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