Acct 7320 Spring 2010 Thanks to Dinara Ablaeva & Tatyana Golosiy TRACKING PERFORMANCE: WHEN LESS IS MORE Gjerde & Hughes, Management Accounting Quarterly Fall 2007 Acct 7320 Spring 2010 Thanks to Dinara Ablaeva & Tatyana Golosiy

THE HOME DEPOT

WHY??? Real Life Situation 1 Home Depot grew to become the world's largest home-improvement chain Service began to slip over the past six years WHY???

STARBUCKS

WHY??? Real Life Situation 2 Starbucks was ranked first in customer loyalty in the coffee-and-doughnuts category for the five years prior to 2007 Lately, Starbucks was knocked out of first place in the coffee-and-doughnuts category by Dunkin' Donuts, the first time in five years Starbucks didn't dominate WHY???

What is Performance Measurement The specific representation of a capacity, process, or outcome deemed relevant to the assessment of performance. A performance measure is quantifiable and can be documented. (Adapted from “Guidebook for Performance Measurement” by P. Lichiello)

What are the Main Objectives of Performance Measurements Translating strategy into desired behaviors and results Communicating expectations to all parties Monitoring progress Providing feedback Motivating employees through performance based rewards and sanctions

Financial Performance Measures - Lagging Indicators: Net Income Operating Income Earnings per share Budget projections and targets, and many others

Nonfinancial Performance Measures – Leading indicators: Initiatives related to customer satisfaction Internal business processes Learning and growth

Customer Prospective: Average customer satisfaction Satisfaction vs. level of importance (gap analysis) Satisfaction distribution

Internal Prospective Cycle time Completion rate Workload and employee utilization Transactions per worker Errors or reworks

Learning and Growth Employee satisfaction Retention and turnover Training hours and resources Technology investments

Balanced Scorecards - Most Widely Used Performance Measurement System Integrated performance management system Provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals

What it Does: Balances financial and non-financial measures Balances short and long-term measures Balances performance drivers (leading indicators) with outcome measures (lagging indicators) Contains just enough information to give a complete picture of organizational performance Leads to strategic focus and aligns the organization to the strategy

How Many Measures do You Think the Company Should Track? Less than 5? Less than 10? Less than 15? Less than 20? More than 20?

Typically It Includes: 20-25 measures total (optimal) Five financial measures Five customer related measures Five to ten internal business measures Five learning and growth measures Is this still too many? Let’s take a

Example: Balanced Scorecard for Retail Apparel Company

Problems With Using Balanced Scorecards Too many targets, may lose sight of overall strategic goal Managers are overloaded trying to evaluate and improve performance on so many measures Making adjustments to improve performance on one measure may cause performance on the others to drop

The Ways to Overcome Problems With Balanced Scorecards are: To identify key leaingd measures, which may be: customer, process and learning initiatives that have significant and direct ties to the long-term strategic objectives of the organization the measures that are accumulated frequently and that result either in achieving or changing of strategic objectives To develop the measurement system with fewer : measurements (not more than ten), but these measurements must include key lead measures

What Went Wrong in Home Depot Example? Measures focused on aspects of store productivity Financial Customer Customer service began to slip. Internal Business Processes Learning and Growth Sales and market share began to slip No Connect to Strategy

What Went Wrong in Starbucks Example? Automation and Standardization Financial Customer Speed and efficiency not what customers value Internal Business Processes Improved efficiency and speed of delivery Learning and Growth Dunkin’ Donuts #1 in customer loyalty

The Steak n Shake Experience

THREE Key Metrics That Drive Restaurant Performance Associate turnover Drive-thru window times Dine-in satisfaction

What is the lesson? Tracking too many metrics can lead to confusion, lack of focus, and, ultimately, failure to achieve the goal. Management needs to identify tree to five key lead measures that most drive revenue and net income performance All employees must have a clear understanding of these measurements and of the final strategic goals The employees’ compensation must be linked to achieving of key lead measures

A Final Thought Companies should remember that performance measurement choice is a dynamic process- measures may be appropriate today, but the system needs to be continually reassessed as strategies and competitive environment evolve

Questions

Sources Kathy A. Paulson Gjerde, Ph.D., Susan B. Hughes, Ph.D., CPA, “Tracking Performance: When Less is More,” Management Accounting Quarterly, Fall 2007. Chee W. Chow, Ph.D., Wim A. Van der Stede, Ph.D., “The Use and Usefulness of Nonfinancial Performance Measures,” Management Accounting Quarterly, Spring 2006. Gerald K. DeBusk, Ph. D., CMA, CPA, Aaron D. Crabtree, Ph.D., “Does the Balanced Scorecard Improve Performance?” Management Accounting Quarterly, Fall 2006. Robert S. Kaplan, David P. Norton, “Putting the Balanced Scorecard to Work,” Harvard Business Review, September-October 1993. Christopher Ittner, David Larcker, “Non-financial Performance Measures: What Works and What Doesn’t,” http:/knowledge.wharton.upenn.edu . NERCOMP Conference Presentation, October 27, 2005, The International, Bolton, MA. John Sanders, “The Balanced Scorecard” Presentation for Finance and Administrative Services Division of California State University. Ram Charan, “Home Depot’s Blueprint for Culture Change,” Harvard Business Review, April 2006. Matt Creamer, “Starbucks Wakes Up and Smells the Death of its Brand Experience,” Advertising Age, February 26, 2007.