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AMITY GLOBAL BUSINESS SCHOOL

Chandigarh

Performance Measurement

Not everything that can be counted counts, and not everything that counts can be counted
Albert Einstein
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AMITY GLOBAL Importance BUSINESS SCHOOL

of Performance Measurement

Chandigarh

What gets measured gets improved Focuses attention on the items measured Poorly designed measures can result in misguided decisions

AMITY GLOBAL Traditional BUSINESS SCHOOLSources

of Performance Chandigarh Measures

Financial statements
Designed for reporting purposes, not guidance Historical, short-term focus Follow arbitrary rules Ignores non-financial information Much useful information is not reported Easy to manipulate through operating decisions
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AMITY GLOBAL Traditional Sources BUSINESS SCHOOL

of Performance Chandigarh Measures

Examples
Profitability
Net income Return on assets

Financial position
Debt position

Stock price
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AMITY GLOBAL Traditional Sources BUSINESS SCHOOL

of Performance Chandigarh Measures

Cost / managerial accounting


Primary purpose is to value inventory for financial statement purposes
Designed to allocate costs, not to control them Historical, short-term focus

Provide information for managerial decisions

AMITY GLOBAL Traditional Sources BUSINESS SCHOOL

of Performance Chandigarh Measures

Examples
Standard costing and related variances Comparisons of actual results to budgets or targets Market share

AMITY GLOBAL BUSINESS SCHOOL

Criticisms of Traditional Measures

Chandigarh

Lack of relevance
Many measures are interesting, but not useful
Market share, revenue, etc. Trends may be useful

Measures may be poorly designed or collected


Customer satisfaction, employee morale, etc.

Goals are arbitrarily determined, beyond the ability of the system

AMITY GLOBAL BUSINESS SCHOOL

Criticisms of Traditional Measures

Chandigarh

Lack of vision
Short-term focus impedes decisions with long lead times or long-term payoffs Focus on what is currently being done, not what should be done Fail to consider the overall organization

AMITY GLOBAL BUSINESS SCHOOL

Promote detrimental outcomes


Short-term thinking Local optimization

Criticisms of Traditional Measures

Chandigarh

Manipulation of operations or measures Well-intentioned but detrimental actions

AMITY GLOBAL Signs of an BUSINESS SCHOOL Ineffective

Performance Chandigarh Measurement System

Performance is acceptable on all dimensions except profit


Measures are not aligned with strategy Measures do not reflect critical success factors

Competitive price, but customers do not buy


Functionality or quality may be more important to the customers
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AMITY GLOBAL Signs of an BUSINESS SCHOOL Ineffective

Performance Chandigarh Measurement System

Managers debate the meaning of the measures


Measures are confusing

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AMITY GLOBAL Signs of an BUSINESS SCHOOL Ineffective

Performance Chandigarh Measurement System

Share price is lethargic despite solid financial performance


Measures are backward looking
Share price reflects future expectations The market expects that current performance will not continue

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AMITY GLOBAL Signs of an BUSINESS SCHOOL Ineffective

Performance Chandigarh Measurement System

Have not changed the measures or targets in a long time


Obsolete, easily met, do not foster change

Corporate strategy has changed


Measures become irrelevant

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AMITY GLOBAL Effective Performance BUSINESS SCHOOL

Measurement Chandigarh

Systems
Initiative must start at the top
Senior management has overview, power to implement the system Goals of lower levels determined by needs of higher levels
Top down system prevents local optimization while emphasizing overall optimization

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AMITY GLOBAL Effective Performance BUSINESS SCHOOL

Measurement Chandigarh

Systems
Must be balanced
Financial and non-financial measures

Must be relatively simple


Limit measures to critical success factors
Too many measures lead to confusion, redundancy, wasted effort, irrelevance

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AMITY GLOBAL Effective Performance BUSINESS SCHOOL

Measurement Chandigarh

Systems
Must promote intended behavior
Employees actions must be aimed at improving the organization, not meeting arbitrary goals Poor measures promote dysfunctional behavior Employees must understand why something is being measured
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Should provide guidance, not just

AMITY GLOBAL Effective Performance BUSINESS SCHOOL

Measurement Chandigarh

Systems
Performance-based compensation
Powerful motivator Who participates? General guidelines
Must promote intended behavior
Long-term or short-term goals?

Employee must understand the performance/pay link Employee must have some control over the measures Must be significant enough to motivate Pay for ideas?

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AMITY GLOBAL Effective Performance BUSINESS SCHOOL

Measurement Chandigarh

Systems
Must look beyond the entity
External groups can provide useful information Measures should be benchmarked
Other departments or divisions Other entities

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AMITY GLOBAL Non-financial BUSINESS SCHOOL

Performance Measures Chandigarh

Useful
Not everything can be measured in monetary terms
Customer service Goal attainment Innovation Employee involvement

Frequently difficult to measure


Rough measures or trends may be better than nothing

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AMITY GLOBAL Non-financial BUSINESS SCHOOL

Performance Measures Chandigarh

Many companies believe they could be useful, but do not measure them
Difficult to measure Resistance to change

Even when measured, they may not be used


Suspicious about the validity of measures Resistance to change
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AMITY GLOBAL BUSINESS SCHOOL

Analysts Top 10 List

Chandigarh

The Top 10
Ability of the company to execute its strategy Credibility of management
Does the company do what it says it will do?

The quality of the strategy


Will managements vision create future value?

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AMITY GLOBAL BUSINESS SCHOOL

Analysts Top 10 List

Chandigarh

Innovativeness
How readily does the company adapt to changing technologies and markets?

Ability to attract and retain talented people Market position


How quickly can the company realize sales, profits and cash flow from products introduced in the prior three years? How strong is the companys brand?
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AMITY GLOBAL BUSINESS SCHOOL

Analysts Top 10 List

Chandigarh

Management experience
What skills and experiences does the management team bring to the organization? What is their success rate in similar situations?

Executive compensation
Are compensation policies aligned with strategy? How many executives have their pay tied to value creation?
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AMITY GLOBAL BUSINESS SCHOOL

Analysts Top 10 List

Chandigarh

Quality of major processes


How well does the company execute its strategy? Does it have plans and processes that enable it to adapt to changing market conditions?

Research leadership
How well does the management understand the link between creating knowledge and using it? R&D budget as a percent of sales, profits and cash flow
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