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 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 14-2 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 14-3 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 14-4 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 14-5 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 14-6 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 14-7 Non-financial measures for operational control Productivity –The ratio of outputs produced per unit of input 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 14-8 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 14-9 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 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 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 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 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 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 14-15

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

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 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 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 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 14-20

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 Benchmarking A process of comparing the products, functions and activities in an organisation against external businesses –Identify areas for improvement 1. Identify the functions/activities to be benchmarked, and performance measures 2. Select benchmarking partners 3. Data collection and analysis 4. Establish performance goals 5. 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 14-22

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 Forms of benchmarking Internal benchmarking –Benchmarking operations that are internal to the larger business group Competitive benchmarking –Benchmarking with companies in the same industry 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 Benchmarking against competitors’ cost structures 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 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 Designing an effective performance measurement system Linked to strategy and goals of the organisation –Encourages goal congruence Simple –Measure should be understandable and easy to communicate with employees Recognise controllability –Responsibility for achieving measures should relate to activities and processes which employees can control 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 Designing an effective performance measurement system Relate to benchmarking –Against external standards Embrace participation and empowerment –To promote motivation and goal congruence 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 Designing measures for continuous improvement 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 Behavioural implications of changing performance measures 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 14-30