Harvard Case - Ashish Interbuild: Finding the Perfect Control System
"Ashish Interbuild: Finding the Perfect Control System" Harvard business case study is written by Shraddha Danani. It deals with the challenges in the field of Accounting. The case study is 12 page(s) long and it was first published on : Jul 13, 2021
At Fern Fort University, we recommend Ashish Interbuild implement a comprehensive management control system that leverages activity-based costing (ABC), performance indicators, and employee incentives to improve profitability, efficiency, and decision-making across the organization. This system should be integrated with existing accounting procedures and policies, ensuring alignment with Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The implementation should be phased, starting with the manufacturing processes and then expanding to other departments. This will enable Ashish Interbuild to accurately track costs, identify areas for improvement, and make informed decisions about resource allocation, pricing, and growth strategies.
2. Background
Ashish Interbuild, a rapidly growing construction company in India, faces challenges in managing its expanding operations. The company's current cost accounting system, based on traditional methods, fails to accurately capture the complexities of its diverse projects and the associated costs. This lack of accurate cost analysis hinders effective decision-making, leading to inefficiencies and potential profitability issues. The company's leadership recognizes the need for a more robust management control system to address these challenges and drive future growth.
The case study focuses on Ashish, the company's founder, and his struggle to find the right system to manage the growing business. He is concerned about the lack of transparency in the current system and the inability to accurately assess the profitability of individual projects. He is also worried about the impact of the current system on employee motivation and performance.
3. Analysis of the Case Study
The case study highlights several key issues that Ashish Interbuild needs to address:
- Inadequate Costing System: The current system relies on traditional cost allocation methods that do not accurately reflect the complexities of the company's projects. This leads to inaccurate cost estimations, impacting pricing decisions and profitability.
- Lack of Performance Measurement: The absence of clear performance indicators makes it difficult to assess the efficiency and effectiveness of different projects and departments. This hinders the ability to identify areas for improvement and incentivize employees.
- Limited Decision-Making Support: The lack of accurate and timely information restricts Ashish's ability to make informed decisions about resource allocation, project selection, and pricing strategies. This can lead to inefficient resource utilization and missed opportunities.
- Employee Motivation and Performance: The current system does not provide clear incentives for employees to improve their performance and contribute to the company's success. This can lead to decreased motivation and productivity.
To address these issues, Ashish Interbuild should adopt a comprehensive management control system based on the following principles:
- Activity-Based Costing (ABC): ABC is a more accurate costing method that assigns costs to activities and then to products or services based on their consumption of those activities. This approach provides a more detailed understanding of the cost drivers for different projects and allows for more accurate pricing and profitability analysis.
- Performance Indicators: Developing and implementing relevant performance indicators for different departments and projects will allow Ashish Interbuild to track progress, identify areas for improvement, and measure the effectiveness of its operations.
- Employee Incentives: Implementing a system of employee incentives tied to performance indicators will motivate employees to contribute to the company's success and drive continuous improvement.
- Integration with Accounting Procedures: The new management control system should be integrated with existing accounting procedures and policies, ensuring compliance with GAAP and IFRS. This will ensure the accuracy and reliability of the data used for decision-making.
4. Recommendations
Ashish Interbuild should implement the following recommendations to improve its management control system:
- Phase 1: Implement Activity-Based Costing (ABC) in Manufacturing Processes: Begin by implementing ABC in the manufacturing processes, as this is where the company has the most complex cost structures. This will involve identifying the key activities involved in manufacturing, assigning costs to these activities, and then allocating those costs to individual projects based on their consumption of those activities.
- Phase 2: Develop Performance Indicators for Manufacturing and Other Departments: Develop performance indicators for key areas such as production efficiency, cost control, project completion time, and customer satisfaction. These indicators should be specific, measurable, achievable, relevant, and time-bound (SMART).
- Phase 3: Implement Employee Incentive Programs: Design and implement employee incentive programs that reward employees for achieving specific performance targets. These programs should be aligned with the company's overall goals and objectives.
- Phase 4: Integrate the New System with Existing Accounting Procedures and Policies: Ensure that the new management control system is integrated with the company's existing accounting procedures and policies, including budgeting, variance analysis, and financial statement analysis. This will ensure that the system is consistent with GAAP and IFRS and provides accurate and reliable data for decision-making.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Implementing a robust management control system aligns with Ashish Interbuild's mission of delivering high-quality construction projects on time and within budget. The system will help the company achieve its strategic goals by improving efficiency, profitability, and customer satisfaction.
- External Customers and Internal Clients: The new system will provide Ashish Interbuild with the information it needs to better understand its customers' needs and provide them with high-quality services. It will also improve communication and collaboration between different departments, leading to a more efficient and effective internal workflow.
- Competitors: By implementing a more sophisticated management control system, Ashish Interbuild can gain a competitive advantage by making more informed decisions, improving efficiency, and controlling costs.
- Attractiveness ' Quantitative Measures: The implementation of ABC and other performance indicators will provide Ashish Interbuild with more accurate data for financial performance measurement, including profitability analysis, break-even analysis, and return on investment (ROI). This will allow the company to make more informed decisions about resource allocation, pricing, and growth strategies.
- Assumptions: The recommendations assume that Ashish Interbuild has the resources and commitment to implement the new management control system. The success of the implementation will also depend on the willingness of employees to embrace the new system and adapt their work practices.
6. Conclusion
By implementing a comprehensive management control system based on activity-based costing, performance indicators, and employee incentives, Ashish Interbuild can significantly improve its profitability, efficiency, and decision-making. This will enable the company to navigate its growth trajectory successfully and achieve its strategic goals.
7. Discussion
Other alternatives to the recommended approach include:
- Continuing with the current system: This would be the least desirable option, as it would perpetuate the existing problems and hinder the company's growth.
- Implementing a simpler cost accounting system: While a simpler system might be easier to implement, it may not provide the level of detail and accuracy required for effective decision-making in a complex and growing business like Ashish Interbuild.
- Outsourcing the management control system: This could be a viable option, but it would require careful consideration of the costs and benefits, as well as the potential risks associated with outsourcing critical business functions.
The recommendations are based on the assumption that Ashish Interbuild has the resources and commitment to implement the new management control system. The success of the implementation will also depend on the willingness of employees to embrace the new system and adapt their work practices.
8. Next Steps
The implementation of the new management control system should be phased, starting with the manufacturing processes and then expanding to other departments. The following timeline outlines the key milestones:
- Month 1-3: Develop a detailed implementation plan, including budget, resources, and timelines.
- Month 3-6: Train employees on the new system and begin collecting data for ABC analysis.
- Month 6-9: Implement ABC in the manufacturing processes and develop performance indicators for key areas.
- Month 9-12: Implement employee incentive programs and integrate the new system with existing accounting procedures and policies.
- Month 12-18: Continuously monitor the system, make adjustments as needed, and expand the implementation to other departments.
By following these steps, Ashish Interbuild can successfully implement a new management control system that will help the company achieve its growth objectives and ensure its long-term success.
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Case Description
Ashish Interbuild Private Limited (AIPL) was a mid-sized founder-driven turnkey fit-out firm based in India. The firm executed prestigious fit-out projects across the country, and it had been making steady progress every year since its founding. Faced with an increasing workload, Ashish Thakkar, the founder and managing director, had decided to change the firm's operating model from an owner-led model to one that was people- and process-driven. To manage the transition smoothly, he had to decide on the most appropriate management control model for the firm. The two management control models proposed to Thakkar stood in stark contrast to each other, each with its own strengths. It was crucial for Thakkar to select the appropriate control fit for AIPL neither too tight nor too loose. An inappropriate model could lead to chaos, employee dissatisfaction, financial loss, a damaged firm reputation, and even potential bankruptcy. Although there were good reasons to pursue either of the two proposed alternatives, it was vital to determine which control system was best suited to the firm.
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