Fair and focused: Management of 'cross-functional teams'

"Cross-functional teams" comprise employees and managers from separate divisions or organizational units within a company. Generally, these teams handle non-routine tasks or projects, addressing critical strategic issues such as change management or growth initiatives. An accountancy professor at W. P. Carey School of Business takes a look at whether changes in the way that management control systems are structured can help to keep cross-functional teams on target. Professor Casey Rowe's research provides evidence that people often fail to recognize how subtle changes in the structure of management control systems can affect informal or social controls such as corporate culture, and how powerfully these "softer" forms of control impact cross-functional team performance.

In today's dynamic business environment, corporate restructurings, process improvement initiatives, and innovation efforts often bring company employees together from divergent parts of the organization to resolve a complex problem or to complete a long-range project.

These "cross-functional teams" are composed of employees and managers from separate divisions or organizational units within the company. Generally, cross-functional teams handle non-routine tasks or projects, addressing critical strategic issues such as change management or growth initiatives.

According to Casey Rowe, an accountancy professor at the W. P. Carey School of Business, a central problem with cross-functional teams is that they operate in a relatively severe control environment in which it is difficult to properly align incentives. Members of these teams often face a dilemma between helping their division or department and helping the company as a whole.

Rowe adds that incentives are less effective for cross-functional teams than for functional teams (a team built around a single company unit or division), as the duties of the cross-functional team members are widely spread out across an organization and accountability can be difficult to trace to one individual or another.

Additionally, for cross-functional teams that may be working in different locations, the "mutual monitoring" of team members during frequent or routine face-to-face contact may be impossible. With duties so spread out, motivating employees to work together within the cross-functional team, rather than "free ride" on the work of other team members, becomes a serious issue. Free riding, Rowe notes, "arises when one benefits without contributing one's share of the inputs to create the group's joint output."

In his recent research paper titled The Effect of Accounting Report Structure and Team Structure on Performance in Cross-Functional Teams, Rowe takes a look at whether changes in the way that management control systems are structured can help to keep cross-functional teams on target.

Interestingly, Rowe provides evidence that people often fail to recognize how strongly subtle changes in the structure of management control systems can affect informal or social controls such as corporate culture, and how powerfully these "softer" forms of control impact cross-functional team performance and deter the "free rider" problem. "Identifying how accounting systems influence social motives is vital to developing a more complete picture of the role that accounting plays in solving control problems," he writes.

Rowe conducted two separate experiments to reach his conclusions. The first experiment examined the question of whether aligning accounting report structure and team structure in such a way as to create a 'group frame' (focusing people's attention on the team as opposed to themselves) helps to mitigate the free-rider problem. In the first experiment Rowe recruited eighty-four MBA students, dividing them up into four-person cross-functional teams assigned to a mock "process improvement initiative."

The study participants were asked to assume the role of a manager who works on a joint project with three other managers from three other units of the XYZ Company. Rowe based performance on a team member's willingness to invest their individual resources in the joint project. The paper notes, "Each individual was given an initial endowment of $6 and two units of resources worth $5 each (total endowment of $16)." In the resulting "game" individuals could earn more by keeping their units. However, the team as a whole performed best when members cooperated.

Two aspects of the control system were investigated in the study. A portion of the cross-functional teams in the research study met face-to-face, while some of the teams used a distributed team approach and were physically separated from the other team members in their group.

Additionally, although companies normally provide divisions with separate accounting reports, they are increasingly "opening the books" and sharing overall company information. In the experiment, team members were presented with unit-based accounting reports (an accounting of activities from a single division or company unit) or, alternatively, process-level accounting reports (an accounting of activities across the entire cross-functional team).

Rowe ensured that only the control system changed in the experiment. For example, no communication was allowed between team members and the participants were at the beginning of their graduate program, so they did not have any prior experience working together. Additionally, study participants were assured that no deception was involved in the experiment, and that each of the other team members received the exact same information.

Rowe finds that the way in which management control systems are typically designed can undermine the cooperation necessary for cross-functional teams to improve company performance. The research indicates that creating effective cross-functional teams depends on structuring both accounting reports and teams in an appropriate fashion.

The combination of process-level accounting reporting coupled with face-to-face meetings of the group proved to be the most valuable structure for promoting effectiveness in cross-functional teams, by effectively blurring the lines between team members.

Rowe notes, "This is a concept that really hadn't been tested before, and certainly not in the context of organizational change — this idea of how the combined structure of accounting reports and teams together influence informal control and cooperation." Fortunately, says Rowe, economic incentives are not the only way to resolve the free rider problem.

Rowe also assessed the individual's level of trust, group identification, and collectivism, in effort to explain how changes in the structure of the control system affected cooperation in teams. A measure of trust was established by asking subjects to predict the actual number of units (0–6) invested by the other team members.

The paper states, "Group identification is a type of bias in which people contribute to their team's performance because they expect to derive positive feelings of self-esteem from being associated with a successful group. In contrast, all cultures instill a norm of collectivism that prescribes contributing, rather than free riding, when one is faced with a group situation." Collectivism refers to the cultural norm, motivated by fear of embarrassment, of cooperating when one is faced with a group situation.

The study demonstrates that accounting structure can help to mitigate the incentive problems that naturally arise in cross-functional teams by fostering trust and collectivism, ultimately discouraging free riding. Rowe adds that he was surprised by how strongly the design of the control system influenced the formation of trust when cross-functional teams first met. Essentially, cross-functional team members chose to "free ride" or simply not to perform, when they assumed other team members would do the same.

According to the research paper, "the second experiment examines the question of whether subjects outside the teams, who act as management control system designers, appreciate how powerfully the design of accounting and team structures influences performance within teams."

Given full knowledge of the incentives the teams in experiment one faced as well as the structure of the teams and the accounting report structures in the first experiment, participants in experiment two tried to accurately predict the results of experiment one. Interestingly, the study participants significantly underestimated how strongly the alternative control systems influenced performance in the experiment one teams.

The author notes that those responsible for managing the control system are often operating from the sidelines, and that they simply don't see how profoundly their decisions affect team performance. He adds, "There is a belief that a corporate culture is relatively stable and enduring. But the research shows that during the non-routine tasks, which cross-functional teams perform, culture can be managed and that there is an opportunity for leadership in this area."

Most organizations design their control systems in a way that creates boundaries between people, and the research shows that these systems undermine performance in cross-functional teams. When organizations make strategic changes organization-wide cooperation can become crucial, the standard incentives we use to motivate people don't work well. In this case, top managers need to be more proactive in restructuring the control system to move lower level managers from a competitive to a cooperative culture."