ENTERPRISE PERFORMANCE MEASUREMENT SYSTEM

(WITH A SPECIAL REFERENCE TO EVA)

INTRODUCTION

Enterprise Performance management / measurement system, deals with providing useful measurements and analytical data about how the enterprise or the organization as a whole is performing from a business perspective.
Also known as Corporate Performance Management or Business Process Management.

Reasons for complexity of performance measurement:

Complex organizations consisting of a multitude of different kinds of systems, structures, processes and functions makes it very difficult to build a performance model. The uniqueness of integration of many different IT systems, business processes, applications and thousands of varieties of infrastructures creates difficulty in finding a common solution for EPM system. Variability of activities taking place in every enterprise raises different kinds of events which in turn impact the performance of the enterprise.

Techniques of Enterprise Performance Measurement System

Balanced Score Card

EVA
Segment Performance Life Cycle Costing

Activity Based Costing

Transfer Pricing

Balanced Scorecard
A Balanced

Scorecard defines what management means by "performance" and measures whether management is achieving desired results. The Balanced Scorecard translates Mission and Vision Statements into a comprehensive set of objectives and performance measures that can be quantified and appraised. These measures typically include the following categories of performance: Financial performance (revenues, earnings, return on capital, cash flow); Customer value performance (market share, customer satisfaction measures, customer loyalty); Internal business process performance (productivity rates, quality measures, timeliness); Innovation performance (percent of revenue from new products, employee suggestions, rate of improvement index); Employee performance (morale, knowledge, turnover, use of best demonstrated practices). BSC helps in identifying small financial and non financial measures and attaching targets to them , so that when they are reviewed it is possible to determine whether current performance meet the expectations.

It alerts managers to focus on areas where there is deviations. Four steps required to design a balanced scorecard are: Translating the vision into operational goals. Communicating the vision and link it to individual performance. Establish objective and standards that support business vision and strategy. Feedback and learning & adjusting strategy accordingly. A Balanced Scorecard is used to: Clarify or update a business's strategy; Link strategic objectives to long-term targets and annual budgets; Track the key elements of the business strategy; Facilitate organizational change; Compare performance of geographically diverse business units; The major criticism is that it does not provide a bottom line or a unified view with clear recommendation . It is simply a list of matrices.

Segment Performance
A segment is a component of business that is or will generate revenues and costs related to operations. Financial information and performance of segment must be regularly reviewed by the companys management before a decision regarding amount of capital that will be given to the segment for a particular operating period. This allows a company to show its investors what part of company is performing better relative to others. Segment performance reporting prevents one sector that is over performing or underperforming from unduly influencing a financial statement. Its purpose is to provide an accurate picture of companys performance. For upper mgmt. business segment performance is used to assess profitability and riskiness of each segment.

ACTIVITY BASED COSTING

It is an approach for assigning overheads, that is indirect costs to end products , jobs and processes . In this overheads are first assigned and then absorbed by cost object on the basis of activities consumed by these cost objects. Terms used in ABC analysis-: ACTIVITY-it is a particular task or unit of work with a specific purpose.eg- placing of purchase orders , setting up of machines. COST OBJECT-it is an item for which cost measurement is required.ega product, a service , a job or a customer. COST DRIVER-it is a factor that causes a change in the cost of the activity. STEPS IN ABC ANALYSIS IDENTIFICATION OF THE MAIN ACTIVITIES. CREATION OF COST POOL. DETERMINATION OF ACTIVITY COST DRIVERS. CALCULATION OF ACTIVITY COST DRIVERS RATE. CHARGING THE COST OF ACTIVITIES TO PRODUCT.

LIFE CYCLE COST ANALYSIS (LCCA) It is a technique used for evaluating the economic performance of the investment projects. It is used by the managements to evaluate the alternatives for equipments , projects , structures and systems. It includes all initial one time costs and the costs over the full lifespan of the equipments. It is also the summation of costs estimates from inception to disposal for both equipments and projects as determined by an analytical study and estimates of total costs experienced in annual time increment during the project life , consideration of time value of money. TRANSFER PRICING It is the price at which a product or service is internally transferred between two units of the same company. It happens in large and decentralized companies with high vertical integration . There are four methods of transfer pricing and they are:VARIABLE COST METHOD-it is fixed at transferors units variable costs plus mark up. TOTAL COST METHOD-here the price is set at full costs which includes variable cost , allocated fixed costs and mark ups. MARKET PRICE METHOD- in this the price is set at the current price of the product in the market. NEGOTIATED PRICE METHOD-in this method the seller and the buyer negotiate for the price at which the goods are to b transferred.

Measuring and Reporting EPM

One of the benefits of measuring and reporting business performance is that it allows you to identify policies, practices, processes, or decisions that are working and those that are not working to measure, deliver and manage enterprise performance. Performance measurement and reporting is not about measuring only that which is easy to measure and only for which there is available data. Rather, strategic performance management involves frequent monitoring and reporting of measures. You should view your performance measurement and learning period as a learning curve. In designing performance measures to track and report on, managers should consider the following factors:

1. Are the measures strategic in nature? Many organizations fall victim of measuring only those measures which are easy to measure or those which they can easily access readily available data but somehow lack any meaningful contribution towards achievement of strategic objectives. A combination of both financial and nonfinancial measures completes the whole puzzle. Also, care should be taken that the measures being monitored and reported on are lead indicators. 2. Resource availability: This involves looking at your human resources, time, data availability, financial resources etc. A cost-benefit analysis of measuring and reporting performance is essential to ensure that this does not come at a cost that surpasses the value added

3. Engagement of employees: It is important to involve those individuals who are going to be affected by the measures at the development phase Effective performance measurement is not about consultation but contribution. There is therefore the need to develop a culture that is geared towards measuring and reporting performance. 4. How urgent: This determines whether there should be frequent provision of performance feedback or not. As an organization, you need to regularly review, monitor and manage your performance measuring and reporting capabilities in order to deliver and improve enterprise wide performance. Treat performance measuring and reporting as an ongoing process not a once in a while activity.

ECONOMIC VALUE ADDED AND ITS SIGNIFICANCE

EVA is a method of companys performance measurement. The trademark concept was introduced by Stern steward & company in 1920. It summarizes how much and from where the company created wealth The formula for EVA is: EVA=Net operating profit after tax - Capital invested x WACC(weighted average cost of capital)

EVA INDICATOR

If EVA>0 it shows an efficient use of the capital and represents an index of company value increase.
If EVA=0 it shows that relevant company has the same value as in the moment investments were made in it. If EVA<0 it shows an inefficient use of the capital and a decrease of the company value.

EVA Advantages

Helps managers to make better investment decision & identify investment opportunities. It measures the quality of managerial decisions & indicate the value of growth in future. EVA calculation is easy as data can be extracted from both the income statement and balance sheet(adjusted figure).

IMPLICATION OF EPM
(Rs. In Crores) Total Capital Total Dividends
Equity Dividends Total Debt NOPAT Net Profit EVA

March 2011 10641.82 164.42

98.65 5540.88 2465.11 1847.62 1826.61

March 2010 4617.54 74.69

44.81 1607.07 1712.68 1597.81 1435.63

March 2009 3609.65 62.24

31.12 2142.87 1617.58 1467.82 1401.01

March 2008 2701.81 62.24

31.12 1740.50 1322.57 1515.29 1160.47

March 2007 1768.21 49.79

19.91 1578.63 1090.06 1175.34 983.97

CONCLUSION

How EVA is a better indicator?

Conclusion
EVA as

an innovative approach to the measurement of business performance gives a more realistic overview about the current state of company. EVA model unlike traditional model of measuring business performance in addition to costs of borrowed capital also takes into account own capital cost i.e. cost of equity. If EVA >0, the relevant company gain more than WACC therefore value creation occurs. It represents company value increase. If EVA=0 it means that company gains exactly as the capital cost level. If EVA>0 it means that the company does not recover cost of capital.

EVA is better indicator of firms value when compared to accounting or net profit. Accounting profit equals sales revenue minus all costs except the cost of equity capital, while EVA is equal to sales revenue minus all costs including the opportunity cost of equity capital. Thus EVA may be lower than net profit or it may be negative even though there is profit.

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