Performance Measurement

Week 5: Chapter 11
Course content
Purpose of PMS
Framework for designing PMS
Traditional vs Contemporary PMS
Balance Scorecards
Interactive vs Diagnostic Control
Challenges and Problems of PMS


Purpose of PMS
Coordination
Strategic decision making by revealing cause
and effect relationships between internal
processes and objectives achievements
Monitor performance
Identifying area that need attention
Enhance motivation
Improve communication
Strengthen accountability
Legitimizing
Framework for designing PMS
STRATEGY
What counts,
get measured
What gets rewarded,
Really counts
What gets measured
get done
What gets done,
Gets rewarded
Anthony &
Govindarajan
(2007)
Implementing a PMS
Design PMS to reflect strategy
Define measures of strategy (i.e App BSC)
Integrate measures into the management
system (Integrate to cos structure, culture
and HR practices (promotion and
compensation))
Review measures and results frequently
allows corrective actions + learning


The Traditional Measurement
Has always been financial data
Did not match with increasing competitive
environment focusing on issues like value
chain management and shorten product life
cycles.
Financials are lagging indicators they show
what happened in the past
What is needed in most organizations is leading
indicators . . .getting an idea of what may be
ahead
Limitations of Financial Control Systems
Cannot rely solely on financial measures as they can
be dysfunctional because:
1) Encourage short-term actions (i.e delivery inferior products
to meet profit targets)
2) Discourage useful long-term actions due to motivation to
obtain short-term profits (i.e Inadequate investment in R&D,
Avoid risky investment with high returns)
3) May distort communication between business unit manager
and top management (i.e Set easy profit target lead to
overall lower budgeted profits, disagree to admit miss
targets delay in corrective actions)
4) May motivate manipulation of data /earnings mgt (i.e
inadequate prov for bad debts, inventory obsolete and
warranty claims)

Alternative- Comperehensive
PMS Models
Performance Measurement Matrix
(Keegan et. al, 1989)
SMART Performance Pyramid (Cross &
Lynch, 1992)
Results and Determinants Model
(Fitzgerald et. al., 1991)
Balance Scorecard (Kaplan and Norton,
1992)
CPMS Models
Describe links between business decisions
and outcomes
To guide strategy development,
communication, implementation and
feedback at multiple points along the value
chain
Measures include operational, strategic,
financial and non-financial, internal and
external measures = KSF = KPIs
To address needs of different stakeholders

Major categories of Key Performance
Indicators / Measures (KPIs)
Financial performance
Operating Efficiency
Customer Satisfaction
Employee performance
Innovation / change
What Is a Balanced Scorecard?
the Balanced Scorecard is
a framework that helps organizations put
strategy at the center of the organization by
translating strategy into operational
objectives
that drive both behavior and performance.
I t cascades from corporate level to SBUs.

Vision
&
Strategy
CUSTOMER

To achieve our
vision, how
should we
appear to our
customers?
Objectives Measures Targets Initiatives
FINANCIAL

To succeed
financially, how
should we
appear to our
shareholders?
Objectives Measures Targets Initiatives
INTERNAL BUSINESS PROCESSES


To satisfy our
shareholders
and customers,
what business
processes must
we excel at?
Objectives Measures Targets Initiatives
INNOVATION AND LEARNING

To achieve our
vision, how will
we sustain our
ability to
change and
improve?
Objectives Measures Targets Initiatives
The Balanced Scorecard
Traditional
display of
BSC
Scorecard template
Objectives Measures Targets Initiatives

Links strategy to operations

Serves as a record of results achieved

Indicates expected results

Focuses on drivers of future
performance

The Balanced Scorecard. . .

BSC Its Continuous
Vision is made explicit and shared
Vision is communicated in terms of goals
Goals are used to focus work, allocate
resources and set targets
Constant follow-up produces lessons
learned
Leads to re-examination of strategies
Financial Perspective
Profitability
Growth
Shareholder
Value
The Vision
Customer Perspective
Price
Service
Quality
Internal Perspective
Learning and Growth
New Skills
Continuous
Improvement
Intellectual
Assets
If we succeed,
how will we look to
our shareholders?
To achieve our
vision, what
customer needs
must we serve?
To satisfy our
customers and
shareholders, at which
business processes
must we excel?
To excel in our
processes, what
must our
organization learn?
Cycle Time
Productivity
Cost
The Balanced Scorecard Provides a Four Perspective
Framework to Translate Strategy Into Operational Terms
Strategic Vision?
Mission
Values
Vision
Our reason
for being...
What success
will look like...
Why?
What are we trying
to communicate, to
whom, and why?

How?
How do we
actualise and action
it?
Things we
value for their
own sake...
Financial: Are our financial
objectives being met?
Revenue growth rates
Cost reduction
Asset utilisation
Project profitability
To succeed
financially, how
should we appear to
our shareholders?
Growth Maturity Harvesting
Financial objectives tend to be influenced by the organisations
position on the life-cycle curve.
What should
our balance
sheet look
like?
THE CUSTOMER PERSPECTIVE
Customer Perspective: Identifies and
measures customer and market
segment where a company can
compete . The key questions:

How do we attract new customers
Who are our current customers
Do we profit from our customers
How large is our market share

Customer!
To achieve our
vision, how should
we appear to our
customers?
Market
Share
Customer
Retention
Customer
Profitability
Customer
Satisfaction
Customer
Acquisition
Product / Service
Attributes
Customer Relationship
Image and Reputation
Customer perspective
1. Product and Service Attributes: Includes the
functionality, quality and price of a product or
services
2. Customer relationship: Includes the delivery of
the product or service and the response and
delivery time, as well as the customers feeling
or experience of purchase from the company
3. Image and reputation: Enables the company to
define itself to its customer especially new
customers


Internal Business
Processes?
Improve quality
Reduce cycle times
Maximise production
Maximise throughput
Reduce cost per process
Reduce cost per transaction
To satisfy our
shareholders and
customers, what
business processes
must we excel at?
core
competencies
Learning and Growth Perspective
Identifies the infrastructure that an organization must build to
create long-term growth and improvement.

(Customer and internal business process identifies the
infrastructure needed for current and immediate future
growth).

Includes the following:
1.Investing in information technology and systems
2.Training or reskilling of employees
3.Aligning organizational procedures and routines

Companies, especially the listed ones, aims for perpetual
existence and hence profitability (if they are to survive)


Learning and
Growth Perspective contd
Employee capabilities
Information system
capabilities
Motivation
Empowerment
Alignment
To achieve our
vision, how will we
sustain our ability to
change and
improve?
Highlight gaps in employee
skills and information systems.
Outcome and Driver Measures
A good Balance Scorecard should have an
appropriate mix of outcomes and driver measures
of the business units strategy:
Driver (leading) measures indicate how outcomes
are to be achieved.
It also gives an early indication of the successful or
otherwise implementation of a strategy
Outcome (lagging) measures help the business to
achieve both short and long-term process
improvements
It also reveals the results of operational
improvements into expanded business with existing
and new customers

Key Performance Indicators (KPIs)
L
e
a
d
i
n
g

L
a
g
g
i
n
g

Vision
&
Strategy
CUSTOMER

To achieve our
vision, how
should we
appear to our
customers?
Objectives Measures Targets Initiatives
FINANCIAL

To succeed
financially, how
should we
appear to our
shareholders?
Objectives Measures Targets Initiatives
INTERNAL BUSINESS PROCESSES


To satisfy our
shareholders
and customers,
what business
processes must
we excel at?
Objectives Measures Targets Initiatives
INNOVATION AND LEARNING

To achieve our
vision, how will
we sustain our
ability to
change and
improve?
Objectives Measures Targets Initiatives
Vision
&
Strategy
CUSTOMER

To achieve our
vision, how
should we
appear to our
customers?
Objectives Measures Targets Initiatives
FINANCIAL

To succeed
financially, how
should we
appear to our
shareholders?
Objectives Measures Targets Initiatives
INTERNAL BUSINESS PROCESSES


To satisfy our
shareholders
and customers,
what business
processes must
we excel at?
Objectives Measures Targets Initiatives
INNOVATION AND LEARNING

To achieve our
vision, how will
we sustain our
ability to
change and
improve?
Objectives Measures Targets Initiatives
Causal Links?
Cause and Effect Relationships
The chain of cause and effect should spread
through all the four perspective of a Balance
Scorecard lining together to show the
companys main (single) strategy.

For example: ROCE net sales high
customer loyalty the production of quality
goods and sold at reasonable price as well as
on-time delivery (OTD) the result of short
cycle time may be caused by well trained
employees.


Objectives
Fast ground
turnaround
Statement of
what strategy
must achieve
and whats
critical to its
success
Target
30 Minutes
90%


The level of
performance
or rate of
improvement
needed
Cycle time
optimization
Key action
programs
required to
achieve
objectives
Initiative Measurement
On Ground Time
On-Time
Departure
How success
in achieving
the strategy
will be
measured and
tracked
Strategic Theme:
Operating Efficiency
Profitability
Financial
Learning
Increase
Revenue
Ground crew
alignment
Lowest
prices
Lower Costs
Customer
Internal
Fast ground
turnaround
Strategy Map: Diagram of the
cause-and-effect relationships
between strategic objectives
Flight
is on time
Theme Example from Southwest Airlines
Balanced Scorecard
The Revenue Growth Strategy
Improve stability by broadening the sources
of revenue from current customers
The Productivity Strategy
Improve operating efficiency by shifting customers to
more cost-effective channels of distribution
Improve
Returns
Improve
Operating
Efficiency
Broaden
Revenue
Mix
Increase
Customer
Confidence in
Our Financial
Advice
Increase
Customer
Satisfaction
Through Superior
Execution
Increase
Employee
Productivity
Access to
Strategic
Information
Develop
Strategic
Skills
Align
Personal
Goals
Financial
Perspective
Customer
Perspective
Internal
Perspective
Learning
Perspective
Cross-Sell
the Product
Line
Shift to
Appropriate
Channel
Provide
Rapid
Response
Develop
New
Products
Minimize
Problems
Understand
Customer
Segments
A Good Balanced Scorecard Strategy Map Tells the
Story of Your Strategy
The Balanced Scorecard Supports a Complete Strategic
Management System by Linking Long Term Strategy and Measures
to More Tactical Planning & Budgeting
Objectives Milestones
Promote
ABC
Culture
Model
Employee
Satisfacti
on Survey
Evaluate
survey
response

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Accountable
HR
Committee
$ xxxx
Resource Alloc. Targets Initiatives Measures Themes/ Goals Vision Mission
Meet access
expectations
3
rd
available
appointment
(% met)
02 xx%
03 xx%
04 xx%
Access
project
Meet monthly
target
Deadline
met
Mkg.
Team
$ xxxx
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Longer Term (3-5 year) View Shorter Term (Annual) View
Strategic Tactical
% patient
mix
02 = 39%
03 = 40%
04 = 41%
Mix Margins
Project
Dept. Chairs Complete by
2003
$ xxxx
Assure
optimum
patient mix
02 xx%
03 xx%
04 xx%
F
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Grow
revenue
from patient
care
% patient
care revenue
growth
02 xx%
03 xx%
04 xx%
Balance Scorecards should
be developed to reflect
organizational strategic
planning (Every strategic
planning = competitive
repositioning = improvement)
It should reflect reforms /
change program over the
period that strategic planning
covers (3-5 years)
Example: South Australia
Water Authoritys Strategic
Reform Program
SA Water Strategic Objectives
Customer Service and Water Quality
We will deliver quality water and services and be responsive to our
customers needs.
System Performance
We will plan, develop, operate and maintain our infrastructure to
consistently meet the needs of our customers and owner.
Sustainable Future
We will play a leading role in providing a sustainable and secure water
supply for the community and minimise our impact on the environment.
People and Culture
We will develop a high achieving culture with a talented and diverse
workforce and aspire to zero harm workplace.
Commercial Success
We will drive operating and capital efficiency and meet the financial
expectations of our owner.
Link between KPIs
Aligned to key stakeholder requirements customer, community,
owner, employees and the environment.

Outcome focused:
19 outcome focussed Strategic Key Performance Indicators
(KPIs) with annual targets over 4 years.
Strategic KPIs are supported by lower level KPIs and process
KPIs.
Gaps between baseline performance and targets have identified
improvement areas.

Smaller number of Strategic Projects to target gaps in performance.

Accountability driven through performance reporting against the KPIs
and through inclusion of targets in Position Descriptions.
Customer Service & Water Quality
Strategic Objective


Desired Outcomes



Measure & Targets for the year 2010


Senior Management Team
accountability

We will deliver quality water
services and be responsive
to our customers needs
Customer Service
& Water Quality
Leadership in Water
Quality
Improved Levels of
Service
Increased Customer
Satisfaction
Compliance with
Australian Drinking Water
Guidelines
Reduce the Number of
Drinking Water
notifications by 10% per
year and improve the
Response Index to 80%
Compliance with SA
Water Customer Charter
Service Standards
Achieve Customer
Satisfaction Index rating
of 8.3
Example
Diagnostic vs Interactive Control
Diagnostic controls based on pre determined
standards and targets
Interactive control management control
information provide basis for thinking about new
strategy (in light of rapid environmental
changes)
Interactive control should facilitate the creation
of organizational learning ongoing to identify
Opportunities and Threats to Organizations.
THE FOUR PERSPECTIVE: ARE
THEY ENOUGH?
While it is not a straitjacket, the Balance Scorecard is
comprehensive enough and covers the interest of various
groups such as customers, employees, shareholders,
suppliers and the community even though Some are
implicitly recognized.

Generally, companies use at least the four perspectives
stated:
Customer, Financial, Internal Business Process &
Learning &Growth.

However, depending upon an industrys circumstance or
a business units strategies, more perspectives can be
added in order to achieve the organizations objectives.

Benefits
Means for implementing strategy
Means to achieve a desired organizational change in
strategy
Can be used to determine managements
compensation and rewards
Coordinates efforts within the firm to achieve CSFs
Limitations
Nonfinancial information is subjective
Confidentiality must be insured for certain information
Must be adaptable and frequently updated
Costly and time-consuming to implement
Benefits and Limitations of BSC
Problems associated with the
implementation of BSC
1. More than 80% of the BSC project failed.
2. The main reasons for failure are:
a) Failure to develop feasible long term vision and
mission of the organization;
b) Failure to identify required number of objectives;
c) Failure to develop practical measures;
d) Failure to set achievable targets;
e) Failure to develop the targets periodically;
f) Failure to identify strategically linked initiatives to
attain the target;
g) Failure to take on the project on a long term basis;
and
h) Failure to monitor the progress continuously

Design an implementation plan that
reduces the risk of failure
Build scorecards through an inclusive process to
develop a sense of individual ownership and
boost understanding of strategies
Cascade scorecards to align and focus people
on strategic actions
Establish a discipline of performance review so
that strategy evolves in response to changing
environments
Lead a scorecard change process that delivers
sustainable results
Design an implementation plan that reduces
the risk of failure contd
Effectively design scorecards to harness the
underlying power of scorecard principles
Conduct effective quarterly strategic scorecard
reviews to continuously ensure learning and
strategy refinement
Practically implement and influence others
around you to engage in and support Balanced
Scorecard implementation within the
organisation
Gain comprehensive instruction from a highly
experienced trainer with extensive operational
experience across a broad range of public and
private sector organisations

Thank you