Chapter 9 Performance Measurementand Balanced Score Cards

MIS can be developed as an act of interrelated components that collect, process, store and distribute information to support decision making, coordinate and control an organization.Information means data have been shaped into a form that is meaningful and useful to human being.Data are stream of raw facts reporting events occurring in organization or physical environment before they have been organized and rearranged into a form that people can understand and use.

2

An Introduction

Performance Measures

Performance measures are a central component of management information and reporting system. It deals with performance measures for different levels of an organization and for managers at these levels – both financial and non – financial performance measures.

3

Representative area at which data gathered

Financial Measures Non-Financial Measures

A. Customer / Market level

i) Prices of company’s products compared with competition

ii) Prices of company’s traded securities

i) Market share held by company’s products

ii) Third party quality ratings for all products in the industry

B. Total organizational level

i) Return on investmentii) Residual incomeiii) Return on sales

i) No of new products introduced

ii) No of new patents filed introduced

C. Individual facility level

Cost and revenue measurements for each responsibility centre according to measure of performance

Capacity UtilizationThroughput time for products. Percentage of times promised delivery dates met.

D. Individual Activity level i) Direct material variance and direct labor variances

ii) Manufacturing overhead variances

i) Time taken to set up machinery for new production

ii) No of accounts receivables processed per hours

E. By product / program Cost and revenue and investment across responsibility centers as far as they pertain to program or product

Time period for compensation i.e. break even time is the time from initial idea date to the time when the cumulative present value of cash inflows of the project equals the present value of total cash outflows

4

Designing Accounting based Performance

Customer/Market level: Less effort has been devoted to collect data at the customer / market level. Data at the customer market level include product quality, the time taken to respond to customer demands and the cost of products marketed. As organizations increasingly adopt a customer – oriented perspective, more attention is being given to including customer data in mgt control system.

5

It requires the following steps:Choosing a variable that represents top mgt financial goals.Choosing definition of key items included in variable in the earlier step.Choosing measures for key items included in the variables.Choosing benchmark against which to measure the performanceChoosing the timing of feedback

6

Individual facility levelThe organization unit is divided into responsibility centre's, which are headed by responsible managers.Each responsibility centre uses inputs such as: physical quantities of material, hors of various types of manpower, variety of services, and other facilities such as working capital, equipment, etc. and produces outputs such as goods and services. Another approach is to compare staffing and budget levels of discretionary expense centre with comparative organizations.The data are usually collected by a company survey and are normalized for size and for some of the differences that come about as a result of classification differences between organizations.

7

Performance Reports: Format and Essential Features

Tailored to organization structure and controllabilityDesigned to implement the exception principle in managementRepetitive and relax to short time spansAdapted to the requirements of the principal userSimple, understandable and report only essential informationPrepared and presented promptlyEffective management follow-up procedures

8

Types of Reports for Different Level of Management1. Top management including Board of Directors and Financial ManagementSales ManagementProduction ManagementSpecific Report

9

Return on Investment AnalysisThe return on investment is defined simply as the ratio of profit to investment:

ROI = Profit InvestmentWith reference to responsibility accounting, the ROI

will be the segment return on investment (SROI). Symbolically,

SROI = Segment Profit Contribution Segment resources / assets

10

Economic Value Added (EVA) (Residual Income)Economic value added is the amount in rupees that remains after deducting an ‘implied’ interest charge from operating income.The implied interest charge reflects an opportunity cost, and is charged on the amount of assets in each investment centre.The rate of interest charge is equal to the minimum rate on investment specified by top management as part of the corporate strategic plan.

11

Multiple Performance MeasuresROI and EVA have been employed with some success by many large sized undertaking which has resorted to divisionalisation.Exclusive reliance on a single profitability measure may lead to manipulation of the system and consequent distortion in decision making.Managers of business unit may delay a potentially profitable investment in a bid to enhance short-term return on income at the cost of long run consequences.

12

Balance Score CardIt is a device of linking financial and non-financial measures and identifies key performance measures that give top management, a first but comprehensive view of the performance of the organization unit.The aim of the score card is to provide a comprehensive framework for translating a company’s strategic objectives into a coherent act of performance measres.

13

It allows managers to look at the business from four different prospects by seeking to provide answers to the following four quest:

• Customer perspective• Internal business process perspective• Learning and growth perspective• Financial perspective

14

Establishing objectives & Performance measuresThe Financial Perspective:

• Customer perspective• Customer retention and loyalty• Customer acquisition• Customer satisfaction• Customer profitability• Measuring value propositions

15

Internal Business PerspectiveInnovation Process:

• Percentage of sales from new products • New product introduction vs. customer vs.

plan• Time to develop new generation of

products• Number of key items in which the company

is first or second in the market

16

Operation process: • Financial measures: standard costs,

budgets and variance analysis.• Non-financial measures: Cycle time,

quality measures, cost measures of the internal business processes through activity based costing.

• Post-service sale process: Warranty and repair activities, the treatment of defects and returns, and the process and administration of customer payments.

17

Learning and Growth PerspectiveInformation system capabilitiesMotivation, empowerment and alignmentPerformance measurement in service organizationCompanies used the following methods to measure performance

18

Rock Waters Model: Implementation of balance scorecardRock water, an undersa construction company that builds the connection between the hydrocarbons that are beneath the surface of the sea and the drilling platform on the surface. Rock water was originally formed through a merger of British and Dutch company.

19

Phase 1: Designing the Balance Score CardFinancial objectivesBusiness from customer's perspectiveInternal Business perspectiveInnovation and learning perspectiveCustomer PerspectiveInternal ProcessInnovation Process

20

Phase 2: The Commitment PhaseThis is when we first set targets – stretch targets for three to five years.If we achieve them we really, are going to get break through performance.And helps us align the change and transformation programs because, once we understand the process and the obj. that are most critical to us, we can see the gap between where we are today and the stretch targets we’ve established for the future

21

Phase 3: Using the Balanced Store Card as a Management ProcessIn the third phase, companies use the Balance Store Card measures as the basis for their periodic reviews.The measures can be changed, perhaps we dint select

22

Just in Time Technique and its Influence on Mgt Control ProcessJust in time, as the name indicates, means at the extreme there are zero inventories, and goods are produced ordered only when they are needed. The extreme case us not common but term is catch way of stating the direction.The following are just in time techniques used:

• Reducing buffer inventory at each workstation• Decrease set up costs• Decrease procurement costs• Relation with customers

23

Computer Integrated Manufacturing & Its Influence on Mgt Control Process

In petroleum refineries, chemical processing & similar processing plants, materials and energy enter at the start and as various stages of the process and the finished products come out at the end without any involvement of manpower.Human beings maintain the equipment, check the quality of the process, and if it goes out of control, shut it down and bring it back into control.

The following are the implications of mgt control process:• Increase in task control• Better information• More prompt information• Work teams• Business unit controller

24