Measuring performance at headquarters and in subsidiaries

The relationship between the headquarters and the subsidiaries of multinational organizations began garnering the attention of analysts in the 1970s, after the boom in international investments. At that time, Performance Measurement Systems (PMS) were seen as useful accounting tools for assessing the financial results of decentralized business units with a low level of autonomy. In the decades to follow, internationalization became the solution to the search for economies of scale and more efficient production sites. PMS no longer served simply for monitoring and reporting financial results, but also to guide behaviors at a local level. In today’s transnational age, multinationals operate like relationship networks linking together complex structures.  In this context, PMS can be utilized to monitor performance through a comparative analysis of objectives and results, to train attention on the critical aspects of performance, to support strategic decision-making and legitimize organizational action. 

Our 2008 study, published in Management Accounting Research, looked at the evolution of PMSs deployed centrally to shape decision-making in subsidiaries. Six dimensions, which make up the headquarters-subsidiary relationship, determine the influence of performance measurement systems on local decisions. The first is how the PMS is designed, i.e., whether the process is participatory or hierarchical. The second is the PMS structure, which can center on a single measurement approach (generally accounting-based) or encompass measurement diversity. What’s more, PMSs can be limited to reporting performance results, or they can be linked to reward mechanisms. Additional salient factors are the national culture at headquarters, the size of the subsidiaries, and the corporate environment.  

To determine the type of influence these dimensions have on the use of performance measurement systems in the decision-making of subsidiaries, we ran a survey based on a questionnaire sent via email to 100 controllers in the Italian subsidiaries of foreign multinationals. In the end, our sample counted 65 subsidiaries. What emerged is that the majority of PMSs were mandated by company headquarters. In fact, only 17 subsidiaries (26% of our sample) participated in designing these systems. In most cases (85%), the PMSs in question concentrated primarily on reporting performance and were often decoupled from reward mechanisms. Responses to our questionnaire highlighted the fact that most subsidiaries developed and applied what we could call “local” PMSs, in addition to the systems implemented by headquarters.  

Our results allowed us to discern four different cases of influence between headquarters and subsidiaries.  

The first is when headquarters is dominant: Here the decisions made by subsidiaries are highly influenced by centrally-imposed systems, which are seen as an adequate representation of performance. These PMSs take diversified approaches and substantially impact the decisions of controlled companies. The second is when multinationals adopt alternative mechanisms for managing headquarters-subsidiary relationships. Generally in this case the PMSs have low diversification and are not linked to rewards. Headquarters applies other management tools to influence subsidiary decision-making, and more than likely PMSs primarily assess financial performance. This happens when global pressure is low, suggesting that PMSs are items in the tool kit deployed by headquarters to guide decisions in subsidiaries. The third case is when local PMSs are dominant: local decisions are primarily shaped by PMSs developed autonomously by subsidiaries, who consider centrally-implemented systems to be inadequate for running the business at a local level. The use of local measurement systems helps subsidiaries pursue their strategic goals, responding actively to local contexts. But at headquarters, this may mean a loss of control. What’s more, discontentment in subsidiaries with the PMS implemented by the main office could create centrifugal tendencies, and the tensions between international integration and local business methods can penalize the economic growth of the controlled company. Last comes the case of PMSs in competition, when both systems (the centrally-implemented one and the locally-implemented one) compete to influence decisions. This competition could be caused by a lack of communication and cooperation between headquarters and subsidiaries. In the short term, such competition allows subsidiaries to develop their own local strategies, but in the long run, it could lead to a strategic misalignment with the center, giving rise to conflict. 

Our results suggest that a project for assessing performance shared by headquarters and subsidiaries, combined with high global pressure, leads subsidiaries to utilize PMSs to support the activation and operationalization of strategic decisions made at a local level. We also found examples of autonomous development and use of local PMSs by subsidiaries, beyond the system mandated by headquarters. 

Combining a PMS implemented by headquarters with systems developed by subsidiaries engenders several problems in the headquarters-subsidiary relationship, which can ultimately impact local economic performance. Subsidiaries benefit from PMS implemented by headquarters when global pressure is perceived as being intense and the measurement approach is diversified, or when the headquarters differentiate in the mix of systems that inform the decisions of controlled companies. In contrast, the economic performance of controlled companies would appear to be penalized when the PMSs mandated by headquarters are seen as inadequate tools for managing local operations.