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Dwitya Aribawa CHAPTER 11 PERFORMANCE MEASUREMENT 61 Int / 353554

The objective of performance measurement systems is to help implement strategy. The discussion on this chapter weighted more in the performance measurement system that included the tools to measure financial and non financial performance of organization. Another discussion is about the interactive control of performance measurement system that used by controllers in order to create goal congruence in organization. Performance measurement system A performance measurement system is simply a mechanism that improves the likelihood the organization will implement strategy successfully. Strategy defines as the critical success factors; if those factors are measured and rewarded; people are motivated to achieve the goal of organization. Limitation of financial control system An important goal of business enterprise is to optimize shareholders return. In the other hand, optimizing short term profitability does not necessarily ensure optimum shareholders return since shareholders value represent the net present value of expected future earnings. There are four limitation of financial control system that will harm the future value of shareholders return or even the value of firm in the long-term. First, financial measurement may encourage short-term actions that are not in the company long-term interest. Second, business unit manager may not undertake useful long-term actions to obtain short-term profits. Third, using short term profit as the sole objective that can be creating goal incongruence between a business unit managers and senior management. Fourth, tight financial control may motivate managers to manipulate data. General and additional considerations Important insight about the mix of financial and non financial measures needed in management control system since a single measure cannot control a complex system and too many critical measures make the system uncontrollably complex. The other considerations of measuring comprehensive performance are about outcome and driver measures from strategy, financial and non financial measures that align to company long term goal, balancing internal and external factors that should be measures and measurement of changes driven in organization. The balance score card The balance score card is an effective tool of comprehensive performance measurement system. According to Kaplan and Norton there are following four perspectives (Financial, Customer, Internal Business, Innovation and Learning) of mix measurement in organization. Every measure on a balanced scorecard addresses an aspect of a company strategy that should be consider about accurately reflect critical factors that fit with company strategy, show the relationship among the individual measures and considering cause and effect manner for long term financial and non

financial goal and the last is provide a broad based view of current status of company. Key success factors that essential to address in order to meet non financial performance measurement related to customer-focused key variables and internal business process. Implementing (and difficulties) a performance measurement system There are four general step to applying performance measurement system in organization, first step is define strategy, define measures of strategy, integrate measurers into management system and review measures and result frequently. Key point to implement measurement system effectively is the congruence of strategy implementation, business process and management control system. Performance measurement system is complex things to done by whole of organization. Some of difficulties may come in the process of implementation. First, poor correlation between nonfinancial measures and results. Second, financial results that not align with non financial performance. Third, measures are not updated and overloaded. Fourth, difficulty to establishing trade offs Interactive Control Interactive controls alert management to strategic uncertainties, troubles or opportunities insight the organization. These become the bases for management to adapt with rapidly changing environment by thinking about new strategy. Reliable information from internal and external organization is the essential element to set the new strategy plan related to the changes of environment. According to Simons, the technological sift, liberalization and emerging market are the future challenges for organization to adapt and create new way to doing business based on those changes. CASE 11-3: CUP CORPORATION Case insight and main problem statement CUP was one of the largest insurance firms based in Europe. They enjoyed growth rate of more than 25% each year for almost past 10 years. They provide various forms of insurance in order to broaden the type of the insurance into health, life, casualty, property, and automotive areas. However, the growth was flat instead of the planned 3 percent by 1996 and 1997. The declining growth rate resulted from several issues, economic climate, higher taxes and social welfare levies, increasing competition, extensive satisfaction of the basic demand for insurance in Germany. In 1996, the number of customer canceling contracts compared to the total amount of contracts, called lapse rate, reached 10% of total premium revenue. They are having customer loyalty problem that has to be solved. The establishment of CCC (Customer Care Center) enables the company to provide customer with one telephone number that will answer all of customer questions due to their contract. They

need to professionally train people who could effectively answer a variety of questions and increase the service dramatically. The main goal of CCC would be to reduce the lapse rate. The lapse rate problem for CUP was summarized by the image of leaking bucket, new customers would flow into the bucket while at the same time many leaked out through big holes. The real problem was insight from the case is a customer loyalty problem that come across product lines and was considered a corporate problem. Discussion and analysis CUP decided to create a Customer Care Center to stem defection of customers resulting in part from dissatisfaction with the firms service. The working hour of CCC is 24 hours a day and 7 days per week. CCCs main idea was to provide private customers with one telephone number to be used for all their questions and problems and for all types of insurance offered by CUP. There are four goal (short term or operational and long-term) from establishing CCC as a strategy to create customers loyalty that stated by senior managers of CUP, there are; CUPs private customers would have one and only on telephone number for all their questions and problems, The center would open 24 hours per day and 7 days per week, CUP would benefit from a reduction in the lapse rate and Become a service leader in the insurance industry and increase the number of customers with multiple policies. From the four lists of goals above we can examine the short term goal and long term goal for CUP Corporation. First of three of goal above consist of operational or short term goal of CUP Corporation which focusing to create reliable service providers to customers needs. The last goal is about the long term goal that should be achieve by CUP Corporation, it means to be a service leader in the insurance industry and increase the number of customers with multiple policies. Insight of these goals is to create performance measurement system that will incline the both of financial (in term of sales and profits) and non financial (in term of customer satisfaction and loyalty) of the CUP Corporation. Conclusion and recommendation CCC will successfully implement to overcome the problems between CUP and its customers. CCC helps the customers when they could not reach their agent with directly contact Company through CCC. CCC can give information what customers need so that finally could decrease the lapse rate. The key success factors that must be fitted by CUP corporation strategy are focusing the customers needs, clearly define information circulation and considering the employee needs. In line to the problem statement, Balanced scorecard is a suitable tool to be used as a comprehensive measurement system for financial and non financial of CUP Corporation. CCC gives the reliable information of non financial performance measurement and for financial performance that should be conducted in quarterly based objective. By balanced scorecard analysis, most of the problems coming from the customer and internal business processes are able to anticipate.