have responsibility for setting standard times, while the controller's department has responsibility for setting standard costs. III. METHOD It should be evident from this tentative outline of problems that useful research work can be carried out only on the basis of careful, intensive study of specific organizations. An intensive approach is called for two reasons. First, a superficial survey of an organization cannot be relied upon to disclose the actual degree and kinds of centralization and decentralization that prevail. Second, even more careful observation and sifting of evidence is needed to trace out the consequences of centralization and decentralization. A. The "Actual" Organization and the Organization "on Paper" As pointed out above, there may be major differences between the organization "on paper" what is usually called the formal organization and the organization as it actually operates. For example, if the communication channels specified in the formal plan of organization appear inadequate to executives in some part of the organization, these executives usually develop additional informal communication channels of their own. A plan that appears "centralized" on paper may actually be decentralized in operation, and vice versa.

9 8 Moreover, executives in different parts of the organization may evaluate quite differently the effectiveness of a system of controls. The controls may appear in entirely different lights to the general manager, the controller, departmental and branchplant managers, and departmental and- branch-plant controllers. A hurried and superficial survey of an organization will almost inevitably attach too exclusive importance to formal organization and to tangible paper-processing work (e.g., the actual accounting records) and will undtr-estimate the significance of informal processes. Intensive observation is needed to describe the actual impact of the control system upon policy and operating decisions, B«Techniques of Observation Following a preparatory period of careful planning, each of the intensive case studies will involve a number of steps: 1. Preliminary interviews with the controller and other top executives, and study of formal documents (organization and accounting manuals, etc.). By these means, the survey staff will get a general picture of the organization structure and procedures as these relate to the control functions. 2. Observation and analysis of the actual procedures for recording and processing accounting and other control data. It will be necessary to determine, for example, the source, processing, and flow of accounting documents; and the types of reports and other information provided to executives. In this phase of the study, the principal technique will be to follow through the actual flows of accounting and other information, paying particular attention to points in the organization where data are classified, interpreted, and analysed. 3. Study of a few selected instances of the making of a decision in the organization for example, a decision to increase or curtail production of a particular item. The purpose of this part of the study would be to locate some of the important points in the organization where problems requiring decision arise, the points where decisions are reached, and the ways in which decisions are followed through. In all these three aspects of the decisionmaking process, primary attention would be directed to the role played by control data and the controller's organization in the initiation, reaching, and follow-through of decisions.

10 4. Analysis of the organization structure in both its formal and informal aspects. This part of the study would be focussed particularly upon those points in the organization where contact takes place between the controllervs department and the operating units. By interviewing methods, and by actual observation of the organization at work, an attempt would be made to assess the closeness and effectiveness of the contacts between the operating departments, the control organization, and top management. 5«Some infonnation would need to be gathered about the training and kinds of experience of the persons in the controller's organization. This information would need to be related to the kinds of problems they are handling, their effectiveness in communicating with the operating units, and the long-term development of executive personnel for the control and other top-management functions. During the more intensive phases of the field-work in any one company, it will probably be desirable to use a field staff of two to four men for a period of one or two months. The various members of the field staff would be assigned to different parts of the organization. For example, one could be primarily responsible for data on operation at the top management level, one for the operation of the controller's office, one for the operation of departmental control units, and one for the operation of departmental production units. In this way information would be secured as to the operation of the control function as it appears from all these different vantage points, and the clearest possible picture would be obtained of the various aspects of the operation under centralized versus decentralized plans for the control functions. IV. STAFF AND BUDGET Research supervision of this project, if it is approved, will be vested in Professor H. A. Simon, Head of the Department of Industrial Management at Carnegie. Professors Harold Guetzkow and George Kozmetsky would share actively in the planning and field work, together with Professor W. W. Cooper who would work closely with this project in his capacity as Research Supervisor of the closely allied long-range administrative research project under way at Carnegie under Air Force sponsorship. Beyond these men, other staff members at the assistant professor level and advanced graduate students would be used as seems desirable.

11 10 We estimate that to carry out the type of study outlined in a medium-sized or large plant would require one to two man-months of senior staff time and two to four man-months of junior staff time, depending on the size and complexity of the operation. After three such intensive studies, perhaps three other less intensive studies, paying particular attention to the questions which appear from the research to be most critical, might each require about one man-week of senior staff time and two man-weeks of junior staff time* A substantial period of careful preparatory planning would need to precede the field work; this planning would overlap the beginning of the field work and would continue for revising plans as work went forward. A period of perhaps four months for analysis of results and preparation of a report should be allowed at the end of the project. Roughly, on the basis of these estimates, we propose the following working budgetary plans: Senior staff Junior staff 1. Planning Intensive studies Additional studies Preparing report Calculating senior staff time at roughly $700 per manmonth and junior staff time at roughly $400 per man-month, this would budget roughly $9800 for senior staff time and" $6800 for junior staff time. An allowance of $3400 for administrative expense and overhead (secretarial expense, supplies, local area travel, and Carnegie expenses for general supervision and over-^ head) would bring the total to $20,000. This figure excludes any substantial amount for travel and per diem expenses in case one or more of the studies is outside the Pittsburgh area, and excludes publication and distribution expense for the report, In case the project is approved, we suggest that an appropriate amount be budgeted for travel in the light of the individual companies selected for study; we shall be glad to see the project restricted largely to the Pittsburgh area to save time and expense. It is our understanding that, subject to final arrangements later, the Controllership Foundation would probably wish to handle publication and distribution of the report. We would expect an agreement that the report would be published after proper clearance, with copies available to libraries and the general public, but we are agreeable to any reasonable publishing arrangements that are in accord with the Foundation's practice.

12 11 We estimate that the project outlined above can be completed and the report prepared for submission in approximately 15 months or by roughly December 31 > 1951 in case work is begun in the near future. September 5, HASrGK