Perfomance Measurement and Balanced Scorecard

Performance Evaluation II

Performance measurement

The process of collecting and analyzing information about organizational performance and comparing it to expectations and goals

Performance measures should be tailored to the type of _____ and exist for ALL elements that are _______ in a competitive market.

responsibility center; critical to an organization’s success

Effective use of resources produces the ____________, while efficient use results in ____________.

intended results; maximum productivity and minimum waste

An information system should track the _____ and _____ use of the organizations resources

efficient; effective

What are the 5 steps of effective performance measurement?

1. Identify financial/nonfinancial goals

2. Create goals for employees (consider goal congruence)

3. Provide employees with the necessary resources

4. Provide timely feedback

5. Make any adjustments necessary

When are performance measures most effective?

• when everyone knows the desired results

• the results can be clearly measured in a timely manner

• results are attainable and controllable by responsible parties.

Internal Performance Measures

Metrics that assess how well internal operations are functioning

External Performance Measures

Metrics that evaluate the organization’s impact on its external environment

What are the internal performance measures?

• Production and Performance

• Employees

• Sustainability

What are the external performance measures?

• Customers

• Investors and Creditors

• Sustainability

Production and Performance

Strive for streamlined production, high-quality products, and reduction of negative environmental impacts

Employees

Motivate employees to accomplish the performance targets by giving incentives

Sustainability (IPM)

Create awareness of sustainable practices from production

Customers

Consider aspects that customer value → increased customer loyalty

Investors & Creditors

Provide valuable information to parties that can make investment decisions

Sustainability (EPM)

Create awareness of external elements of sustainability that can affect the organization’s local and global community

Metrics used in performance measurement should reflect the ______________ of the organization

strategic organizational priorities

Why do we consider segment margin?

Because it measures the direct financial effect each segment has on the organization’s profitability, helping management assess how well each segment contributes to overall success.

Segment Contribution Margin Ratio

Segment CM / Segment Sales

Segment Margin Ratio

Segment Margin / Segment Sales

How to calculate segment margin

Segment sales - Segment costs(direct variable and direct fixed) = Segment margin

What does segment CM ratio measure?

The portion of the segment’s sales that covers their direct fixed costs and allocated costs and goes towards segment profit

What does segment margin ratio measure?

The portion of the segment’s sales that covers their allocated costs and goes towards segment profit

Potential Issues of segment margin

• Managers can delay/accelerate discretionary costs

• Managers can delay/accelerate recognition of sales

• Managers can change the depreciation method to affect the depreciation expense

• Earnings can be “managed” by increases/decreases in production

Statement of Cash Flows

Provides information about the sources and uses of cash from operating, investing, and financing activities.

Return on investment =

Income / Assets

ROI (Du Pont Model) =

(Income / Sales) x (Sales / Assets)

Residual Income =

Income - (Target Rate x Assts)

Economic Value Added (EVA) =

After-tax Income - (Cost of Capital % x Fair Value of Invested Capital)

Ratio Analysis limitations

• Accounting income can be manipulated by lower management

• Asset bases can be difficult to measure, hard to be consistent across all segments

• Suboptimization may occur if measures are not tied to the goals of the company

Financial Performance Measures

Quantitative metrics based on financial data used to assess an organization’s profitability, efficiency, and overall financial health.

Nonfinancial Performance Measures

Quantifiable, selected from the cost management system

Selection guidelines for NFPM

1. Clearly defined

2. Relevant to organizational objectives

3. Clearly defined responsibility

4. Uses valid data

5. Has target objectives

6. Has established internal and external benchmarks

Types of nonfinancial performance measures

• Throughput

• Quality

• Lead Time

• Enviromental

Quality measures

High-quality products and services are generally important to organizations when these organizations operate in a global environment.

4 Costs of Quality Categories

• Prevention

• Appraisal

• Internal Failure

• External Failure

Prevention

Ensuring high quality prior to and throughout the process using preventative actions

Appraisal

Reviewing output prior to customer consumption

Internal Failure

Measuring the organization’s failure to maintain high quality products or services

External Failure

Failure of the organization to provide the customer with high quality products or services

Which cost of quality is this: Hours spent on planning and design review

Prevention

Which cost of quality is this: Number of inspections performed on materials, work in process, and finished goods

Appraisal

Which cost of quality is this: Number of lawsuits

External Failure

Lead Time

Reflects how quickly customers receive their product or service after placing an order

Environmental-Related Metrics

Measurements relating to an organization’s impact on the earth’s ecosystem

Climate-related Metrics

Measure the organization’s carbon footprint

Throughput

The amount of a product or service the company can produce and deliver to a client within a specified time

When compared to financial performance measures, nonfinancial performance measures are more…

• Relevant

• Causal of goal-congruent behavior

• Cross-functional (apply to many different organizational functions)

Benchmarks enable…

measurements to be interpreted as a positive or negative effect on achieving the organization’s objectives.

Balanced scorecard

summarizes strategic goals and defines performance measures in four different categories

Describe the balanced scorecard

• encourage long term decision making

• uses lagging indicators to analyze past performance

• uses leading indicators to predict future performance

4 categories of the balanced scorecard

financial, customer, learning and growth, internal process

KPIs should focus on _____and use _____ to keep management focus on the exact goal.

results; results-oriented language

Key performance indicators

performance metrics that can be tracked and evaluated for each strategic goal.

KPIs are SMART

• Specific

• Measurable

• Achievable

• Relevant

• Time-Bount