Do management control systems impact capabilities and innovation in city councils?

Purpose This study aims to examine the mediating role of organizational capabilities in the relationship between the management controls systems (MCSs) adopted by city councils and their performance. To achieve this, it pursues two objectives: to analyze the impact of MCSs adopted by city councils on organizational capabilities; and to examine the mediating effect of organizational capabilities on the relationship between MCSs and both financial and nonfinancial performance. Design/methodology/approach This study is based on a sample of 123 Portuguese city councils. The analysis was conducted using partial least square structural equation modeling and necessary condition analysis (NCA). Findings The results show that informal controls play a crucial role in developing organizational capabilities within city councils, and the relationship between informal controls and liquidity is nonlinear. In addition, the authors found that MCSs and some capabilities are necessary conditions to achieve different performance outcomes in these entities. Originality/value In an environment characterized by bureaucracy and strict legal compliance, where formal controls are often applied transversally, this study strengthens the empirical evidence that informal controls are very important for developing organizational capabilities. By adopting a multi-method approach using NCA and conducting a robustness analysis, the authors were able to identify nonlinear relationships between the variables under study. The results offer valuable insights for public managers into the controls and capabilities that can enhance city council performance.