Chapter 14
Contemporary approaches to
measuring and managing
performance
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-1
The purposes of performance
measurement
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•
•
•
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Communicate the strategy and plans of the
business and align employee’s goals
Track performance against targets
Identify problem areas
Evaluate subordinates’ performance, and as a
basis of rewards
Guide senior managers in developing future
strategies and operations
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PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-2
Problems with conventional financial
performance measures
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•
They are not actionable
Financial measures emphasise only one
perspective
Financial performance measures provide limited
guidance for future actions
May encourage actions which decrease
shareholder and customer value
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-3
Contemporary performance measurement
systems
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•
•
•
Include non-financial and financial measures
Have a strategic orientation—directly measure
areas that provide competitive advantage
Use external benchmarks
Emphasise continuous improvement
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-4
Non-financial measures for operational
control
•
Non-financial measures reflect the drivers of future
financial performance
– Improvements will flow through to financial performance
•
More actionable
– Easier to investigate the source of low performance,
compared to low cost variances
•
More understandable and easier to relate to,
particularly at the operational level
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-5
Non-financial measures for operational
control
•
Customer satisfaction
– Measured by survey administered to customers
•
Defect measures
– Measurement of faults in a product that occur during the
manufacturing process
– Support a high-quality strategy
•
Quality
– Periodic inspections or testing of products
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-6
Non-financial measures for operational
control
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Productivity
– The ratio of outputs produced per unit of input
Labour productivi ty 
Number of units produced
Number of direct labour hours
Total factor productivi ty 
Number of units produced
Cost of all inputs to production
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-7
Non-financial measures for operational
control
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Stock status
• Accident report
– Safety statistics
•
Multi-skilling
– Number of employees who have attained skills to allow
them to undertake a range of operational tasks
•
Machine downtime
– Number of hours, or percentage of total production hours,
that machines are unable to operate
•
Delivery on time
– Prompt delivery to customers is an important driver of
customer value
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-8
The problems with non-financial
performance measures
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Wide choice of non-financial measures available
Their development can be ad-hoc and undirected
Managers must necessarily make trade-offs
between achieving some measures and not others
Some measures lack integrity
– Accuracy of the data, opportunity for manipulation
•
Some measures not easily translated into financial
outcomes
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-9
Measuring performance with a balanced
scorecard
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A performance measurement system that identifies
and reports on performance measures for each
key strategic area of the business
The Kaplan and Norton model translates an
organisation’s mission and strategies into
objectives and performance measures
Has four perspectives
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–
–
–
Financial
Customer
Internal business processes
Learning and growth
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-10
Measuring performance with a balanced
scorecard
•
Financial perspective
– Reflects perspective of the shareholder
– Summarises the financial outcomes of decision and
actions
– Measures include various cost and product measures,
return on investment, cash flow measures, shareholder
value measures
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-11
Measuring performance with a balanced
scorecard
•
Customer perspective
– Measures the company’s success in achieving customer
value
– Outcome (lag) measures include customer profitability,
market share, number of new customers
– Lead indicators include on-time delivery, number of
defects
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-12
Measuring performance with a balanced
scorecard
•
Internal business processes
– Objectives relate to specific processes that contribute to
achieving customer and financial objectives
– Processes critical to delivering products to customers and
achieving financial strategies
– Product design, operations, marketing, sales, customer
service processes
– Measures of cost, product quality, time-based measures,
new product development
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-13
Measuring performance with a balanced
scorecard
•
Learning and growth
– Focuses on the capabilities of the organisation to achieve
superior internal processes that create both customer and
shareholder value
– To deliver long-term growth and improvement
– Measures focus on employee capabilities, capabilities of
information systems and organisational climate
– Employee satisfaction, training, skills, employee
suggestions
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-14
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PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-15
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-16
Measuring performance with a balanced
scorecard
•
Lag indicators
– Monitor progress towards the organisation's objectives
– Difficult to monitor directly
– Summary financial measures, market share, customer
satisfaction
•
Lead indicators
– Measures that drive the outcomes and provide
information that is actionable and manageable
– Relate to the processes and activities of the business
– Improvements in these measures should, over time, flow
through to improvements in lag indicators
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-17
Measuring performance with a balanced
scorecard
•
Measures in the balanced scorecard provide
balance between
– Short-term and long-term objectives
– Financial and customer measures, and measures of
business processes, and learning and growth
– Outcome measures and drivers of those outcomes
– Objective and easily quantified measures and subjective
performance measures
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-18
Linking non-financial measures to
financial performance measures and
financial performance
•
Improvements in non-financial measures will not
result in improved profits if
– Management has selected the wrong critical success
factors
– Management fails to utilise freed-up resources, following
on from improvements in non-financial measures
– The performance measurement system is incorrectly
designed

Provides incentive to engage in dysfunctional behaviour
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-19
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-20
Benchmarking
•
A process of comparing the products, functions
and activities in an organisation against external
businesses
– Identify areas for improvement
1.
2.
3.
4.
5.
Identify the functions/activities to be
benchmarked, and performance measures
Select benchmarking partners
Data collection and analysis
Establish performance goals
Implement plans
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-21
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-22
Forms of benchmarking
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Internal benchmarking
– Benchmarking operations that are internal to the larger
business group
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Competitive benchmarking
– Benchmarking with companies in the same industry
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Industry benchmarking
– Against companies that have similar interests and
technologies within an industry
– Performance measures and practices directly comparable
•
Best-in-class or process benchmarking
– Benchmarking against the best practices that occur in
any industry
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-23
Benchmarking against competitors’ cost
structures
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Costs can be inferred by using publicly available
information, such a sales volume, market share,
product mix
Industry-sponsored databases
Stockbroking firms
Specialist benchmarking consulting firms may
provide data
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-24
Warning signs of an inadequate
performance measurement system
•
How does a firm know when its performance
measurement system is inadequate?
– Performance is acceptable on all dimensions, except
profit
– Customers do not buy product, even when prices are
competitive
– Managers are not concerned when performance reports
are not supplied
– Significant time is spent debating the meanings of
measures
– Measures have not changed for some time
– The business strategy has changed
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-25
Designing an effective
performance measurement system
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Linked to strategy and goals of the organisation
– Encourages goal congruence
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Simple
– Measure should be understandable and easy to
communicate with employees
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Recognise controllability
– Responsibility for achieving measures should relate to
activities and processes which employees can control
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•
Emphasise the positive
Timely
– Measures reported as close as possible to the period to
which they relate
continued
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-26
Designing an effective
performance measurement system
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Relate to benchmarking
– Against external standards
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Embrace participation and empowerment
– To promote motivation and goal congruence
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Includes only a few performance measures
– Rule of thumb is that no person should be responsible for
more than 4 or 5 measures
•
Link to rewards
– Motivational
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-27
Designing measures for continuous
improvement
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Continuous improvement can be built into
performance measurement systems by
– Selecting relevant performance targets that focus on
problems areas and moving to other measures when
performance has improved
– Defining 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 time
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-28
Behavioural implications of changing
performance measures
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Resistance to change may be more likely when
– Individuals consider targets unfair or unachievable
– Individuals’ rewards are affected by changes
•
Changes are most likely to succeed if
– They are supported across the entire organisation
– Bottom-up approaches are included
– New measures should not be seen as an ‘add on’ to an
inadequate performance measurement system
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-29
Copyright  2006 McGraw-Hill Australia Pty Ltd
PPTs t/a Management Accounting: Information for managing and creating value 4e
Slides prepared by Kim Langfield-Smith
14-30