Accounting Information System 1 - Ais20103

Chapter 14
Contemporary approaches to
measuring and managing
performance
Copyright © 2012 McGraw-Hill Australia Pty Ltd

PowerPoint slides to accompany Management Accounting: Information for managing and creating value 6e
14-1
Slides prepared by Kim Langfield-Smith
Outline
• The purposes of performance measurement
• The problems with conventional financial
performance measures
• The advantages of non-financial performance
measures
• Non-financial measures for operational control
• Problems with non-financial measures
• Strategic performance measurement systems
(cont.)
14-2
Outline (cont.)
• The balanced scorecard (BSC)
– The four perspectives
– Strategy maps
– Causal linkages within an SPMS
– How successful are BSC?
• Does non-financial performance lead to financial
performance?
• Benchmarking
• Designing contemporary performance
measurement systems
– Designing measures for continuous improvement

14-3
The purposes of performance
measurement
• Communicate the strategy and plans of the
business and align employees’ goals with those of
the organisation
• Allow managers to track their own performance
against targets and take corrective action
• Evaluate subordinates’ performance, and provide
rewards
• Guide senior managers in developing future
strategies and operations

14-4
Problems with conventional
financial performance measures
• Financial measures emphasise only one
perspective of performance
• Conventional financial performance measures
focus on the consequences, not the causes
• Financial performance measures provide limited
guidance for future actions
• Financial performance measures may encourage
actions which decrease both shareholder and
customer value

14-5
The advantages of non-financial
measures
Non-financial measures
• May emphasise strategy
• Can be the drivers of future financial performance
– High performance in these areas will flow through to
improved financial performance
• Are more actionable
– Easier to investigate the source of low performance,
compared to source of low cost variances
• More timely
• More understandable and easier to relate to,
particularly at the operational level

14-6
Non-financial measures for
operational control
• Customer satisfaction
– Measured by survey administered to customers
• Defect measures
– Measurement of faults in a product that occur during the
manufacturing process
– Support a high-quality strategy
• Quality
– Periodic inspections or testing of products
(cont.)
14-7
operational control (cont.)
• Stock status
• Accident report
– Safety statistics
• Multi-skilling
– Number of employees who have attained skills to allow
them to undertake a range of operational tasks
• Machine downtime
– Number of hours (or percentage of total production hours)
that machines are unable to operate
• Delivery on time
– Prompt delivery to customers is an important driver of
customer value
(cont.)
14-8
operational control (cont.)
• Productivity
– The ratio of outputs produced per unit of input
Number of units produced

Labour productivi ty 
Number of direct labour hours
Number of units produced

Total factor productivi ty 
Cost of all inputs to production

14-9
The problems with non-financial
• Wide choice of non-financial measures available
• Inclusion of non-financial measures can be ad hoc
and undirected
• Managers must necessarily make trade-offs
between achieving some measures and not others
• Some non-financial measures lack integrity
– Difficult to verify accuracy of measures
– Potential for measures to be inaccurate, incomplete and
manipulated
• Some measures may not easily translate into
financial outcomes

14-10
Strategic performance
measurement systems (SPMS)
• Translates strategy into an integrated set of
financial and non-financial measures across a
range of perspectives
• Examples include the balanced scorecard (BSC),
performance prism, intangible asset scorecard
• All are driven by the goals and strategic priorities
of the organisation and provide the potential to
identify cause and effect relationships between a
variety of measures, including financial
performance

14-11
The balanced scorecard (BSC)
• A tool that translates an organisation’s mission,
objectives and strategies into performance
measures for each key strategic area of the
business
• Used to implement strategy and to monitor and
manage organisational performance
• May form part of the organisation’s planning cycle
(cont.)
14-12
The balanced scorecard (BSC)
• Stages of development and use

– Articulate the mission, overall goals or objectives and
strategic priorities of the organisation
– Develop specific objectives for each perspective and
formulate a strategy map
– Choose performance measures for each perspective
– Develop targets for each performance measure
– Cascade the BSC down the organisation to divisions and
other units
(cont.)
14-13
The balanced scorecard (cont.)
– Plan and undertake initiatives and activities to implement
the chosen strategies to support the achievement of the
objectives
– Generate reports to monitor and manage actual
performance against targets for units and the
organisation as a whole; assign units and personal BSCs
to specific managers to enhance accountability and
improve performance

14-14
The four perspectives of the BSC
• Financial perspective
– Reflects perspective of the shareholder
– Summarises the financial outcomes of decision and actions
– Measures include cost and product measures, ROI, cash
flow measures, shareholder value measures
• Customer perspective
– Measures the company’s success in achieving customer
value
– Outcome (lag) measures include customer profitability,
market share, number of new customers
– Lead indicators include on-time delivery, number of defects
(cont.)
14-15
(cont.)
• Internal business processes
– Objectives relate to specific processes that contribute to
customer and financial objectives
– Measures of cost, product quality, time-based measures,
new product development
• Learning and growth
– Focus is on the capabilities of the organisation to
achieve superior internal processes that create both
customer and shareholder value
– Delivers long-term growth and improvement
– Measures focus on employee capabilities, capabilities of
information systems and organisational climate
(cont.)
14-16
(cont.)

14-17
Strategy maps
• A visual representation that explains the cause
and effect relationships linking the objectives of the
perspectives of the BSC and the objectives of the
organisation
• Can be used to communicate to managers the
components of the strategy and the processes and
systems that will help achieve it
(cont.)
14-18
Strategy maps (cont.)

14-19
Causal linkages within an SPMS
• Lag indicators (outcome measures)
– Measures that help managers monitor progress towards
the organisation's objectives
– Provide limited information to help managers monitor
performance directly
– Aggregated financial measures, market share, customer
satisfaction measures
• Lead indicators (drivers of outcome measures)
– Measures of the factors that drive the outcomes and
which provide information that is actionable
– Relate to the processes and activities of the business
– Improvements in these measures should, over time, flow
through to improvements in lag indicators
(cont.)
14-20
(cont.)
(cont.)
14-21
(cont.)
• SPMS may rely on cause and effect linkages
between measures in different perspectives
• In practice
– Not all organisations use lag and lead indicators
– Lag indicators may be called outcome measures or key
performance indicators (KPIs)
– Lead indicators may be called driver measures or key
performance drivers (KPDs)
– Some organisations identify and measure critical
success factors (CSFs)
– The number and types of perspectives in BSCs will
differ across organisations
(cont.)
14-22
(cont.)

14-23
How successful are balanced
scorecards?
• General characteristics
– Cause and effect assumptions may be too simplistic
– May encourage managers to manage the numbers
rather than observing operations directly
– The timing between lag and lead indicators may be
uncertain and will differ between perspectives
• Design and implementation issues
– Top down design may lead to limited manager buy-in
– Linkages between measures may not have been
rigorously tested and validated
– Implementation may involve major change and
resistance
– Unrealistic expectations for improvement by managers
14-24
Does non-financial performance
lead to financial performance?
• Improvements in non-financial measures will not
result in improved profits if
– Management has selected the wrong strategic priorities
– Management fails to utilise freed-up resources, which
result from improvements in non-financial measures
– There is a lag between financial and non-financial
performance
– There are incentives to engage in dysfunctional
behaviour, such as manipulating measures or
maximising performance of some measures at the
expense of others

14-25
Benchmarking
• A process of comparing the products, functions
and activities in an organisation against external
businesses by identifying areas for improvement
– Identify the functions/activities to be benchmarked, and
– Select benchmarking partners
– Data collection and analysis
– Establish performance goals
– Implement plans

14-26
Forms of benchmarking
• Internal benchmarking
– Benchmarking operations that are internal to the larger
business group
• Competitive benchmarking
– Benchmarking with companies in the same industry
• Industry benchmarking
– Against companies that have similar interests and
technologies within an industry
– Performance measures and practices are directly
comparable
• Best-in-class or process benchmarking
– Benchmarking against the best practices that occur in
any industry

14-27
Benchmarking against
competitors’ cost structures
• Costs can be inferred by using publicly available
information, such as sales volume, market share,
product mix
• Industry-sponsored databases
• Stockbroking firms
• Specialist benchmarking consulting firms may
provide data
(cont.)
14-28
Benchmarking against competitors’
cost structures (cont.)

14-29
Designing contemporary
performance measurement
systems
• Link to strategy and goals of the organisation
– Encourages goal congruence
• Keep it simple
– Measures should be understandable and easy to
communicate with employees
• Recognise controllability
– Responsibility for achieving measures should relate to
activities and processes which employees can control
• Emphasise the positive
(cont.)
14-30
systems (cont.)
• Be timely
– Measures reported as close as possible to the period to
which they relate
• Include benchmarking
– Against external standards
• Embrace participation and empowerment
– To promote motivation and goal congruence
• Include only a few performance measures
– Rule of thumb is that no person should be responsible
for more than four or five measures
(cont.)
14-31
systems (cont.)
• Link to rewards
– Motivational
• Include non-financial and financial measures
• Have a strategic orientation—directly measure
areas that provide competitive advantage
• Use external benchmarks
• Emphasise continuous improvement

14-32
Designing measures for
continuous improvement
• Continuous improvement can be built into
performance measurement systems by
– Selecting relevant performance targets that focus on
problem areas and moving to other measures when
performance has improved
– Defining and re-defining the measure to provide scope
for improvement and increasing the challenge
– Making the performance target more challenging by
making the performance target more difficult over time

14-33
Summary
• The main purposes of performance measurement
systems are to communicate strategy, track
performance again targets, evaluate subordinates’
performance and reward, develop future
strategies
• Conventional financial-based performance
measurement systems have many limitations and
can be enhanced by non-financial measures
• Non-financial measures have advantages and
their own limitations
• Strategic performance measurement systems
translate strategy into an integrated set of financial
and non-financial performance measures (cont.)
14-34
Summary (cont.)
• Strategy maps assist in the communication of
strategy and the articulation of the performance
measurement system
• Benchmarking provides an external perspective to
allow the identification of areas for improvement
• Effective performance measurement systems
should link to strategy and goals, be simple,
recognise controllability, emphasise the positive,
be timely, include benchmarking, embrace
participation, include only a few measures and link
to rewards

14-35

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Chapter 14

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Number of units produced

Number of units produced

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• Stages of development and use

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