Performance Management

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Concepts on Performance Management

What is Performance Management?

A key aspect of management accounting
determining an organisation's structure
- e.g. should they adopt a functional struture or a divisional one and what level of decentralisation would be appropriate?
assigning responsibility
- is the manager of a division responsible for costs, revenues and investment or just cost control?
setting up a system of performance measures and targets
- reviewing performance and acting accordingly

What are some ways to measure Performance?

Critical Success Factors (CSF)
- What are CSFs?
  - vital areas 'where things must go right' for the business in order for them to achieve their strategic objectives.
  - The achievement of CSFs should allow the organisation to cope better than rivals with any changes in the competitive environment.
- The organisation will need to have in place the core competencies that are required to achieve the CSFs, i.e. something that they are able to do that is difficult for competitors to follow.
- There are five prime sources of CSFs:
  - (1) The structure of the industry
    - CSFs will be determined by the characteristics of the industry itself, e.g.in the car industry 'efficient dealer network organisation' will be important where as in the food processing industry 'new product development' will be important.
  - (2) Competitive strategy, industry position and geographic location
    - Competitive strategies such as differentiation or cost leadership will impact CSFs.
    - Industry position, e.g. a small company's CSFs may be driven by a major competitor's strategy.
    - Geographical location will impact factors such as distribution costs and hence CSFs.
  - (3) Environmental factors
    - factors such as increasing fuel costs can have an impact on the choice of CSFs.
  - (4) Temporary factors
    - temporary internal factors may drive CSFs, e.g. a supermarket may have been forced to recall certain products due to contamination fears and may therefore generate a short term CSF of ensuring that such contamination does not happen again in the future.
  - (5) Functional managerial position
    - the function will affect the CSFs, e.g. production managers will be concerned with product quality and cost control.
Key Performance Indicators (KPI)
- What are KPIs?
  - Part of the Strategic Planning Process
    - Strategic Analysis
      - Internal analysis to identify resources and core competencies
      - External analysis to identify CFS in markets
    - Strategic Choice
      - Select strategies where firm can acquire core competencies to meet CSFs
    - Strategic Implementation
      - Formulation of detailed plans and budgets
      - Target setting for KPIs for each CSF
      - Monitoring and Control
- Hierarchy of Objectives
  - Mission Statement
  - Strategic Objectives
  - Tactical Objecties
  - Operational Targets
- Choice of Targets
  - Behavioural Aspects
    - Relevant to the organisation's overall objective
      - e.g. if the organisation has an objective of 100% quality then an individual production worker maybe set a target to produce products with zero defects. (It is worth noting that quality initiatives are often undermined by targets that focus on short term profits).
    - Achievable
      - employees may be unmotivated if they consider targets are very difficult or impossible to achieve, e.g. zero defects may be seen as impossible. However, it is worth noting that the same may be true if targets are too easy to achieve.
    - Controllable
      - the individual will be unmotivated if they feel they can't control the target set, e.g. a production worker may not be responsible for defects if poor quality materials are purchased.
    - Prioritised
      - employees will be overwhelmed and hence unmotivated if they are set a large number of targets.
  - Financial and non-financial indicators

What are some Impacts of a Badly Designed Performance Management System?

Wrong Signals and dysfunctional behaviour
Berry, Broadbent and Otley identified the following problem areas:
- Misrepresentation
  - 'creative' reporting to suggest that a result is acceptable.
- Gaming
  - deliberate distortion of a measure to secure some strategic advantage.
- Misinterpretation
  - failure to recognise the complexity of the environment in which the organisation operates.
- Short-termism
  - leading to the neglect of longer-term objectives.
- Measure fixation
  - measures and behaviour in order to achieve specific performance indicators which may not be effective.
- Tunnel vision
  - undue focus on stated performance measures to the detriment of other areas.
- Sub-optimisation
  - focus on some objectives so that others are not achieved.
- Ossification
  - an unwillingness to change the performance measure scheme once it has been set up.

What is the Optimum System for Performance measurement and control in today's dynamic business environment?

Financial performance indicators (FPIs)
- t is still important to monitor financial performance, e.g. using ROCE, EBITDA, EVA.
Non-financial performance indicators (NFPIs)
- these measures will reflect the long-term viability and health of the organisation

What are some Models for evaluating financial and non-financial performance?

4 Key Tools

Kaplan and Norton's balanced scorecard
The performance pyramid
Fitzgerald and Moon's building block model
The performance prism

Benefits of Using these Models

financial and non-financial performance measures are included
they are linked in to corporate strategy
include external as well as internal measures
include all important factors regardless of how easy they are to measure
show clearly the tradeoffs between different dimensions of performance
show how measures will motivate managers and employees.

References

http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Performance%20Management.aspx?mode=none

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