Performance Measurement and Management

Dr. Fahim Ahmed

Fahim.ahmed@strath.ac.uk
DW 820

Materials in these slides are owned and developed by Management Science department , University of Strathclyde
Outline of the PM

• Introduction to PM
• Customer Perspective
• Operational Perspective, Comparative Perspective
• Integrative Perspective, KPIs, Implementation
• Class test and Recap
Why it is difficult to learn PM?

q Performance measures themselves are not rocket science

q PM discipline is not owned by a particular academic subject
q Teaching is not the right word for PM. It is more about
sharing an insight.
Think about it:
You are living in the early 19th century. You are responsible for
designing a performance measurement system for a cloth factory. The
conditions are:
q There are no serious competitors
q There is no service involved
q There are strict governmental regulations in place that hugely
influence the price and any advertisement activities

Propose a few performance measures that could help at the time.

Traditional PMs, where did they come from ?

It was first in Venice, during the 14th century

that commercial transactions were tracked
technically by very simple accounting methods.

The advent of large industrial

organizations in the nineteenth century
created a need for management
accounting (mid 19th ).
Fact One !

Introducing of management accounting

techniques as the first approach to
performance measurement was due to the
increase of complexity.
Development of Management Accounting
(traditional PMs)

q Early costing systems: cost per ton, cost per unit

q As communications and transportation improved:
Development of new PMs for the individual
branches.
q Scientific Management Movement: Introducing
standard costs for products, capital investment
analysis, PM ratios
 All of the essential elements of modern
management accounting had been
established and codified by 1930s:

-Forecasting
-Budgeting
-Standard Costing
-Variance Analysis
-Return on Investment
-Productivity
-…
Fact Two !

Traditional PMs were developed along with the

increased complexity of organisations till 1930s.
From 1930s, while the complexity of organisations and their
environment kept increasing, the PMs remained stable.
Companies began to lose market share to overseas
competitors

Strategic priorities shifted from low cost production to

quality, flexibility, short lead-time and dependable delivery

Philosophy of technology, production management,

customer satisfaction, and loyalty.
Management Accounting (and finance) Simply Couldn’t Catch Up
with the New Developments.
Advancement in
complexity

TIME
Activity Time and break !
Scenario (Business consultant)

Last year, you finally completed your degree and, with few other students on the course, you set
up a small Business consultancy.

Each of you put some money into the business and you were able to borrow the rest of the
finance you needed from the bank.

The business operates with your group as OR consultants. You have a secretary and an
administrative assistant who looks after the marketing as well as all the admin work. You also
employ an IT person who set up the company website, looks after all the office IT and also
provides an IT input into consultancy projects when needed.

Business has been tough in the first year although the business has won a number of projects.
The business plan to the bank did not anticipate breaking even anyway until Year 3.

•Which aspects of the business's performance would you want to measure? Why?
•What difficulties might you anticipate in measuring the business's performance?
•Who else might be interested in the business's performance and what measures might they
want to see?
Common limitations of traditional PMs:

q Being based on accounting (ignoring more important

factors, difficulty to quantify in price)
q Inflexible
q Lack of information about Customer requirements and
competitors performance
q Designed in isolation from the business strategy
Fact Three !

Traditional Performance Measures failed to be satisfactory simply

because they couldn’t catch up with the new developments after
1930s.
 Think about it (again??)

You are living in the late 19th century. You are responsible for designing a
performance measurement system for a cloth factory. The conditions are:
- Serious competitors are emerging
- Initial aspects of ‘service’ are materialising
- You have more freedom with regard to price and advertisement

- What would you propose now ?

Porter’s Five Forces model

https://www.youtube.com/watch?v=OCnlArFuU-E
A brief case study on Imagine Hospital (IH)

As a private hospital that wishes to be among the best in the region,

IH is taking benefit of a very strict and firm
Performance Measurement system. The system is a very powerful
system that captures more than 500 financial ratios in order to
measure all aspects of the performance of the hospital. These ratios
also cover aspects of human resource productivity, like patients
served per hour. The system is so powerful and advanced that
certain highly trained analysts are recruited to run it and derive
conclusions from it. The system is aimed to monitor the
performance of the hospital. The main outcome of the system is in
the form of reports comparing the performance (financial ratios)
over any given time period in the past.
Can you spot problems with imagine hospital
performance measurement system ?
More serious problems for traditional approaches to PM

PROBLEM ONE: SERVICE INDUSTRIES

Remember ?

Intangibility
Heterogeneity
Inseparability
Perishability
Fact Four !

The specific characteristics of service operations and the wide

range of services brought more complexity and therefore put the
traditional PMs in more trouble.
More serious problems for traditional approaches to PM (Contd.)

PROBLEM TWO: PUBLIC SECTOR

With the new challenging environment, Public Sector now

needs to satisfy ALL the stakeholders.
 Try it Yourself

What are the appropriate performance

measures for a prison manager ?
Some Difficulties with Public Sector PM
•Who is the customer?
•What is the objective?
•What is outcome?
One of the main reasons that an industry goes under public domain is
its complexity, including sensitivity of the work of that organisation
Fact Five:
The unique characteristics of public sector have brought even
more complexity and therefore put the traditional PMs in much
more trouble!

The nature of Change

Accounting dominance Strategic Management
dominance

(Report-Control) (Report – Control - Improvement)

PAST ORIENTED FUTURE
ORIENTED ORIENTED
 Some of the Newly Developed PMs

q Quality Award’s Foundations (EFQM, Baldrige, etc.)

q Hard OR Techniques (DEA)
q Process Mapping as a PM
q Based on Customer Satisfaction (SERVQUAL)
q Benchmarking
q Strategic Performance Perspective: Balanced Scorecard
 (Attempted) Characteristics of the Non-traditional PMs

q Relate to manufacturing/service strategy

q Primarily non financial measures
q Simple
q Fostering improvement
q Changeable by a dynamic market place
Accounting and Financial KPIs are still needed. Some main financial KPIs

• Net Profit
• Net Profit Margin • Return on Assets (ROA)
• Gross Profit Margin • Return on Equity (ROE)
• Operating Profit Margin • Debt to Equity Ration (D/E)
• EBDITA • Cash Conversion Cycle (CCC)
• Revenue Growth Rate • Working Capital Ration
• Total Shareholder Return • Operating Expense Ratio
(TSR) (OER)
• Economic Value Added (EVA) • CAPEX to Sales Ratio
• Return on Investment (ROI) • Price to Earnings Ration (P/E)
• Return on Capital Employed (ROCE)

https://www.bernardmarr.com/default.asp?contentID=773
q Utilisation: actual output / design capacity

q Efficiency: actual output / effective capacity

q Productivity: actual output / input

A number of studies have shown positive relationship between NFIs
and financial and accounting goals
(Said et al 2003, Banket et al. 2000, Gosh and Lusch 2000, Hughes 2000, …)
But what are the latest trends in PM ?
(mentimeter)
Differences between traditional and non-traditional PMs

q Traditional PMs qNon-traditional PMs

q Outdated accounting system qBased on company strategy
q Mainly financial qMainly non-financial
q Intended for middle and high managers qIntended for all employees
q Difficult, confusing qSimple, easy to use
Differences between traditional and non-traditional PMs
(Contd)
qLead to employee frustration
qNeglected at the shop floor
qHave a fixed format
qNot vary between locations
qNot change over time
qIntended for monitoring
q Not applicable to JIT, TQM, FMS, BPR..
q Hinders continues improvement
qLead to employee satisfaction
qFrequently used at the shop flour
qHave no fixed format
qVary between locations
qChange over time
qIntended for improvement
qApplicable
qHelp in achieving continues
improvement
What is the purpose of ‘measurement’?

‘to bring clarity to complex and confusing situations’

(Micheli, P. and Manzoni J. F. (2010)

Some common diseases in PM:

q Competitive measuring (e.g. academic accreditation)

q Sticky measures (e.g. NART measure in a carpet manufacturing company in N. England!)
q Loosing the link between PM and objectives (e.g. over 90% of the workforce achieved ‘above the
norm’ performance)
q Tunnel vision (e.g. number of papers published in academia)
q Measure fixation(e.g. downgrading recording of crime)
q Getting desensitize to numbers as the result of extensive reliance on measurement
q Getting lost in performance data
q Preventing learning and change
Paying the cost!

A study by Cranfield School of Management found that large organisations such as

Volvo believed that up to 20% of management time could be attributed to
planning, budgeting and measuring.

Neely, et al. (2001)

Purpose of PM

q Improvement Planning
Accountability

q Future Oriented
q Strategic Perspective Review Control
q Integration
Activity 2

Try searching the company called Better works !

pull some latest PM dimensions
https://www.betterworks.com/
Image credit :
• lumaxart, CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, via Wikimedia
• https://pixabay.com/images/id-1297779/