Controlling and the Controller – the background
Nowadays, the function and role of the controller are clearly defined. However, you will still find people in the business world who have only the haziest idea of what kind of service a controller can provide. So explaining how controlling can benefit managers remains a never-ending task.
As a guideline for controllers but also as a brief summary of the service provided to others, the International Group of Controlling, IGC (www.igc-controlling.org) has formulated a mission statement for controllers:
Controllers design and accompany the management process of defining goals, planning and controlling and thus have a joint responsibility with management to reach the objectives.
Controllers ensure the transparency of business results, finance, processes and strategy and thus contribute to higher economic effectiveness.
Controllers co-ordinate sub-targets and the related plans in a holistic way and organise a reporting system which is future-oriented and covers the enterprise as a whole.
Controllers moderate and design the controlling process of defining goals, planning and management so that every decision maker can act in accordance with agreed objectives.
Controllers provide managers with all relevant controlling-information.
Controllers develop and maintain controlling systems.
First of all, companies depend heavily on their stakeholders. They, as well as analysts, always expect to get future-oriented figures about a company's performance. Here reliable figures are needed. Controllers are the people who organise the planning process, checking whether the information is feasible. A company will never be awarded an outstanding rating if it lacks a well-integrated controlling process.
Secondly, customer demands are changing more rapidly. Product life cycles are getting shorter. Competitors can copy products and services more quickly. It is therefore essential to focus your company's resources in such a way that you can demonstrate to your customer where you are different from the rest. Controllers will help ensure that a company's money won't be wasted but put where a competitive advantage can be built up or further increased.
Companies are competing as well as working together world wide. The environment is getting more complex. To run a business successfully quantities of information need to be analysed. Increasingly, controllers are becoming information officers operating powerful databases and expert systems to sift out the really relevant information from the masses of collected data. Controllers even need to be teachers (or „trainers“ as we would say at Controller Akademie) to enable the responsible managers to make the best use of the available information themselves so as to manage their business both efficiently and effectively!
Controlling and the Controller – this book
At the end of the 1980's Dr. Alfred Blazek was asked by big German companies to help them pass on their advanced controlling concepts to their subsidiaries all over the world. So he developed the seminar „Controlling and the Controller“ based on the material of Dr. Albrecht Deyhle, his colleague and founder of Controller Akademie AG, Germany. David Gill assisted in translating the material and took part in the first seminars as English language coach. I still remember being in this seminar in 1992 amongst the first participants, coming from different parts of the world.
In 1995 I left Porsche Group and joined Controller Akademie myself as a trainer and partner, where Dr. Deyhle took me by the hand. Right from the beginning I assisted Dr. Blazek in the English seminars. At the beginning of the new millennium I promised to develop the English programme further, so that by 2005 my colleagues and I were able to offer the complete five weeks diploma programme in English.
This book will give you insights into what controlling involves and how the role of the controller is defined, setting out concepts, presenting illustrative case studies, telling amusing anecdotes and tales.
Enjoy reading it. It will certainly help you. And, happy controlling!
Etterschlag/Munich, Christmas 2010
Dr. Klaus Eiselmayer
Controller – why?
What is a controller? First and foremost, a controller is a man or a woman trained in accountancy. Put another way, accounting is the airport, where controllership takes off and lands.
But why accounting? The controlling function, in its narrowest sense, has to be exercised so that the business may reach its profit goal. The profit goal or profit objective, for example in terms of ‚return on investment‘, calls for a profit accounting technique. But this technique is one that paves the way to the profit objective in a controlled manner, and not one that springs surprises on the management. For this reason the profit and loss statement has to use the format of contribution accounting, graphically expressed in the break-even diagramm or profit-engineering chart. We call it management result account MRA.
Just like an air traffic controller directing safe landings, the economic controller has to make sure that his business enterprise lands safely in the profit zone. And again, like the air traffic controller, the economic controller is not the man or woman at the steering wheel. Steering wheels have to be handled by the executive officers, in other words, by the managers. The controller has to service them with accounting advice. A good controller, though, should not wait to be asked for assistance. He also comes on his own initiative. Controllers provide their consultations – unbidden. Like good salespeople, controllers have to play the role of door-openers, figure-vendors, presenters of economic consequences, speculative questioners forever asking, ‚What will happen, if …?‘ In short, the controller's role is an extremely active one. During the course of a seminar organized for sales managers of a big Swiss trading company, one of the participants, a sales director, commented to me: ‚As far as I can see now, controllership is the marketing of accounting.‘ I would agree with this completely.
Figure 1: Break-even chart, showing the path to the profit zone
An accounting expert becomes a controller the moment he is able to sell his services to the managers. He becomes a controller at the point when his accounting service ceases to be just documentation of the past and becomes a launch pad for ideas about managing the future.
Every bit of decision-making looks to the future. You can't make decisions about yesterday. So decision-making is really planning, and planning is decision-making. That is why decision-making is bound to be, to some extent, theoretical. Putting decisions into practice gives you the feedback you need to confirm whether the decision were feasible in the first place. This is the controlling process.
It is the controller's task to ensure that a company has established a planned route to its profit goal – and furthermore, that it gets regular advice as it proceeds towards that goal. Just as when we travel, we need a time-table and we should be able to announce our time of arrival.
How close are the actual performance figures to our planned figures? Are these figures issued on time? When a controller reports on variances, he can never give a complete report. It can only be completed in co-operation with the responsible executives. They are the ones who have to take corrective action, when variances occur. But the controller must look out for the tell – tale signs and publish them as far ahead as possible. Forecasts become imperative; figures for actual performance are already too late.
This brings us back to the decision-making function itself. Decisions cannot be based on actual facts; they can only be based on expected results. We don't make decisions about the last few months but about the next few months, the next half year or the next five years. The accounting service that the controller provides can be divided into two sectors. The first is decision accounting. Figures are needed to enable decisions to be made on alternative proposals. Which idea is likely to be more profitable in the short run, or in the long run? The other kind of service is concerned with the company's objectives. This is responsibility accounting. The company's ultimate objective figure, its „return on investment“, has to be broken down into so many sub-objectives depending on the structure of the organization and the delegated responsibilities of employees at various levels in the hierarchy. Every responsibility figure must correspond to the task and the reponsibility of the people co-operating to manage the business. The people responsible in the organization look after the sales volumes, contribution margins, purchasing prices, selling prices; they meet their cost budgets, reach their targets of standardised input of time and materials in production. And everybody (unfortunately) is constrained by time. A time limit is always set for the ROI, the sales volume and the costs.
Decision accounting is mainly concerned with facts. This aspect of a controller's service is easier to sell than the other. Responsibility accounting is a more sensitive matter. Here we do have to remember that a variance is not just a matter of fact but is also addressed to somebody. And that somebody could be feeling guilty about the variance in question. Responsibility accounting really demands the highest level of salesmanship from the controller. He has to serve individuals, so he must be extremely careful about the kind of questions he asks, especially when discussing variances. Managers have often told me that they get irritated by controllers asking them questions about problems that are already worrying them. It's rather like this: My arm aches. The person beating me than asks, „Do you realize that your arm aches?“
I feel that a controller would be well-advised not to press questions of the „Why did it happen ?“ variety. Very often they only elicit a weather report response, when what we need is a „What is to be done“ report. Admittedly this is more difficult to produce, but it does make for a better atmosphere in discussions between managers and controller, who are more likely to feel that they are working as a team.
Controller Academy's work has been mainly in the German speaking Countries of Europe, Germany, Switzerland and Austria. As I am a member of the Institiute of Management Accounting IMA, Montrale N. S., many helpful ideas, suggestions and experiences of American colleagues provided additional insight.
Can we claim to have developed our own vision of the controller's role and function? Have we perhaps found – on the principle that we've been trying harder – in some respects an even better pattern for practical controllership than the founding fathers and their successors in the USA ever dreamt of? At any rate, the thousands of people who have participated in the seminars of the Munich Controllers' Academy, the subscribers to the German Controllers' Magazine, and the members of the Controllers' Association (Internationaler Controller Verein e.V., Gauting near Munich) permit us to maintain that we have established a considerable repertoire of techniques and rules for the successful practice of controlling in those three countries.
We have written Controlling and the Controller in English for the benefit of those controllers and managers, for whom English is becoming more and more the commercial „lingua franca“. I owe much to the efforts of my colleague, Alfred Blazek, who held the English seminar „Controlling and the Controller“ for many years, and to David Gill, an Oxford-based author and translator, for knocking my English prose into shape.
And I dedicate this book to all my colleagues around the world who are keen to extend and improve their controlling activities. I firmly believe that by combining our business strengths with a more co-operative style of management we can achieve great things in our world of enterprises.
Gauting/Munich, Christmas 1991
Dr. Albrecht Deyhle
Chapter 1: It's the manager's job to control
A controller doesn't control. This may sound paradoxical, but the controller's job is to provide the best possible information and interpretation of it so that the controlling funtion can be carried out.
So who performs the actual controlling function? It's the CEO (Chief Executive Officer) or manager, as we shall call him or her in this book. It's the manager's job to do the controlling. The controller has to ensure that the managers actually do carry out their controlling. The controller, in short, is an internal controlling consultant.
A controller is an adviser, not an executive. He needs to persuade people to take the right course; he acts through them. The controller manages controlling – getting controlling done by the managers.
The manager's job
A salesman doesn't make a sales manager just because he knows the needs of his customers. Nor is a good engineer, simply by being a good engineer, necessarily cut out to manage a plant or a construction office. The head of the sales department in a pharmaceutical company once said to me after a lecture I had given on contribution accounting: „My dear fellow, here you have to look at everything from a medical point of view.“ There speaks the typical medic! His products require a doctor's prescription. He himself is a trained doctor. But now he's a sales manager too, he needs to look to the financial returns. Otherwise the company's economic health will suffer! And he has to guide people who did not learn the medical profession.
Take another example. A perfectly running machine built by a team of first-rate engineers must also have a price tag. Otherwise those engineers can't be paid for their excellent work. In other words, you cannot build a machine without also calculating its cost. Everything we do in selling, production, purchasing, research and development has to be accompanied by figures. Because we have to exchange goods and services in market place – following the divison of labour laws and the propensity to exchange as has been formulated by Adam Smith in his famous book on „Wealth of Nations“, already 1776.
And the controller is the „engineer of the figure-producing machine“ as a condition to get running the famous „Marktwirtschaft“. He also needs to be an expert. It is not something that can be done in passing.
But what it is exactly that makes a manager? It is not a professional education, whether in economics, law or technical subjects, not to mention physics or theology. Being a manager is not confined to any particular level in the hierarchy. The managing director is not the only manager in the company. Anybody in charge of a group must be a manager. Indeed, even a self-employed individual needs managerial skills. And, of course, managing is not restricted to any particular branch of organised activity. It's just as essential in the manufacturing industries as it is in the service industries, insurance and banking, or running a hospital.
How to construct a management model
Fig. 2 is an outline management model. As a model, of course, it has to apply to all cases. It doesn't claim to be original: it's simply a system which imposes some order on a tangle of management functions we are familiar with in our day-to-day work. First we have to define the job. The job is what we do. The objectives associated with the job define what we achieve by doing the job. Unfortunately, it is perfectly possible to do a lot and achieve nothing. Now we must ask ourselves: what kind of objectives – what kind of figures – apply to my type of job and responsibility? If I'm a salesman, then my objectives are sales volume and market share. If I'm involved in production, then my objectives are expressed in terms of units, cost per item, quality, i.e. standards of performance. The idea of attainable objectives applies generally to our economic activities. It also applies to sport.
I can play tennis without keeping the score. But then, I'm an amateur. The professional tennis-player watches the score. We could have amateur managers, of course, but the professional manager uses a scoring system.
On the left-hand side of the management model in fig. 2 we have to match the requirements of the job with the capabilities of the men and women employed to perform it. Do we have the right person in the right place? Or is this a case for job development? And if so, does this apply to every body? It's the manager's task to ensure that the people under his guidance are learning on the job and broadening their capacities. He's responsible, in short, for implementing job enrichment. The model's third component is dynamic. This is real life. Jobs, after all, are dynamic, for ever changing, allowing us to discover new potential in ourselves.
Incidentally, our management model works for the top manager in the same way as for the junior manager or the foreman. The junior manager's job is integrated into the senior manager's job – and vice versa. In the same way, the senior manager's objectives include the objectives of those working under him. This is most readily apparent where the top manager is head of sales and those below him are area chiefs. The area chiefs have their own objectives in terms of sales volumes, but these figures are incorporated into the senior sales department manager's overall sales objective figures. Again, the contribution II figure provided by area managers is incorporated in the contribution III figure
Figure 2: Management model
provided by the manager in charge of all domestic sales. When combined with the chief export manager's figures, these contribution III figures produce the sales director's contribution IV figures for total sales.
The right-hand side of the management model (fig. 2) illustrates the controlling process. We now have to ask what kind of activities need to be undertaken to reach the objectives. And what budgets do they need? The plan must say whether the objectives seem to be realistic; the objectives demand appropriate plans and budgets. To bring objectives and budgets into harmony, I should say that two or three budget rounds will be necessary. But, as we all know only too well, we can make a plan, but the best-laid plans seldom work out in practice. We have to recognise this and start making corrections. The need to make corrections is central to the dynamic art of management. But we should not change our plans and objectives because of variances. This would mean that we were painting our targets after we had shot our arrows. And no doubt the best time to make a budget would be the end of the financial year! But, unfortunately, this would leave us without a compass by which to steer our daily business. The advantage of the budget is that it highlights any variances; no budget: no variances.
But we have to make a forecast. We should announce how we think our corrections will be working out up the end of the budget period. This is the rolling forecast which we could make twice or three times a year.
Our management model also shows how plans of action are related to judgements of capabilities. How should we regard a budget proposal? Should a salesman set a sales volume target of 1000, when he really thinks he can reach 1200? If he does, he is off to a flying start. Or should a man budget for the cost of 1000 units when he really only needs 800? Perhaps he is guarding against a possible future cut. So there's more to preparing budgets than just shuffling budget proposals. It's more of a discussion process top down and bottom up.
And the controller is not just someone who tots up figures and staples papers together. He has to take part in he whole business of piecing together the budget jigsaw from the individual bits. At the same time he has to participate in discussions designed to break down the company objectives into individual objectives according to the defined jobs.
Testing the management model
Let's test out the model with some examples. Let's assume we are responsible for selling beer in a particular area. (This means  in fig. 2). We must ask the following questions to get our job description: How big is our district? Where are its borders ? What products are we going to sell ? All the company's products, i.e. beer, lemonades and mineral waters? Or are we specialising in just beer? Do our salesmen visit all the customers in our district, or are there special customers, the headquarters of big retailers, for example, who are the province of the sales director himself? What resources have we got for sales promotion? What kind of deductions and bonuses can we offer?
Then we have to match what the job requires with what we are able to do ( in fig. 2). We come next to the dynamic concept of job enrichment , At first we may just be concerned with selling. Then pricing comes into it. Then sales promotion, then logistics, and so on. On the right-hand side  of the management model we need to list the kind of figures representing the objecives of the brewery's district sales manager. Do we express them in hectolitres or sales money, or are we talking about profit, or is it the contribution left once the costs of sales promotion and office administration have been deducted? The lower down the target figure in the area profit and loss statement, the greater the responsibility of the area manager.
The kind of activities ( in fig. 2) he has to plan to reach those objectives will include how frequently customers are visited and what steps are to be taken to win new customers. He has to design activities to promote distribution and market share.
We can take a second example to test out the management model, this time from factory management. The job  is to promote technical improvement. Do we have the capacity, the potential and the right atmosphere in the company to take new ideas on board ? Sometimes we are so overworked that we simply can't afford the time for creative thinking. The objective for the task „improvement“ could be  a reduction of hours per unit. Let's assume that in a car factory unit hours should be reduced from 120 to 110. Now the question is how this is to be achieved. Is it by better organisation or smoother work flow? Do we need investment in machinery and equipment? If so, a bigger budget is required. Or do we have to change the product in order to reach our objective of reducing hours per unit ? In the end we have to compare the actual results  with the objective. Let's assume that we have actually got down to 115 rather than the desired 110. The question is how well was the task of controlling carried out. Did the figure of only 115 hours per unit take us by surprise at the end of the year? Or did we have our hand on the pulse the whole time the show was running? Were there any announcements of delays? The detailed plan must have had shortcomings, and we may well have had to put back delivery dates. Did customers accept this? Announcing delays tends to be better received than just allowing them to happen without a word said.
When we come to diagnosing the variances , we find that the problem may lie in the planning of activities , and being aware of the facts behind our decisions. So we have to learn from the variances. Controlling is a learning process. But this kind of learning should also take place on the left-hand side of the management model. What kind of training should we undertake ? Perhaps we need to improve our teamwork? No one person can implement better solutions; it needs cooperation between all departments, between product development, construction, plant management, logistics, sales, and the controller, of course.
So we see that any event or managerial experience can be pinpointed on our management model, which quite clearly shows that it is the manager's job to do the controlling. The controller's function is to help him by building him a controlling cockpit and advising him on how to use it. So the controller's function must always be understood as a training role. He has to give help in order to enable managers to help themselves. It's a form of self-medication.
Identifying objectives through participation
The management model as shown in fig. 2 with its six building-blocks gives us an outline structure of the manager's function. Now we need an additional symbol to show us the participative management process. This may be seen in fig. 3. The circles overlap. This means that the boss and the person working with him are in a dialogue, maybe even in a clinch!
Our management model (fig. 2) applies to the boss and his colleague equally. The boss may be the deputy director of domestic sales, while the middle manager looks after sales for the southern region. Or the boss may be the factory director, but also responsible with the factory manager for one of the factory's departments, maintenance, for example. So the sales volume objective of the manager in charge of the southern region is included in the sales volume objective of the deputy sales director. Similarly, the factory boss's whole cost budget will include the special budget of the maintenance department. Since the factory manager has to set his costs against the transfer prices of his products, all the members of his team have to feel responsible for their respective cost budgets, yield rates and standards of time consumption per unit, as well as for the purchasing prices if logistices is part of the factory manager's responsibility. Otherwise standard purchasing prices for materials and components bought in from outside have to be used instead.
To fix objectives requires bottom up and top down communication. Bottom up, the colleague responsible (in the lower circle) makes suggestions as to what he thinks he can reach as a sales objective for the coming year. On the other hand, the boss in the upper circle has his own ideas as to what level of sales should be reached or what costs are acceptable. The two arrows meet; like terminals they spark each other off. During this lively interaction the boss has to judge whether his colleague has been overcautious in the objectives he has put forward. When the objectives have been agreed, they must be challenging, but capable of realization. If you demand too much, people lose heart and make an early start on their reports justifying their failure to reach the target. But if the challenge is too low, motivation suffers. „Why should we sweat our guts out“, people will say, „if nobody wants us to ?“ Like in any sport, we need a personal goal: „How much can I demand with a reasonable chance of success ?“
Figure 3: Identifying objectives through participation
Nothing succeeds like success. Again we see how controlling is a matter of applied psychology.
The manager, as well as the controller at his side, has to sense whether the figure is right or not quite high enough. If I detect a quaver in my partner's voice, then I know that we have pushed up the sales figure too far or set the costs too low. Alternatively, I have to know who hasn't put all his cards on the table. We might call this social sensitivity.
The overlapping circles in fig. 3 make the point that agreement on objectives has to be made by putting heads together. This implies the need for conference management, the ability to manage meetings without wasting time (which unfortunately often happens). It is not enough to prepare the subject matter of the conference – and then expect the meeting to run itself. Conference management is a separate study.
Enlisting colleagues in the task of fixing objectives is absolutely essential because the man in the lower circle may be more in touch with the realities of the business scene. Moreover, he could be an expert in a specialist field with which the boss has only a nodding acquaintance.
So the way to motivate people is not by showing that you know the ins and outs of the job better than they do, but by asking them the right questions. Can you explain to me what kind of job you are doing here, and what it the real point of it ? This management style uses the question mark, not the exclamation mark.
This is the controller's normal management style. He can't issue commands; he has to convince by argument. Indeed, it's his job to ask questions. After all, it's much better to ask questions first than be sorry afterwards.
The management model applied to the company as a whole
The six building-blocks in fig. 2 can also be applied to the company as a whole. There has to be a job description for the whole company. In what field of business do we want to be engaged as a company?  A clear-cut job description of the enterprise gives rise to a corporate identity and a well-defined image in all kinds of market-places – for customers, for purchasing, for personnel, and indeed for government, community and the banks. In German language we say „Leitbild“.
And we must be competent in our chosen field . And as a company we have to assess our capabilities or potential correctly. Furthermore, the company has to develop. The whole firm has to engage in job enrichment . When we compare our own ability to solve a customer's problem with that of our competitors, we see ourselves as a
Figure 4: Organizational chart and the return on investment (ROI) tree
„strategic business unit“. A strategic business unit is competent to solve customers' problems. These problems must be attractive and may well place additional demands upon us. And we must be better at solving any such problems than our competitors are.