Ch-08-MCS-In-MNC
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Transcript of Ch-08-MCS-In-MNC
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- Prof. N. Iyengar
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MCS in Non-Profit Organizations
Organization CharacteristicsControl Design Considerations
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A non-profit organization is one that does not have owners whoprofit when revenues exceed expenses
A non-profit organization operates in the interests of society anddoes not participate in the equity markets since it has noshareholders
The activities of a non-profit organization are in line with the statedmission which describes the nature of its contribution to society
Profit does not form a part of the mission
The sources of funds (primarily three)
Contributions
Grants and
Operating surplus
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Most non-profit organizations provide services
They are run professionally, by managers who developobjectives, strategies and budgets
Performance reviews are conducted for the employees
and they are suitably rewarded Controlling employees, systems and processes in a non-
profit organization is different from controlling them inprofit seeking organizations
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Mission Statement of Ford foundationFounded in 1936, the Foundation operated as a local philanthropy in thestate of Michigan until 1950, when it expanded to become a national andinter-national foundation. Since its inception it has been an independent,nonprofit, nongovernmental organization. It has provided slightly morethan $10 billion in grants and loans. These funds derive from aninvestment portfolio that began with gifts and bequests of Ford MotorCompany stock by Henry and Edsel Ford. The Foundation no longerowns Ford Motor Company stock, and its diversified portfolio is managedto provide a perpetual source of support for the Foundation's programsand operations.
The Trustees of the Foundation set policy and delegate authority to the
president and senior staff for the Foundation's grant making andoperations. Program officers in the United States, Africa, the Middle East,Asia, Latin America and Russia explore opportunities to pursue theFoundation's goals, formulate strategies and recommend proposals forfunding.
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Mission Statement of Ford foundation .The Ford Foundation is a resource for innovative people and institutionsworldwide. Its goals are to: Strengthen democratic values, Reduce poverty and injustice, Promote international cooperation and Advance human achievement
A fundamental challenge facing every society is to create political,economic and social systems that promote peace, human welfare and thesustainability of the environment on which life depends. Ford Foundationbelieves that the best way to meet this challenge is to encourageinitiatives by those living and working closest to where problems are
located; to promote collaboration among the nonprofit, government andbusiness sectors, and to ensure participation by men and women fromdiverse communities and at all levels of society. Such activities help buildcommon understanding, enhance excellence, enable people to improvetheir lives and reinforce their commitment to society.
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Mission Statement of Ford foundation .The Ford Foundation is one source of support for these activities. It worksmainly by making grants or loans that build knowledge and strengthenorganizations and networks. Since its financial resources are modest incomparison to societal needs, it focuses on a limited number of problem
areas and program strategies within their broad goals
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Seven key characteristics
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Characteristics NP Orgs
Dual Bottom Lines
Atmosphere
Bias
Gov. Board Roles
Program Outcomes
Atmosphere of Scarcity
Most non-profit leaders are
severely constrained by lackof resources
Non-profit organizations,generally rely on altruism
As a result, they haveunderdevelopedinfrastructures
Bias towards Informality,Participation and Consensus
Give less importance tohierarchy
Informality - limit exercise ofauthority, over-Participation
inhibit division of labour,Consensus bog downdecision making
Mission & Financial
Tension between bottom
lines influences manystrategic decisions &performance at alloperational levels
Some stakeholders (funders,regulators) care about bothbottom lines while others(clients and community) careprimarily about mission
Difficulty in AssessingProgram Outcomes
Have limited capacity forprogram evaluation due to:
Absence of standards forprogram outcomes
Lack of unambiguous marketfeedback on serving theirclients
Governing Board with bothOverview and Supporting
RolesDual roles
Responsible for ensuringthat the public interest is
served by the organization, Expected to help the
organization to be successful
Mixing up Governance &
Management roles
Vol. ParticipationStaff,Mixed Skill Level
The individuals passion for
the mission, the limited
financial resources & ashallow pool of candidatesoften result in hiringmanagers with limitedmanagement training andprogram staff with littleprogram experience
Volunteers usually have tojuggle multiple commitments,
and the relative priority theyassign to their volunteer jobmay have to be balancedwith their paid job, familyresponsibilities, and othervolunteer commitments
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Control Designing for Non Profit Organizations is different fromthat for Profit making Organization due to following reasons:
Absence of profit measure makes performance evaluation difficult
Separate tax and legal status - Non-profit organizations are exemptedfrom taxation and there are no shareholders
Most non-profit organizations provide services rather than productswhere it is difficult to measure the quality & quantity
Fragmented governance due to numerous sources of influence.
Excessive constraints in terms of usage of funds
Traditionally non-profit organizations have had poor management
controls because the management consisted of professionals liketeachers, priests, doctors, etc. who tended to give greater importanceto professional goals and do not give requisite value to managerialskills
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Employee Characteristic
Employees in Non Profit Organization are different fromthose in Profit Making Organization
Positive & Negative implications on Control System
Negative Implication Control problems are usually aggravated when
employees compare themselves with the employeesof profit seeking organizations
Positive Implication Employee Commitment
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Organization Culture
Non-profit organizations are dominated byEmployee/Professionals, who have little regard formanagement control systems
Employee prefer to concentrate on their profession andundermine the value of MCS
Because of poor compensation, do not attract the best ofmanagerial talent
Absence of performance measurement methodscompounds this problem leading to a culture reflectingpoor coordination and lack of trust among employees
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Rewards Employees get lower compensation and rewards as
compared to employees in Profit Seeking Organizations
Employees feel rewarded on achievement the goals formingpart of mission statement (Example - Employees of a non-
profit organization working towards preventing the spread ofAIDS feels rewarded when rate at which the disease isspreading decreases)
Negligible financial rewards
Achieving Goals in Mission Statement keeps employees
motivated Exceptions Universities & Research Non-Profit
Organizations
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Performance Measurement Measuring performance is difficult as most non-profit
organizations provide services which are measured inqualitative terms rather than quantitative terms
Without a quantifiable Performance Indicator, it is difficulttoMeasure organizational performance and to use results
control at the broad levelAnalyse the benefits of alternative courses of action
Decentralize the organization and hold sub-unit managersresponsible for specific areas of performance; andCompare the performance of sub-units which are
performing dissimilar activities
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Performance Measurement .
Irrespective of mission, scope and needs Control Designfollow three types of performance metrics
Success in mobilizing resources
Effectiveness of staff on the jobProgress in fulfilling the mission
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Fund Accounting Accounting system used by many non-profit
Organizations is Fund accounting In Fund Accounting, accounts are kept separately for
several funds, each of which is self-balancing, with thesum of debit balances tallying with the sum of creditbalances
Non-profit organizations have three categories for fundsGeneral fund or operating fund, corresponding to the set of
operating accountsPlant and Endowment fund, accounting for contributed
capital assets and equities andVariety of other funds for special purposes
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Programming and Budget Preparation
Programming is a more important and time consumingprocess in a non-profit organization, where a decision has tobe made on how best to allocate limited resources to
worthwhile activities Non-profit organizations have to work within their budgets and
cannot exceed the set monetary limits because they do notmarket their services to increase revenue
They limit their expenditure and aim to break even at
estimated amount of revenue The budget is therefore, a very important management
control tool for a non-profit organization
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Meditech Hospital is a 250-bed tertiary care hospital specializing in the treatment ofmany forms of cancer. Founded in 1950 as a center for the treatment of tuberculosispatients, it has evolved into a major research and treatment institution. Manyexperimental therapies have been pioneered at Meditech Hospital. Patients withadvanced diseases who did not find treatment anywhere else were treated here.From its inception until 1970, Meditech Hospital was a charitable institution, providingcare to patients free of charge. In 1970, as the hospital authorities felt that the fundsthey received were insufficient, they began to bill patients.
In order to bring professional management practices to the hospital operations, thestaff decided to develop sound cost accounting and control procedures. Traditionally,hospitals have done little or no cost accounting. In the past, cost reimbursement wasbased upon actual costs incurred for patients. The governments policy to setdifferent reimbursement levels for different diagnosis categories based on the
severity of the diagnosis had resulted in tremendous pressure on hospitals, includingMeditech Hospital, to determine their true costs for each relevant diagnosiscategory, so that costs could be reduced below the reimbursement level in order toprovide subsidies for those services in which costs could not be reduced.
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Meditech Hospital hired a cost accounting manager to install a new cost accountingsystem that could be used for budgeting and cost control at the hospital. The costaccounting manager identified the top revenue-producing procedures andconcentrated upon developing standard costs for these revenue-producingprocedures. He interviewed each departmental head and related technicians, todetermine the actual cost of each procedure performed in the department. Also theamount of time each employee spent on a given task was identified with the help of aquestionnaire. The process was repeated for the medical group.
The cost data developed as per this procedure were then used to develop the annualoperating budget. Each departmental head was expected to forecast a volume ofprocedures for the next year. Besides the actual volume of procedures, case mix(kinds of patents) was also forecasted by each department head. Here departmentsestimated the kinds of patients they were expecting to treat over the next year. A
standard treatment plan was prepared in order to identify what it took to treat anaverage patient with a given disease. On this basis, an approximate treatment cost tothe hospital for a particular diagnosis and therapy was developed. In this way thehospital could gain insight into which procedures were more cost-effective as well asthe costs of treating specific diseases.
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Department managers did not like the cost accounting manager and tried to avoidhim as they felt that the cost accounting manager was confronting them withproblems which were outside their areas of competence. Further, they felt thatbudgeting was not directly related to the mission of the organization, which was toprovide the highest-quality health care to patients. Since the process of developingoperating budgets in relationship to patient volume was a new concept for manymedical managers, a considerable amount of time had to be spent to explain theprocess.
A monthly cost report was used to determine productivity levels for all non-physicianpersonnel. Physicians refused to use monthly cost reports to control their behavior.
Questions for Discussion:
1. How can sound control procedures help improve practices in a nonprofitorganization?
2. Discuss the features of the new cost accounting system implemented by MeditechHospital.
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1. A non-profit organization is meant to operate in the interests of the society. It is notinfluenced by any tax burden and functions freely without any obligations. Itprocures funds from contributions, grants, etc. Its unique feature is that profit doesnot enter into its mission statement.
Since non-profit organizations do not work on the profit motive, they need to beoriented to function professionally. Adopting professional management practices in
every functional area helps it to achieve the goals. Non-profit organizations arerequired to bring in professionalism by implementing sound control procedures tominimize costs. This may be done in the following ways:
Designing a mission statement, reflecting the organizations purpose and themeans to achieve it.
Using qualified professionals to look after the finances to minimize wastage ofresources
Control of labour costs
Minimizing interference from political forces
Less dependence on external financiers.
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2. The new cost accounting system implemented by Meditech Hospital focuses on: Revenue-producing procedures.
Development of standard costs.
Gathering accurate data from department heads in determining actual costs.
Estimation of direct labour input of physicians.
Calculation of cost per procedure to arrive at annual operating budget.
Forecasting the case-mix along with the procedures.
Calculation of appropriate treatment cost.
Submission of monthly cost report to determine productivity levels of all non-physician employees.
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Q & A
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