Performance Measurement Flashcards
Difficulties in measuring performance
If measures are not aligned to overall organisational aims, it could result in dysfunctional behaviour.
How do we measure group performance - problem with free-riders.
Although bonuses are awarded (in Western world) on individual performance, the performance has in most cases been earned as part of a team effort.
COST CENTRE MANAGER VIEWPOINTS
- Infatuation with cost control - budget data used inflexibly. Wouldn’t it be better to use budget data with intelligence? This is a budget constrained style.
- Profit conscious style - far more attention paid to long term cost control. Requires that accounting data are used flexibly. Performance of cost centre unit is appraised in the context of the organisation as a whole.
- Non-accounting style - accounting data plays a rather less important role in appraising performance.
BUDGET CONSTRAINED STYLE
Rather “behaviourist” - there is a system of rewards and penalties for performance measured against the budget.
PROFIT CONSCIOUS STYLE
Much more flexible and reasons for poor or good performance are sought before any appraisal or managerial action is taken.
NON-ACCOUNTING STYLE
Not influenced by the budget - the manager is appraised according to a wide range of metrics. Far less importance is attached to cost control, compared to the other methods.
POSITIVES OF USING THE BUDGET TO MOTIVATE AND TO CONTROL
Imoisili (1989) - a prescriptive budget can be a good thing if managers believe they can significantly control or alter their tasks.
NEGATIVE OF USING THE BUDGET TO MOTIVATE AND TO CONTROL
Study by Hopward (1976) - budget constrained style led to stress and a feeling of injustice.
DISADVANTAGES OF BUDGET CONSTRAINED STYLE
-Inter-divisional relationships can suffer - a manager can be under pressure from superiors and react by exploiting the immediate subordinates. Makes for unhealthy working environment.
Accounting information may not be changed merely to attain a bonus - it may be done to ensure divisional survival.
Otley suggested that managers in an environment which faces high levels of uncertainty tend to react worse with a budget constrained style.
THE BALANCED SCORECARD
- A way of balancing financial performance measures with non financial measures.
- Quality, delivery times, reliability, after-sales service and customer satisfaction cannot be measured from the proxy of financial performance.
Must be a cause and effect relationship in the chosen measures.
Some measures will LAG and will tell the story of what has happened. Mainly applies to financial measures.
Other measures will LEAD - principally the non financial measures. These will DRIVE future financial performance.
What does the balanced scorecard enable organisations to do?
1) Bridge the gap between strategy and action.
2) Engage a broader range of users in organisational planning.
3) Reflects the most important success factors of the business.
4) Respond immediately to progress, feedback and changing business conditions.
How does learning improve financial results?
- Learning improves business processes.
- Improved business processes improve customer satisfaction.
- Improving customer satisfaction improves financial results.
ADVANTAGES OF BALANCED SCORECARD
- Simple identification of key matters.
- Less infatuation with financial measures.
- Difficult for junior managers to “bury bad news”.
- Much easier to track performance throughout the value chain.
- Encourages a strongly customer oriented view, linkage into reward system.
- Aiding coordination and communication in the business.
Implementation issues of a Balanced Scorecard
- The non-financial information used is not subject to control or audit and may be unreliable or inaccurate.
- Non-financial information is often prepared on a weekly or daily basis while performance reviews are generally conducted quarterly or annually.
- Concern arises related to the timeliness and reliability of non-financial data prepared by external courses.
NON-FINANCIAL PERFORMANCE INDICATORS
- Like the annual budget, it’s a manifestation of strategic aims into the every day activities of the business.
- Performance measures are devised for four perspectives.
- The scorecard can be adapted then to ask the questions which management thinks need to be asked, and it gives top management a very quick and insightful summary of business performance.
What are the four perspectives of performance measures?
- Financial perspective
- The customer perspective
- The internal business perspective
- The learning and growth perspective