Chapter 14 Contemporary approaches to measuring and managing performance Copyright ª 2006 McGraw­Hill Australia Pty Ltd 14­1 The purposes of performance measurement • 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 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 14-2 Problems with conventional financial performance measures • 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 • 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 • Productivity – The ratio of outputs produced per unit of input Labour productivity Number of unitsproduced Number of directlabour hours Total factor productivity Number of unitsproduced Cost of allinputs toproduction 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 • 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 • 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 • 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 – 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