Dominic Keating 8th February 2016 Cost & Performance Management 5BUS1093 Lecture 14 Performance Management & Measurement Systems Dominic Keating 8th February 2016

CPM L14– Performance Management & Measurement Remaining Topics Lecture No. Lecture Date Lecture Topic 14 08-Feb Performance Management & Measurement 15 15-Feb Budgeting 1 16 22-Feb Budgeting 2 17 29-Feb Beyong Budgeting 18 07-Mar Balanced Scorecard 19 14-Mar Divisional Performance Management 20 21-Mar Transfer Pricing

CPM L14– Performance Management & Measurement Learning Objectives Performance Management VS. Performance Measurement Elements effective performance management systems Characteristics of effective performance measures

CPM L14– Performance Management & Measurement Performance Management Systems “A performance management system is a set of integrated management processes, such as the selection of performance measures, the setting of targets, decision-making, performance evaluation and rewards which are all aligned with the strategic objectives” Ittner, Larcker & Randall, 2003 http://www.youtube.com/watch?v=jkZVnXn5MwM

CPM L14– Performance Management & Measurement Performance Measurement Systems “A performance measurement system is the information system which is at the heart of the performance management process and it is of critical importance to the effective functioning of the performance management system” Bitici, Carrie & Mcdevitt (1997)  

CPM L14– Performance Management & Measurement Performance Measures Financial performance crucial but financial measures are backward looking Volatile world - past performance is no guarantee of future performance Today’s firms compete on price, quality, service, innovation etc. etc. Non-financial measures are better indicators of future performance Good performance in these areas is likely to lead to future financial success An effective performance management system contains a mix of leading non-financial indicators and lagging financial indicators that together provide a comprehensive view of performance

CPM L14- Performance Management & Measurement Performance Measure Examples

Leading to a lack of focus CPM L14– Performance Management & Measurement Which Performance Measures to Use? Many slip up on the ICE Leading to a lack of focus

CPM L14– Performance Management & Measurement Key Performance Indicators Identify critical areas / activities needed to achieve strategic objectives = Critical Success Factors (CSFs) e.g. customer service Select / develop Key Performance Indicators (KPIs) for each CSF e.g. Complaint Response Time KPI good practice Few in number Clearly defined Easy to understand Reported regularly Replaced if necessary

CPM L14– Performance Management & Measurement Don’t Avoid Measuring Tricky Areas Some CSFs might not be easily to measure e.g. intellectual property innovation Can measure indirectly e.g. no. years staff service / experience No. staff suggestions Improvements in product quality % of sales from new products “Everything that can be counted does not necessarily count. But everything that counts cannot necessarily be counted” Albert Einstein

Dissatisfied customers CPM L14– Performance Management & Measurement Be Aware of Behavioural Implications Focussing on one area can lead to problems …. Fast delivery Sloppy and undercooked Health and safety Dissatisfied customers

CPM L14– Performance Management & Measurement Targets Inappropriate targets can be divisive & demotivating Appropriate targets; Are fair & achievable Motivate employees Encourage the right behaviour Drive performance Fair aross the organisation Target setting issues Who should set? How difficult? Absolute or relative?

CPM L14– Performance Management & Measurement Employee Involvement A performance mgmt. system must be implemented top down Leaders set the strategy, determine objectives & select KPIs Employees, not leaders, implement the strategy Must buy-in or will be ineffective Measures must be relevant otherwise ignored If accepted, demanding targets more likely to be achieved Measures & targets set locally but linked to objectives “ Importance of Buy In “Objectives should be cascaded down to provide a link between each individual and the overall strategy of the organisation” Rogers, 1990

If measurement does not lead to action there is no management control CPM L14– Performance Management & Measurement Evaluating Performance & Feedback Continuous cycle Identify variances Understand causes Take action Controllability Principle Evaluate management performance only on areas they can control Otherwise will demotivate not encourage better performance Particularly relevant in today’s volatile business environment If measurement does not lead to action there is no management control

CPM L14– Performance Management & Measurement Rewards Critical part of any PMS Poorly designed rewards system - more harm than good But can motivate, attract & retain outstanding performers Ultimately linked to strategic objectives Must be fair & seen to be fair across organisation Expectations must be clearly defined in advance Objective evaluation (using measures & targets) Levels: Organisational : same for all Group / Team : encourage team work Individual : create competition

PEOPLE AND PROCESSES ALIGNED TO ACHIEVE GOALS CPM L14– Performance Management & Measurement Characteristics of Effective Performance Management Systems Clear, well communicated strategy & objectives Comprehensive view of performance Well-defined performance measures clearly linked to objectives Objectives cascaded down to lower organisational levels Employee involvement (in setting local measures & targets) SMART stretching targets Timely reporting & analysis Fair performance evaluation Rewards for good performance Effective feedback mechanisms Culture of continuous improvement PEOPLE AND PROCESSES ALIGNED TO ACHIEVE GOALS

CPM L14– Performance Management & Measurement Remember………….. It’ people, not organisations, who perform http://www.youtube.com/watch?v=2D8HjH31pfI

CPM L14– Performance Management & Measurement Private Study & Tutorial Reading All MA texts have chapters / sections on the areas covered today See section 5b of the module guide for example texts Select one text, read the relevant chapter(s) and add to your lecture notes Private Study Question Simon’s Salon – evaluating business performance using fin. & non-fin. measures You must attempt this before tutorial & bring your answer with you