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

2. 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

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

4. 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,

5. 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)

6. 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

7. CPM L14- Performance Management & Measurement Performance Measure Examples

8. 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

9. 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

10. 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

11. 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

12. 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?

13. 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

14. 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

15. 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

16. 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

17. CPM L14– Performance Management & Measurement Remember…………..
It’ people, not organisations, who perform

18. 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