PERFORMANCE MEASURES

1
PERFORMANCE MEASURES - Chapter 11
2
"We want to change the competitive landscape by
being not just better than our competitors, but
by taking quality to a whole new level. Jack
Welch
Performance measures should aim at the long-term
and should be forward-thinking initiative
designed to fundamentally change the way
corporations do business. It is not a
post-mortem of what happened but a step towards
how we do better in the future.
3
Why measure performance?

• Objectives for for-profit organizations
• Measure changes to stakeholders wealth put in
  simple terms, the value of a firm.
• Reward an employee for contributing to increase
  in firm value

Issue How would a firm measure an individuals
contribution to value creation and what
purpose does it serve?
4
The value concept(Results control)

• The performance measurement concept indicates
  that employees can increase the value of the firm
  by
• Increasing the size of a firms future cash
  flows,
• By accelerating the receipt of those cash flows,
  or
• By making them more certain or less risky.

If you are a CEO or CFO, how would you increase
the cash flows?
5
Measure the right things

• An ideal performance management system is one
  that energizes the people in an organization to
  focus effort on
• Improving things that really matter
• One that gives people the information and freedom
  that they need to realize
• Their potential within their own roles and that
  aligns their contribution with the success of the
  enterprise.

6
Then, why do performance measures fail?

• Root cause complexity - details, details,
  details
• Staff who collect data get frustrated.
• Follow What has to be done" (WHTBD).

7
Measure What Matters

• Easy to say but difficult to do.
• Find out what is valued both by customers and
  stakeholders
• Examples process new product
• development, measure time to market.
• process customer service, measure customer
  retention.
• process treasury management, measure cost of
  service vs. value created.

8
Keep it simple

• Performance Measures must be
• simple to operate simple to understand
• simple to action
• Ex If a sales person spends too much time on
  call reporting, they have less time for making
  calls.

9

• Let us now examine how real world firms measure
  performance and we will, later, find out whether
  these measures conform to the concepts we just
  discussed.

10
Most organization measure performance using
accounting measures Net profits, gross margin,
ROA, ROE, etc.
11
Why do organizations choose accounting data as
measures of performance?

• Accounting profits and returns can be measured on
  a timely basis relatively precisely and
  objectively.
• Because they are timely, precise, and objective,
  employees would react positively.
• The short term measures keep employees on check.

12
Why accounting measures of performanceare not
adequate?

• Accounting measures are lagged indicators.
• Dependent on the choice of measurement method.

13
Accounting can create management myopia

• Accounting is short term earnings or returns.
• Why focusing on the short term is inappropriate?
• Why would this short-term focus affect long-term
  relationships?

14
The Changing Business Environment

• Are historical accounting measures adequate for
  todays business environment that transcend
  global boundaries?

15
Performance Measurements for the new era

• In the global, technology-driven, decentralized
  environment, measuring
• Financial performance, while important, is not
  adequate.
• Even if less than precise, other measures of
  performance are required.
• These measures should be capable of measuring
  multiple attributes of an organization.

16
We need a balanced set of Performance Measures
We need both lead and lag indicators
17
Lead indicators as value drivers

• Many non-financial indicators can serve as lead
  indicators in certain settings.
• Common examples are
• Market share, backlog (book-to-bill ratio), new
  product introductions, new product development
  lead times, product quality, customer
  satisfaction, employee morale, personnel
  development, inventory turnover, bad debt ratio,
  or safety

18
Lag Indicators

• In contrast to lead indicators, lag indicators
  are measures that point to earlier plans and
  their execution.
• Financial performances are lag indicators.
• Many times, financial performances are too late
  to affect future products and services.
• Therefore, we need multiple measures that include
  both financial and non-financial measures.

19
Comprehensive Performance Measures must address

• Financial performance
• Customer satisfaction
• Internal business process developments and
• Allow an organization to learn and grow.

20
Financial Performance can be measured by

• ROA ROE, EPS etc. These measure are essential to
  summarize the economic consequences of strategy.

21
Customer-related measures

• Managers must identify the customer and market
  segments in which the business desires to
  compete.
• Develop measures to track the business units
  ability to create satisfied and loyal customers.

22
Customer-based measures

• Customer Satisfaction

• Customer Retention

• Customer Loyalty

• Product and Service Attributes

Image and Reputation
23
Internal Business Process Measures

• Identify the critical internal processes for
  which the organization must excel in implementing
  its strategy.
• IBP dimension enable the business unit to
• deliver the value propositions that will attract
  and retain customers in targeted market segments,
  and
• satisfy shareholder expectations regarding
  financial returns.

24
Internal Business Process Measures

• Innovation processes

• Operation Processes

• Quality Measures

• Cycle Time Measures

Cost Measures
25
Learning and Growth measures

• Learning and growth identifies the
  infrastructure an organization must build to
  create long-term growth and improvement.
• Growth comes from people, systems and
  organizational procedures.

26
A performance concept that combines everything
that we discusses so far is
Six Sigma
27
The Six Sigma

• Is a business process that enables companies to
  increase profits dramatically by streamlining
  operations, improving quality, and eliminating
  defects or mistakes in everything a company does.
  
• The objective is change the process so that
  defects are never produced in the first place.

28
The objectives of Six Sigma

• To satisfy the customer by changing internal
  performance and processes.
• To enable better performance by better design
• To improve the quality of supplies and other
  operational processes.
• Manage the costs

29
Six Sigma points out

• You don't know what you don't know You can't do
  what you don't know
• You don't know until you measure
• You don't measure what you don't value
• You don't value what you don't measure

30
Difference between TQM and Six Sigma

• TQM focuses on improvement in individual
  operations with unrelated processes takes many
  years before all operations within a given
  process are improved.
• Six Sigma focuses on making improvements in all
  operations within a process, producing results
  more rapidly and effectively.