Cost & Performance Management
5BUS1093
Lecture 14
Performance Management
& Measurement Systems
Dominic Keating
8th February 2016
CPM L14– Performance Management & Measurement
Remaining Topics
Lecture Lecture Lecture Topic
No.
Date
14
08-Feb Performance Management & Measurement
15
15-Feb Budgeting 1
16
22-Feb Budgeting 2
17
29-Feb Beyong Budgeting
18
07-Mar Balanced Scorecard
19
14-Mar Divisional Performance Management
20
21-Mar Transfer Pricing
CPM L14– Performance Management & Measurement
Learning Objectives
• Performance Management VS. Performance Measurement
• Elements effective performance management systems
• Characteristics of effective performance measures
CPM L14– Performance Management & Measurement
Performance Management Systems
• “A performance management system is a set of integrated
management processes, such as the selection of performance
measures, the setting of targets, decision-making,
performance evaluation and rewards which are all aligned
with the strategic objectives” Ittner, Larcker & Randall, 2003
http://www.youtube.com/watch?v=jkZVnXn5MwM
CPM L14– Performance Management & Measurement
Performance Measurement Systems
“A performance measurement system is the information
system which is at the heart of the performance
management process and it is of critical importance to
the effective functioning of the performance
management system” Bitici, Carrie & Mcdevitt (1997)
CPM L14– Performance Management & Measurement
Performance Measures
• Financial performance crucial but financial measures are backward looking
• Volatile world - past performance is no guarantee of future performance
• Today’s firms compete on price, quality, service, innovation etc. etc.
• Non-financial measures are better indicators of future performance
• Good performance in these areas is likely to lead to future financial success
An effective performance management
system contains a mix of leading
non-financial indicators and lagging
financial indicators that together
provide a comprehensive view of
performance
CPM L14- Performance Management & Measurement
Performance Measure Examples
Sales growth %
Market share %
Sales per employee
Operating Profit % (EBIT Margin)
Return on Capital Employed %
Earnings per Share
Customer satisfaction
Sales from new customers
Customer complaints
Product Returns
Defect-Rate
New Product Sales
Employee Satisfaction
Employee turnover
Sales this period / Sales prior period %
Firm's sales / whole market sales %
Sales / Av. no. employees
Operating profit / sales %
Profit / Average Operating Assets
Net profit / Av. share price
% rating from surveys
New customer sales / total sales %
Number or % of total sales orders
Product returns (at sales value) / total sales %
% of defects as % total units produced
New product sales / Total sales %
% results from surveys
No. leavers / Av.no. employees
CPM L14– Performance Management & Measurement
Which Performance Measures to Use?
Many slip up
on the ICE
Leading to a
lack of focus
CPM L14– Performance Management & Measurement
Key Performance Indicators
• Identify critical areas / activities needed to achieve strategic objectives
= Critical Success Factors (CSFs)
e.g. customer service
• Select / develop Key Performance Indicators (KPIs) for each CSF
e.g. Complaint Response Time
KPI good practice
•
•
•
•
•
Few in number
Clearly defined
Easy to understand
Reported regularly
Replaced if necessary
CPM L14– Performance Management & Measurement
Don’t Avoid Measuring Tricky Areas
• Some CSFs might not be easily to measure e.g.
₋ intellectual property
₋ innovation
• Can measure indirectly e.g.
₋ no. years staff service / experience
₋ No. staff suggestions
₋ Improvements in product quality
₋ % of sales from new products
“Everything that can be counted
does not necessarily count. But
everything that counts cannot
necessarily be counted” Albert Einstein
CPM L14– Performance Management & Measurement
Be Aware of Behavioural Implications
Focussing on one area can lead to problems ….
Fast
delivery
Sloppy
and
undercooked
Health
and
safety
Dissatisfied
customers
CPM L14– Performance Management & Measurement
Targets
• Inappropriate targets can be divisive & demotivating
• Appropriate targets;
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Are fair & achievable
Motivate employees
Encourage the right behaviour
Drive performance
• Fair aross the organisation
Target setting issues
– Who should set?
– How difficult?
– Absolute or relative?
CPM L14– Performance Management & Measurement
Employee Involvement
• A performance mgmt. system must be implemented top down
• Leaders set the strategy, determine objectives & select KPIs
Importance of Buy In
•
•
•
•
•
Employees, not leaders, implement the strategy
Must buy-in or will be ineffective
Measures must be relevant otherwise ignored
If accepted, demanding targets more likely to be achieved
Measures & targets set locally but linked to objectives
“Objectives should be cascaded down to provide a link
between each individual and the overall strategy of the
organisation” Rogers, 1990
CPM L14– Performance Management & Measurement
Evaluating Performance & Feedback
• Continuous cycle
• Identify variances
• Understand causes
• Take action
Controllability Principle
• Evaluate management performance only on areas they can control
• Otherwise will demotivate not encourage better performance
• Particularly relevant in today’s volatile business environment
If measurement does not lead to action there is no
management control
CPM L14– Performance Management & Measurement
Rewards
• Critical part of any PMS
• Poorly designed rewards system - more harm than good
• But can motivate, attract & retain outstanding performers
• Ultimately linked to strategic objectives
• Must be fair & seen to be fair across organisation
• Expectations must be clearly defined in advance
• Objective evaluation (using measures & targets)
• Levels:
–Organisational : same for all
–Group / Team : encourage team work
–Individual : create competition
CPM L14– Performance Management & Measurement
Characteristics of Effective Performance Management Systems
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–
–
–
–
–
–
–
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Clear, well communicated strategy & objectives
Comprehensive view of performance
Well-defined performance measures clearly linked to objectives
Objectives cascaded down to lower organisational levels
Employee involvement (in setting local measures & targets)
SMART stretching targets
Timely reporting & analysis
Fair performance evaluation
Rewards for good performance
Effective feedback mechanisms
Culture of continuous improvement
PEOPLE AND PROCESSES ALIGNED TO ACHIEVE GOALS
CPM L14– Performance Management & Measurement
Remember…………..
It’ people, not organisations,
who perform
http://www.youtube.com/watch?v=2D8HjH31pfI
CPM L14– Performance Management & Measurement
Private Study & Tutorial
Reading
• All MA texts have chapters / sections on the areas covered today
• See section 5b of the module guide for example texts
• Select one text, read the relevant chapter(s) and add to your lecture notes
Private Study Question
Simon’s Salon – evaluating business performance using fin. & non-fin. measures
You must attempt this before tutorial &
bring your answer with you