Performance Measurement System

The goal of performance measurement system is to implement strategies. A performance measurement system is simply a mechanism that improves the likelihood the organization will implement its strategy successfully. Any performance measurement system blends the financial information and non-financial information with each other. In setting up such systems, the senior management selects measures that best represent the companys strategy and these measures can be seen as current and future critical success factors.

Limitation of Financial Control Systems

The short-term actions taken by managers to earn profits may be wrong in the long term. Business unit managers may not take long term actions in terms of investment, in order to generate short term profits. Using short-term profit as the sole objective can distort communication between unit manager and senior management. If business unit managers are evaluated based on their profit budget, they may try to set profit targets they can easily achieve. Tight financial control may motivate managers to manipulate data. Thus, relying only on financial data is insufficient to ensure that strategy will be executed successfully.

The Balance Scorecard

A Strategic Management ---- a new approach developed in the early 1990s by Robert Kaplan and David Norton.

This approach provides a clear prescription as to what companies should measure in order to balance the financial perspective.

Introduction:------

The Balanced Scorecard is a management system that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business process and external outcomes in order to continuously improve strategic performance and results.

Methodology:----------

The Balanced Scorecard methodology builds on some key concepts of previous management ideas such as TQM (Total Quality Management) including customer defined quality, continuous improvement, employee empowerment and primarily measurement-based management and feedback.

Four Perspectives

The Balanced Scorecard suggests that we view the organization from four perspectives and to develop metrics, collect data and analyze it relative to each of these perspectives. The Learning and Growth Perspective The Business Process Perspective The Customer Perspective The Financial Perspective.

Learning and Growth Perspective

To Achieve the vision, how will we sustain the ability to change and improve. People need to constantly learn and grow to accept the desired changes happening in the organization This is an important perspective as it takes into consideration Learning and Growth of employees so that they don't resist change and therefore improve continuously.

Internal Business Process

To satisfy the shareholders and customers what business process must one be excellent. All the business process should be efficient and effective so as to satisfy the customer's demands and shareholder's needs. Internal business Process are important aspect for productivity and overall attainment of organizational goals and objectives.

Customer Perspective

To achieve the vision, how should one appear to the customers Customers are one of the most important asset of the organization. Their satisfaction is of utmost important for the business. Hence to take the customer aspect or perspective into consideration is necessary.

Financial Perspective

To succeed financially how should one appear to the shareholders. The objectives, targets measures and initiatives should be taken into consideration. Financial perspective is the most important perspective. It helps the organization to know the cost effectiveness and profitability of the organization

DoubleLoop Feedback

In order to shield the customer from receiving poor quality products,aggressive efforts were focused on inspection and testing at the end of the production line. True causes of defects can never be identified and there is always inefficiencies due to rejection of defects. Hence the causes of variation needs to be identified and fixed

DoubleLoop Feedback

To establish such a process, Deming emphasized that all business processes should be part of a system with feedback loops. The feedback data should be examined by managers to determine the causes of variation, what are the processes with significant problems and then they can focus attention on fixing the subset of processes.

DoubleLoop Feedback

The Balanced Scorecard incorporates feedback around internal business process outputs, as in TQM, but also adds a feedback loop around the outcomes of business strategies. This creates a double-loop feedback processes in the balanced scorecard.

Performance metrics

Financial Perspective Goals Measures Survive Cash flow Succeed Quarterly sales growth & operating income by division Prosper Increase market share
and ROE

Customer Perspective

Goals

Measures

New Product

Percent of sales from new Products Percent of sales from Proprietary products
On-time delivery supply

Responsive

Preferred Supplier Share of key accounts purchases Ranking by key accounts Customer Partnership Time with customers

Internal Business Perspective

Goals Technology Capability Manufacturing Excellence Design Productivity New product Introduction

Measures Manufacturing geometry Vs competition Cycle time

Yield Silicon efficiency Engineering efficiency Actual introduction schedule Vs. Plan

Internal Business Perspective

Goals Technology Leadership Manufacturing Learning Product focus Time to market

Measures Time to develop next generation Process time to maturity percent of products that equal 80% sales New product Introduction Vs. competition

Implementing a Performance Measurement Systems

Steps contd
3. Integrate measures into the management system: the scorecard must be integrated with the organization's formal and informal structures, culture and human resource practices. 4. Review measures and results frequently: once the scorecard is implemented and running, the senior management should review is constantly. The organization should look for the following: how is the organization is doing according to the outcome measures? how is the organization is doing according to the driver measures? How has the organizations strategy changed since the last review? How have the scorecard measures changed?

Difficulties in implementation
1.

2. 3. 4. 5.

Poor correlation between non-financial measures and results Fixation on financial results Measures are not updated Measures are overloaded Difficulty in establishing trade-offs