TOPIC 4

PERFORMANCE MANAGEMENT

Lecture outline:Understand what is performance managementUnderstand limitation of traditional PMSExplain the BSCUnderstand performance evaluation for service organisations and non-profit organisationExplain reward systemsUnderstand critical success factors and key performance indicator

What is Performance Measurement and Management?Performance measurement - A process of assessing progress toward achieving predetermined goals.

Performance management - The use of performance measurement information to create positive change in organisational culture, systems and processes. helping to set agreed-upon performance goals allocating and prioritizing resources informing managers to either confirm or change current policy or program directions to meet those goalssharing results of performance in pursuing those goals.

The Building Blocks of Performance Management Source: Fitzgerald & Moon, 1996

Performance Measurement SystemsMeasurements are not in tune with strategic objectives. Measurements are not customer driven. Financial measures are too late for any corrective action and encourage a short term focus. Many key non-financial performance indicators are ignored. Measures are often used for punishment rather than for learning. What is wrong with the present measurement systems?

Financial vs Non-financial MeasuresFinancial Indicators Example: ROI, RI, EVA, NPV, Sales, profitProblems with reliance on traditional financial indicatorsTendency to rely on short term views.Distorted perception due to use of historical data to make future plans and decision making and controlling.Time lag from preparation to use. Management Accounting needs timely data. Qualitative information cannot be obtained therefore unbalanced perceptions.

Financial vs Non-financial MeasuresNon-financial indicatorsExample: customer satisfaction, on-time delivery, quality.Benefits of non-financial indicators:Able to view firms as having many dimensions needed for survival.Able to assess potentials.More accurate to measure operations of an organization. Less reliance on proxy financial measures which are less accurate

The Balanced ScorecardDesigned by Kaplan and Norton Use financial and non-financial measurements within 4 perspectives-Financial, Customers, Internal Business Process, Learning and Growth.How do customers see us? (customer perspective)What must we excel at? (internal business process perspective)Can we continue to improve and create value? (learning and growth perspective)How do we look to shareholders? (financial perspective)Each perspectives has two to three measurements.Link strategy with overall performance measures.

The Balanced ScorecardTo implement the BSC the major objectives for each of the 4 perspectives should be articulated and these objectives should be translated into specific performance measures. A critical assumption of BSC is that each performance measure is part of a cause-and-effect relationship. Each measurements relate to each others e.g. profit (financial)-customer turnover (customer)- On time deliveries (internal business process)- training hours (learning and growth)

The BSC consists of two types of performance measures: Lagging measuresLeading measuresExample of lag measure is increase in turnover, while order execution time would be lead measure for it.

The Balanced ScorecardStrategy Map guides the organization to achieve its objectives and translates strategy into action.

The description of strategy maps:All the information is contained on one page; this enables relatively easy strategic communication.

There are four perspectives: Financial; Customer; Internal; Learning and Growth.

The cause-and-effect relationships are described by connecting arrows. The argument has it that succeeding against objectives from the learning and growth perspective (the foundation of the strategy map) has a causal effect on success of the IBP perspective, which in turn creates success from the CP and finally to the FP.

Figure 1: Strategy Map

2000 Colin DruryFigure 2 The Balanced Scorecard (Source: Kaplan and Norton, 1996b)

Eg: internal business process (IBP)

objectivemeasurestargetAchieve fast ground turnaroundTime at gateOn-time departure30 minutes90%

The Balanced ScorecardThe BSC Management System (see Figure 2) is a scorecard of measures, targets and initiatives that supports the Strategy Map.The scorecard shows the measures that is used by an organization to track its progress towards achieving its strategic objectives.

Four Perspectives in Balanced ScorecardFinancial perspectives-ROI, EPS, Profit/Sales, Debt/Equity, Sales/AssetCustomer perspectives- No. customer complaints, Market share, Product returns/ Sales, No. new customersInternal Business process- On time deliveries, Quality costs, Setup time, standard cost variancesLearning and growth- Suggestions per employees, Employees turnover, Hours of training

Advantages of Balanced ScorecardLink long term strategy with short term objectives and measures.Encourage continual improvement.Balanced view between needs of financial and non-financial objectives.Modifiable for different organisations.Facilitate communications of companys strategy to lower level subordinates.

Measuring Customer PerformanceCustomer profitability analysis- the reporting and analysis of revenues earned from customers and the costs incurred to earn those revenues.

- attention given to customers who make large contributions to the operating income.

Performance Evaluation for Service OrganizationsService companies differ from manufacturing companies in several ways:

Outputs for most services are intangible.Outputs for services are heterogeneous.The production and consumption of many services are simultaneous.Services are perishable.

As in manufacturing companies, managers of service companies now require accurate, timely information to improve the quality, timeliness and efficiency of their activities, and to make decisions about their individual products, services and customers.

Fitzgerald et al (1993) proposes the Results and Determinants Framework as a PMS for service companies.

Performance Evaluation for Service Organizations

Performance Evaluation for Service Organizations Results & Determinants F/work

Performance Dimensions

Types of Measures

Competitiveness

Relative market share and position

Sales growth, Measures re customer base

Financial Performance

Profitability, Liquidity, Capital Structure,

Market Ratios, etc.

Quality of Service

Reliability, Responsiveness, Appearance, Cleanliness, Comfort, Friendliness, Communication, Courtesy, Competence, Access, Availability, Security etc.

Flexibility

Volume Flexibility, Specification and Speed of Delivery Flexibility

Resource Utilisation

Productivity, Efficiency, etc.

Innovation

Performance of the innovation process, Performance of individual innovations, etc.

Performance Evaluation for NPO NPO are different from profit organization.Reason for existence NPO no profit motive.The best performance indicators for NPO are generally not in the financial terms. Thus, it is more difficult to measure performance of NPO compared to the profit companies.Kaplan & Norton (2001) suggest that NPO can use BSC to measure their performances.Refer Figure 5.4 (Module, p 103).

Why would managers do not provide good service? There are three reasons:They may have low ability.They may prefer not to work hard.They may prefer to spend company resources (privilege given to them).The purpose of reward is to motivate superior performance among managers and employees to achieve organizations goals.

Reward Systems: Incentives for managers

Reward Systems

Frequently managerial rewards include incentives tied to performance.

The objective of managerial rewards is to encourage goal congruence, so that managers will act in the best interests of the company.When controls can motivate behavior that is organizationally desirable, they are described as encouraging goal congruence.

Managerial rewards can be:Monetary and non-monetaryExamples - salary increases, bonuses based on reported income, stock options, and recognition

Performance Measurement & Reward SystemsHow to tie reward to performance effectively (Atkinson et al, 2007, p369) by:Ensuring that employees understand how their jobs contribute to achieve organizational goals;Ensuring employees understand and trust the reward system. Ensuring employees believe that it measures what they can control.

Performance Measurement & Reward SystemsEmployee must perceives the reward system as fair and predictable.If the reward system does not measure performance that is under the managers control,they may ignore the measured performance because it is independent of their efforts and the reward system will be ineffective.

Performance Measurement & Reward Systems2. The designers of the PMS must make a careful choice about whether it measures employees inputs or outputs.In general, the greatest alignment between employees and the organisations interests is provided when the PMS monitors and rewards employee outputs that contribute to the organisations success.

However, sometimes outputs are beyond the employees control.

When outcome measurement is problematic, organisations often choose to monitor and reward inputs i.e. employee learning, demonstrated skill and time worked.

The elements of performance that the PMS monitors and rewards should reflect the organisations critical success factors.

This to ensure that the PMS is relevant and motivates intended performance that matters to the organisations success.

PMS must consider all facets of performance so that employees do not sacrifice performance on an unmeasured element for performance for performance on an element that the reward system measures.

Performance Measurement & Reward Systems4.The reward system must set clear standards for performance that employees accept.Standards help employees assess whether their skills and efforts create results that the PMS captures and reports as outcomes.

5.The measurement system must be calibrated so that it can accurately assess performance.PMS establishes clear relationship between performance and outcome.

Performance Measurement & Reward Systems6. When it is critical that employees coordinate decision making and other activities with other employees, the reward system should reward group rather than individual performance. Many organizations now believe that, to be effective, employees must work well in teams.They are replacing evaluations and rewards based on individual performance with evaluations and rewards based on group performance.

Critical Success FactorsDefinition A key area where satisfactory performance is required for the organization to achieve its goals.A means of identifying the tasks and requirements needed for success.At the lowest level, CSF become concrete requirements.A means to prioritize requirements.

Types of Critical Success Factors CSF

There are four basic types of critical success factors CSFsIndustry critical success factors (CSFs) resulting from specific industry characteristics;Strategy critical success factors (CSFs)resulting from the chosen competitive strategy of the business;Environmental critical success factors (CSFs)resulting from economic or technological changes; andTemporal critical success factors (CSFs)resulting from internal organizational needs and changes.

Things that are measured get done more often than things that are not measured.

Critical Success Factors

CSF for a business organization will be:i) Serviceii) Qualityiii) Costiv) Customer

Critical Success Factors-ServiceThe products tangible and intangible features promised to the customer; service is also known as value in use. How customers are treated before, during and after purchase decisions.

Critical Success Factors- Cost

Resources used to provide the product or service. The aim is to produce with the least resources hence increase competitiveness.

Critical Success Factors- QualityThe difference between the promised and the realized level of service; conformance to specifications.Example: Proton and Mercedes manufacture cars for different market segments and different product specifications. As long as both adhered to their specified standards, they achieve quality in their market segment.

Critical Success Factors- CustomerTaking the value chain concept into perspective, Customers will be the most important determinant of a companys success.Customer is always right.

Statistical research into CSFs on organizations has shown there to be seven key areas. These CSFs are:Training and educationQuality data and reportingManagement commitment, customer satisfactionStaff OrientationRole of the quality departmentCommunication to improve quality, andContinuous improvement

Examples of Critical Success factors

According to a 2000 Standish Group Report, the top success factors for projects were as follows. The list is in decreasing order of percentage factors responsible for success. % Success Factors18% Executive support16% User involvement14% Experienced project manager12% Clear business objectives10% Minimized scope8% Standard software infrastructure6% Firm basic requirements6% Formal methodology5% Reliable estimates5% Other criteria

Examples of Critical Success factors

Key Performance IndicatorsPerformance measures used to assess an organization's performance on its critical success factors.Measurements can be non-financials and subjective by nature.

CSFKPIServiceTime to respond to customer orders, time taken to resolve customer complaints.QualityNumber of complaints, customer satisfaction surveys, percent on-time delivery,returns, warranty claims.CostRatio of costs to revenues, cost of particular activity, customer profitability, sales per hour. CustomerNo. of customers, no. of new customers, no. of lost customers, market share.

End of Topic 4what gets measured gets done(Kaplan & Norton, 1996)

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