Contemporary approaches to measuring and managing performance

Chapter 14Contemporary approaches to measuring and managing performance14-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineThe purposes of performance measurementConventional performance measurementContemporary performance measurementNon-financial measures for operational controlStrategic performance measurement systemsDoes non-financial performance lead to financial performance?BenchmarkingWarning signs of an inadequate performance measurement systemDesigning and effective performance measurement system14-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe purposes of performance measurementCommunicate the strategy and plans of the business and align employees’ goalsAllow manager to track their own performance against targets and take corrective actionEvaluate subordinates’ performance, and provide rewardsGuide senior managers in developing future strategies and operations14-3Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithProblems with conventional financial performance measuresThey are not actionableFinancial measures emphasise only one perspectiveFinancial performance measures provide limited guidance for future actionsMay encourage actions which decrease both shareholder and customer value14-4Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithContemporary performance measurement systemsInclude non-financial and financial measuresHave a strategic orientation—directly measure areas that provide competitive advantageUse external benchmarksEmphasise continuous improvement14-5Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithNon-financial measures for operational controlNon-financial measures reflect the drivers of future financial performanceImprovements will flow through to financial performanceMore actionableEasier to investigate the source of low performance, compared to low cost variancesMore understandable and easier to relate to, particularly at the operational level14-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Non-financial measures for operational control (cont.)Customer satisfactionMeasured by survey administered to customersDefect measuresMeasurement of faults in a product that occur during the manufacturing processSupport a high-quality strategyQualityPeriodic inspections or testing of products14-7(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithNon-financial measures for operational control (cont.)14-8ProductivityThe ratio of outputs produced per unit of inputCopyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Non-financial measures for operational control (cont.)Stock statusAccident reportSafety statisticsMulti-skillingNumber of employees who have attained skills to allow them to undertake a range of operational tasks Machine downtimeNumber of hours (or percentage of total production hours) that machines are unable to operateDelivery on timePrompt delivery to customers is an important driver of customer value14-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe problems with non-financial performance measuresWide choice of non-financial measures available Development can be ad-hoc and undirectedManagers must necessarily make trade-offs between achieving some measures and not othersSome measures lack integrityAccuracy of the data, opportunity for manipulationSome measures are not easily translated into financial outcomes14-10Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStrategic performance measurement systems (SPMS)Translates strategy into an integrated set of financial and non-financial measures across a range of perspectivesExamples include the balanced scorecard (BSC), performance prism, intangible asset scorecardAll provide the potential to identify cause and effect relationships between a variety of measures and the financial performance of the organisation and its strategies14-11Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithMeasuring performance with a balanced scorecardA performance measurement system that identifies and reports on performance measures for each key strategic area of the businessThe Kaplan and Norton model translates an organisation’s mission and strategies into objectives and performance measuresHas four perspectivesFinancial CustomerInternal business processesLearning and growth14-12Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Measuring performance with a balanced scorecard (cont.)Financial perspectiveReflects perspective of the shareholderSummarises the financial outcomes of decision and actionsMeasures include cost and product measures, ROI, cash flow measures, shareholder value measuresCustomer perspectiveMeasures the company’s success in achieving customer valueOutcome (lag) measures include customer profitability, market share, number of new customersLead indicators include on-time delivery, number of defects14-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Measuring performance with a balanced scorecard (cont.)Internal business processesObjectives relate to specific processes that contribute to customer and financial objectivesMeasures of cost, product quality, time-based measures, new product developmentLearning and growth Focus is on the capabilities of the organisation to achieve superior internal processes that create both customer and shareholder valueDelivers long-term growth and improvementMeasures focus on employee capabilities, capabilities of information systems and organisational climate14-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)14-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithStrategy mapsA visual representation that explains the cause and effect relationships linking the objectives of the four perspectives of the BSC and the organisation’s objectivesMay also identify linkages between lag and led measuresA tool to communicate to mangers the components of the strategy and the processes that will help achieve it 14-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith14-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithLag and lead indicatorsLag indicatorsMonitor progress towards the organisation's objectivesDifficult to monitor directlySummary of financial measures, market share, customer satisfactionLead indicatorsMeasures that drive the outcomes and provide information that is actionable and manageableRelate to the processes and activities of the businessImprovements in these measures should, over time, flow through to improvements in lag indicators14-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithDoes non-financial performance lead to financial performance?Improvements in non-financial measures will not result in improved profits ifManagement has selected the wrong critical success factors Management fails to utilise freed-up resources, following on from improvements in non-financial measuresThere is a lag between financial and non-financial performanceThere are incentives to engage in dysfunctional behaviour, such as manipulating measures or maximising performance of some measures at the expense of others14-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith14-20Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithBenchmarkingA process of comparing the products, functions and activities in an organisation against external businesses Identify areas for improvementIdentify the functions/activities to be benchmarked, and performance measuresSelect benchmarking partnersData collection and analysisEstablish performance goalsImplement plans14-21Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithForms of benchmarkingInternal benchmarking Benchmarking operations that are internal to the larger business groupCompetitive benchmarkingBenchmarking with companies in the same industryIndustry benchmarkingAgainst companies that have similar interests and technologies within an industryPerformance measures and practices are directly comparableBest-in-class or process benchmarking Benchmarking against the best practices that occur in any industry14-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithBenchmarking against competitors’ cost structuresCosts can be inferred by using publicly available information, such a sales volume, market share, product mixIndustry-sponsored databasesStockbroking firmsSpecialist benchmarking consulting firms may provide data14-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithWarning signs of an inadequate performance measurement systemHow does a firm know when its performance measurement system is inadequate?Performance is acceptable on all dimensions, except profitCustomers do not buy product, even when prices are competitiveManagers are not concerned when performance reports are not suppliedSignificant time is spent debating the meanings of measuresMeasures have not changed for some timeThe business strategy has changed14-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithDesigning an effective performance measurement systemLink to strategy and goals of the organisationEncourages goal congruenceKeep it simpleMeasures should be understandable and easy to communicate with employeesRecognise controllabilityResponsibility for achieving measures should relate to activities and processes which employees can controlEmphasise the positiveBe timelyMeasures reported as close as possible to the period to which they relate14-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Designing an effective performance measurement system (cont.)Relate to benchmarkingAgainst external standardsEmbrace participation and empowermentTo promote motivation and goal congruenceInclude only a few performance measuresRule of thumb is that no person should be responsible for more than four or five measuresLink to rewardsMotivational14-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithDesigning measures for continuous improvementContinuous improvement can be built into performance measurement systems bySelecting relevant performance targets that focus on problem areas and moving to other measures when performance has improvedDefining and re-defining the measure to provide scope for improvement and increasing the challenge Making the performance target more challenging by making the performance target more difficult over time14-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithBehavioural implications of changing performance measuresResistance to change may be more likely whenIndividuals consider targets unfair or unachievableIndividuals’ rewards are affected by changesChanges are most likely to succeed ifThey are supported across the entire organisationBottom-up approaches are includedNew measures should not be seen as an ‘add on’ to an inadequate performance measurement system14-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummaryThe main purposes of performance measurement systems are to communicate the strategy, track performance again targets, evaluate subordinates’ performance and reward, develop future strategiesConventional financial-based performance measurement systems have many limitations and can be enhanced by non-financial measuresNon-financial measures have their own limitationsStrategic performance measurement systems (e.g. the balanced scorecard) track performance across key strategic areas of the organisation14-29Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Summary (cont.)Strategy maps and du Pont charts assist in the communication of strategy and the articulation of the performance measurement systemBenchmarking provides an external perspective to allow areas for improvement to be identifiedEffective performance measurement systems should link to strategy and goals, be simple, recognise controllability, emphasise the positive, be timely, include benchmarking, embrace participation, include only a few measures and link to rewards14-30Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith