Chapter 11: Performance Measurement

The goal of PF is to implement strategy, therefore must select systems that best reflect strategy. There is always a need for short-term/ongoing feedback to managers which contradicts the fact that short-term focus tends to erode long-term shareholder value. Relying solely on financial measures can be dysfunctional to the organi ation for four reasons! ". Errors of commission: #ncourages short-term actions $costly actions that are good in the short run to ma%imi e profits/bonuses& '. Errors of omission: (ot undertake useful long-term actions $in order to obtain shortterm profits, e.g. not doing sufficient R)*& +. Distorted communication: setting targets they can easily meet which leads to erroneous planning data, reluctant to admit that they will miss their targets etc. ,. Data manipulation: -orrow from future earnings, falsify data $cf. article&. Therefore, one needs to use multiple measures at all levels in the organi ation. .istorically, non-financial measures $leading indicators of future performance& have been used at lower levels in the organi ation $task control& and financial at higher $management control&. Framework for designing a reward system ;hat counts, gets measured
;hat gets rewarded, really counts

strategy

;hat gets measured, gets done

;hat gets done, gets rewarded

The Balanced Scorecard -usiness units should be assigned goals and be measured from the following perspectives $that each addresses an aspect of the company/s strategy&! Financial 0nternal business 0nnovation and learning 1ustomer Fosters balance to achieve goal congruence, encouraging employees to act in the company/s best interest. 0t helps the company/s focus, improves communication, sets organi ational ob2ectives and provides feedback on strategy $cf 3aplan ) (orton $"445&&. #%ecutives must choose a mi% of measures that! ". 6ccurately reflect the critical factors that will determine the success of the company/s strategy

7ophia 7kogetun, '889-"8-":

"

'. +.

7how the relationships among the individual measures in a cause-and-effect manner $show how short-term affect long-term& and Provide a broad-based view on the current status of the company.

A blend of different strategic measures <to address the need of different stakeholders! Outcome and driver measures! =utcome measures/lagging indicators tell what/s happened. *river measures/leading indicators show the progress of key areas in implementing a strategy. These are ine%tricably linked. Financial and nonfinancial measures! many organi ations have failed to incorporate nonfinancial measures into their performance reviews because they are less sophisticated than financial measures. Internal and external measures! needs balance between e%ternal $customer& and internal $manufacturing&. Measurements drive change! most important aspect is the system/s ability to measure outcomes and drivers that direct the company towards its strategies. >easures must be< 7trategy- and organi ation specific ?inked from top to bottom $tied to specific targets and clarified by ob2ectives& 7how cause-and-effect relationships <and measures should not be a laundry list, but linked together. Relationships must be understood Process for implementing a performance measurement system (iterative process : ". Define strategy: -71 is a link between strategy and operational action. Single industry firm! should be developed at the corporate level and cascaded down. Multi-business firm! should be developed at the business unit level and aggregated in a corporate-wide -71. '. Define measures of strategy: focus on a few, linked measures that support the strategy. =ne single measure is not sufficient, and too many measures make the system too comple%. -y making trade-offs, the manager can choose btw behaviours that benefit the short- or long-term success. 3. Integrate measures into the management system ,. Revie measures and results fre!uently: to be able to revise the strategy. >ost important, the reviews should i& tell how and whether the strategy is working, ii& show that the measures are really important, iii& keep the measures aligned and iv& improve measurement.

7ophia 7kogetun, '889-"8-":

'

Possible implementation problems <which could limit the usefulness! "oor correlation #et een nonfinancial measures and results: hard to determine the cause-effect relationships/pro%y measures for nonfinancial ob2ectives. Fixation on financial results: < due to short-term pressure. This overwhelms the longterm, uncertain payback of nonfinancial measures. 6n incentive system that only rewards financial results creates additional pressure. Measures are not updated Measurement overload $"@%@98& Difficulty in esta#lishing trade$offs! could give weights to the individual measures in the -71. ;ithout them, it is more difficult to establish trade-offs between financial and nonfinancial measures. !nteractive control"#earning organi$ations 0n industries that are sub2ect to rapid environmental changes, it is important that the organi ation can continuously adapt to the changes through interactive controlsA a way of using the management control system as a source of information. 0nteractive controls alert management to strategic uncertainties, which forms the basis for managers to adapt to the changing environment by creating new business models. #%amples are technological discontinuities $internet, e-commerce growth, shifts from physical goods to services<& and globali ation discontinuities $deregulation, competition moving freely across borders<&.

Chapter 1%: Service &rgani$ations

>1 differs in service organi ations from manufacturing organi ations! 6bsence of an inventory buffer between production and sales *ifficulty of measuring Buality ?abor intensive Professional service organi ations! (o dominant goal of return on assets employed -ehavioural characteristics do not include attention to costs =utput measures are sub2ective (o clear line between marketing and production Performance appraisal by peer revivews which are sub2ective Financial services organi ations! Raw material is money C the value in each unit of money in inventory is the same for all organi ations $cost of using money of course varies& Profitability cannot be measured until several years after a commitment has been made C continual periodic audits are necessary .ealthcare organi ations! 1urrent control and deliver system is unworkable. 1osts cannot be standardi ed. (onprofit organi ations! 1annot use the profit measure for control but must account for contributed capital instead #%penditure decisions are sub2ective $are becoming more effective due to shrinking sources of funds&

7ophia 7kogetun, '889-"8-":