Lars Östman towards a general theory of financial control

Resource allocation and horizontal alternatives 

 

Vertical transmittances are dependent on how principals in the vertical line regard horizontal 

processes, the character of their involvement, the financial capacity that is available for them 

and the outlook of these processes. For some activity flows, external interests and needs are 

basically similar over time, but volume and form may change. For other activities, the 

significance of certain horizontal processes may shift continuously or abruptly. Great 

challenges may follow for an organisation, including new conditions in terms of activity 

orientation and target groups. Through methods of accumulating and transmitting capital, the 

horizontal outcome during one period can affect horizontal processes in the following 

periods. Surpluses are made directly available within a generating pay-driven unit, or funds 

are allocated to function-driven units based on performance in other respects. 

Mainly, function-driven organisations are financed through periodical capital input. To 

some extent, capital may be accumulated. Connections are weak to individual users and their 

output. Nowadays, pseudo-pricing is common, perhaps combined with periodical input. For 

some function-driven organisations, opportunities for horizontal substitution are small 

because activities are lastingly indispensable, potentials for rationalization are relatively 

limited and operating revenues are only a fraction of total funds. Relationships between 

decreases in resources and performance are difficult to capture in a meaningful sense, 

including prospects and capacity for the future. An organisation and surrounding parties are 

exposed to uncertainties for variables that are not easily defined. Allocation is often based on 

some reception of needs and how these are satisfied – for example, purely verbal goals, data 

about the scope of activities and the expressed views of users. A fundamental issue is how 

allotments are related to the development of incoming prices. This determines how costs and 

price risks are borne at different levels in an organisational hierarchy. 

In business life, principals in the vertical line may have direct intentions with function-

driven units but these units are not lastingly indispensable. On the contrary, such a function-

driven unit fulfils a function for a greater whole but substitutes often exist. Selection is 

possible in some time horizon but may have repercussions on other units. Resources are not 

allocated to such a function-driven unit only on the basis of the merits of the unit as self-

sustained. Various forms of pseudo-pricing are common, sometimes combined with vertical 

transmittances. 

In the public sphere, many control approaches are applied in order to get functions 

accomplished. Pseudo-commercial models are used, or assignments are given to pay-driven 

organisations that are privately owned. Normally for these suppliers, functions are satisfied 

to the extent that there is willingness and capacity to pay. Basically, revenues in these cases 

are determined by what funds the public buyer makes available, and their risks are affected 

by the durability of their relations to the buyer. In these cases, a complex vertical structure 

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stands above activities. Some parts are dependent on periodical allotments that are shaped by 

accounting concepts of public administration. Other parts have a direct connection to cash 

flows and the rate of return requirements in pay-driven organisations. Interaction between 

different control models becomes a key issue for the functions that are aimed at. 

Pay-driven units are based on the original capital input from founders and the subsequent 

non-periodical input that may have been determined by special decisions. Often, the most 

essential source is capital accumulated through retained earnings, period by period. Financial 

benefit is related to individual input. Normally, individual shares represent transferable 

values. Basically, vertical principals of pay-driven organisations are in the business for the 

sake of surpluses, but of course their motives may be related to specific horizontal processes 

as well. The alternatives of developing or winding up can be evaluated for a unit irrespective 

of other units. Selection is important, as well as competitiveness. 

For transfer-driven organisations, principals in the vertical line have no direct interest in a 

specific horizontal process, with the possible exception of markets where transfers and 

financial transactions are made.  Their focus is basically on transfers of equities or parts. The 

selection of equities is a core activity. In addition, adapting organisations in order to 

facilitate transfers may be a main interest. Shifts in ownership may take place because 

transfers are possible and without any particular relation to horizontal structures for the 

future. Attractive media story-telling becomes blurred with acquisition processes in a narrow 

sense.