Simons' Levers of Control: Wincor Nixdorf Case Study

Introduction

Wincor Nixdorf, one of the world's leading developers and suppliers of user-interface banking software and point-of-sale kiosks, has long been a powerhouse in its industry, having achieved international success with its ATMs, lottery ticket machines, distribution deals with IBM, and several other endeavors. Through a streamlining of company operations in the late twentieth century, the company increased its profitability by increasing efficiency and decreasing costs — an orientation which the organization has attempted to maintain into the first decade of the twenty-first century. This, however, has proven more difficult for Wincor Nixdorf and for other companies than would have been predicted even a few short years ago, due to the global recession that became evident in 2008.

The collapse of several major banking institutions and the ripple effect this caused in the economy as a whole led to major restructuring and a great deal of shrinkage in operations and profitability for many organizations across diverse industries. Generally speaking, the larger the organization — both in sheer size and in the global spread of its operations — the harder the company was hit by the global financial meltdown, and Wincor Nixdorf was certainly not immune to the effects of this economic event. Especially because the company's operations are intimately tied to banking success (though it is more involved with individual and personal banking than inter-organizational operations, where the damage might have been more severe), there were definite negative effects on the company from the recession.

This paper examines some of the specific ramifications of the recession and the initial banking collapse on Wincor Nixdorf and its bottom line, identifying managerial accounting problems in the company's reaction to the external situation as well as methods for bringing these managerial accounting practices in line with optimum organizational performance. Specifically, the management control system proposed by Simons (1995) — his levers of control framework — will be applied to the internal and external situations facing Wincor Nixdorf following the banking collapse and the onset of the recession, in an attempt to examine how a different approach might have allowed the company to fare better in these tough economic times. Though Wincor Nixdorf continues to be a profitable enterprise, improvement in managerial control and accounting is always advantageous.

One of the primary characteristics of any recession — but perhaps especially one as sudden and violently begun as the economic slowdown of 2008 — is uncertainty. It is this uncertainty that kept the unemployment rate so high even amidst signs of recovery; it also kept consumer spending lower, stalled a recovery in the housing market, and caused many businesses to postpone expansions and any other unnecessary expenditures while waiting to see what further developments in the global economy might occur. This lack of economic movement has, almost by definition, prolonged the recession to some degree, and though some analysts claim we are already moving out of it, many problems persist.

Problem Statement

What all of this uncertainty means for the economy as a whole is a matter of debate, and the exact cause-and-effect mechanisms at work will likely continue to be the subject of academic disagreement for generations, as have those of the Great Depression and other major economic shifts. What all of this uncertainty means for Wincor Nixdorf, however, is fairly straightforward: uncertainty, for any business, means risk, and risk management is a key element of success in terms of both stability and growth. There are, of course, many different methods for managing risk, each with its own set of attendant advantages and disadvantages, and managing risk is in fact such a complex and constant process that a single clear method is rarely — if ever — a truly fixed part of an organization's strategic operations beyond a set of more generalized guiding principles.

For simplicity's sake, this paper examines Wincor Nixdorf's response to the global economic slowdown and uncertainty as a more singular and extreme variation of its general position regarding risk management. The company's real-world response to the worldwide recession has left it fairly viable and possibly poised for later growth, but the response is not as aggressive as it could be. Essentially, Wincor Nixdorf moved too far into the area of risk avoidance, which has limited the company's growth potential during these volatile times. Risk avoidance can be an effective strategy to some degree, especially in times of higher uncertainty, but total risk avoidance — the semi-hypothetical business strategy examined here in relation to Wincor Nixdorf — is a severely limiting and ultimately self-defeating way to manage risk.

Much of the risk avoidance problem that Wincor Nixdorf is facing could be solved through the application of a management control system to its managerial accounting practices — specifically, by placing a check on managerial conservatism in response to accounting statements. Though some degree of protective and risk-avoidant managerial action is of course warranted in response to shrinking numbers that reflect the global pattern, establishing a clear system of action and control that would focus management more on long-term growth strategies rather than on day-to-day survival based on accounting reports would be more beneficial. The managerial accounting practices at Wincor Nixdorf have become too fixated on risk management through number control, and this is limiting company potential.

There is abundant literature on the effects of the global recession on individual companies, as well as much larger volumes of research into the areas of managerial accounting, management control systems, and risk management. In an effort to narrow the scope of this review, selections from academic and professional journals were limited to a specific discussion of managerial control in the current economic climate and previous examples of Simons' levers of control framework. Literature regarding risk management as a function of the levers of control was also consulted.

Literature Review

One of the most interesting phenomena observed regarding changes in management control systems within Simons' framework is that companies unaccustomed to dealing with uncertainty are more likely to change managerial practices and controls in a drastic manner in response to shifts in conditions, compared to companies that already operate in an environment of greater uncertainty (Asel 2009, pp. 5–9). That is, perceived environmental uncertainty leads to managerial control and accounting practices in many companies that are more rapid and extreme than they generally need to be, and ultimately prove counterproductive (Asel 2009). The conservative managerial accounting reactions to the recession practiced by companies such as Wincor Nixdorf do not encourage individual and organizational behaviors that are as beneficial as could be desired.

Simons' identification and description of the four levers of control that can be used to develop a comprehensive managerial control system requires integration and some semblance of equality in their application (Abas 1999). The basic levers identified in this framework are diagnostic systems, belief systems, boundary systems, and interactive systems. When there is an imbalance in the application of or focus on these systems, managerial control becomes less effective. Though particulars such as cost accounting are specifically and explicitly identified as essential components of any managerial control system, they cannot be the sole or even primary focus of such controls if the organization is to continue to function and grow effectively (Abas 1999). A focus on accounting issues alone does not provide an accurate view of the company or its environment.

Perhaps one of the most essential elements of Simons' levers of control framework, in the case at hand, is the proper implementation of what he identifies as interactive control systems (Simons 1995). Regular interaction and contact between supervisors and subordinates — and executives, to some extent and in some circumstances — is essential for maintaining real control over an organization. This allows for the incorporation of all the most relevant and critical information from the company's operations and environment, rather than simply the managerial analysis of whatever information crosses their desk (Simons 1995). Through properly functioning interactive control systems, accurate and up-to-date analysis of the company, its operations, and its external environment can be maintained in a way that accounting alone does not allow.

Despite the success that Simons' framework has had in the business world and in academia, some scholars caution against a complete devotion to this method of exerting managerial control (Tuomela 2005). The perception that the measures themselves will eventually produce a solid understanding of cause-and-effect relationships was noted as a common feature of implementations of Simons' framework, which limits the framework's actual effectiveness (Tuomela 2005). This does not negate the essential claims made by Simons nor the construction of his levers of control, but instead suggests that cause-and-effect relationships must be understood through solid initial analysis before a new framework can be developed and implemented effectively within an organization (Tuomela 2005).

A broader empirical analysis of the levers of control framework reveals that differences in the efficacy and appropriateness of this approach depend on whether the system of control and measurement is engaged with primarily as a diagnostic device or more as an interactive system (Widener 2005). As noted above, interaction is a key element of the framework — arguably the most important element, as the other levers are entirely useless without proper and adequate interaction between all elements of the organization and the managerial control system (Simons 1995). At the same time, when interactive procedures consume too much managerial attention, the firm suffers; it is the balance between interactive attention and diagnostic control that makes Simons' framework effective (Widener 2005). This is precisely the balance that is missing from Wincor Nixdorf.