Performance Measurement and Evaluation
Divisional Performance Measures
Financial & Non-Financial Measures
Social & Environmental Measure
Financial Measures
Economic value added
Residual value
Shareholder value added
Return on investment
The performance pyramid
Building block model
Balanced Scorecard
The performance prism
Triple bottom line
Responsibility Accounting
Responsibility Centre
Organisational Structure
Revenue Centre
Profit Centre
Cost Centre
Investment Centre
Chief Executive (IC)
Chief Executive (IC)
Financial and Administration Manager (CC)
Purchasing Manager (CC)
Marketing Manager (RC)
Research and Development Manager (CC)
Production Manager (CC)
Product Y Divisional Manager (IC)
Product Z Divisional Manager (IC)
Product X Divisional Manager (IC)
Other Functional Managers (CCs)
Other Functional Managers (CCs)
Other Functional Managers (CCs)
Other Functional Managers (CCs)
Performance Measures
Benefits
Performance Measures - Problems
Features_A good performance measure should:
Only include factors for which the divisional manager can be held accountable
Recognise the long-term objectives as well as short-term objectives of the organisation
Provide incentive to the divisional manager to make decisions which are in the best interest of the overall company (goal congruence)
Goal Congruence
Accept if ROI>Cost of capital
RI = Controllable contribution - Cost of capital
EVA = NOPAT - WACC x Capital
"Value drivers" that affect shareholders value
Investment in working capita
Fixed capital investment
Income tax rate
Cost of capital
Operating profit margin
Life of the project
Rate of sales growth
Three Dimensions
Social
Economic
Environmental
Performance Measures_Four Business Perspectives
Both Tangible and Intangible Factors
Customer Perspective
Internal Business Perspective
Financial Perspective
Learning and Growth Perspective
"How do we look to shareholders?"
It should serve two purposes:
To provide definite performance that was expected at the time of strategies selection
To provide a focus for objectives and appropriate measures in each of the other three perspectives
"How do customer view us?"
Lead Indicator_Examples
After sales support
Defects per order
On-site service
Cost of the product
On-time delivery
Free shipments, etc
"At what must we excel?"
"How do we continue to improve and create value?"
Principle Sources
Systems i.e. information system capabilities and
Organisational procedures i.e. motivation. empowerment and alignment
People i.e. employee capabilities
Reasons for failure
Senior executives misguidedly delegate the responsibility of the Scorecard implementation to middle level managers
Company's try to copy measures and strategies used by the best companies rather than developing their own measures suited for the environment under which they function
Managers mistakenly think that since they already use non-financial measures, they already have a Balanced Scorecard
There are times when Balanced Scorecards are thought to be meant for reporting purposes only
Objectives - Top to Bottom
Measures - Bottom to Top
Common for All_Performance measures should:
Include financial as well as non-financial measures
Make explicit the trade-offs between different dimensions of performance
Include internal as well as external measures
Include all important but difficult to measure factors as well as easily measurable ones
Be allied to corporate strategy
Consider measures for managers/ employees' motivation
Rewards = The motivation to meet standards
Dimensions = These are the goals for the business
Standards = These are the measures used
Ownership
Achievable
Equity
Clear
Controllability
Motivation
Determinants = Performance areas which influence the results
Results = Success or failure of determinants
Flexibility
Innovation
Quallity
Resource utilisation
Financial performance
Competitive performance
Five Facets
Processes
Capabilities
Strategies
Stakeholders contribution
Stakeholders satisfaction
Helps facilitate comparison between divisions
Promotes accountability to stakeholder
Greater understanding of process
Helps in setting of targets for managers
Clarifies the objectives of the organisation
Helps facilitate comparison between different organisation
Develop agreed measures of activity
Myopia
Misrepresentation
Sub-optimisation
Misinterpreting
Tunnel Vision
Ossification
Undue focus on measurement to the detriment of other areas
Focus on one measurement to the detriment of others
Focusing too much on short-term measures and not looking long-term
Not presenting the data correctly
Misinterpreting the data
Keeping of out of date measures
Benchmarking
Pre-requisites for Successful Benchmarking
Difficulties in Implementation
Process of Benchmarking
Benchmarking Code of Conduct
Types
Process Benchmarking
Functional Benchmarking
Global Benchmarking
Internal Benchmarking
Strategic Benchmarking
External Benchmarking
Competitive Benchmarking
Intra-Group Benchmarking
Inter-Industry Benchmarking
Analysing the Findings
Recommendations
Collection of Data and Information
Monitoring and Review
Planning
Sufficient resources are available to complete projects within the required time scale
Benchmarking teams have a clear picture of their organization's performance before approaching others for comparisons
The scope of the work is appropriate in the light of the objectives, resources, time available and the experience level of those involved
Benchmarking teams have right skill and competencies
The objectives are clearly defined at the outset
Stakeholders, particularly staff and their representatives, are kept informed of the reasons for benchmarking
Senior managers support benchmarking and are committed to continuous improvements
It is likely that there is resistance form employees
Companies can become preoccupied with the measures. The goal becomes not to improve process but to match the best practises at any cost
Benchmarking implementation requires the direct involvement of the senior manager, etc. The drive to be best in the industry or world cannot be delegated
The key element in benchmarking is the adaptation of a best practice to tailor it to a company's needs and culture. Without that step, a company merely adopts another company's process. This approach condemns benchmarking to fail
Benchmarking is time consuming and at time difficult. It has significant requirement of staff time and company resources
Companies often waster time in benchamrking non-critical functions
Principle of Confidentiality
Principle of Use
Principle of First Party Contact
Principle of Third Party Contact
Principle of Preparation
Principles of Exchange
Principle of Legality
Performance Measurement in Not For Profit Sector
Value for Money Framework
Adapted Balanced Scorecard
Key Challenges
Other Performance Measures
Benefits may accrue over a longer term
Measurement of utilization of funds and expenditure
Benefits cannot be quantified
Multiple objectives
Efficiency
Economy
Effectiveness
Financial Perspective
Internal Processes Perspective
Customer Perspective
Innovation and Learning Perspective
Satisfaction of beneficiary and other stakeholder's interest
Fund raising, funds growth and funds distribution
Internal efficiency, volunteer development and quality
The capacity of organization to adjust to the changing environment
The best use of financial as well as non-financial resources to achieve desired objectives and mission
The long-term impact (benefits) of the activities of the not-for-profit organisations
Submitting periodic reports to the stakeholders in a transparent manner
The quality of services provided by the organizations
The ability to raise funds to meet the objectives efficiently