Measuring Up: Performance Reporting and Measuring

MIR 889Andrew Graham

Queen’s University

Why Measure?

• To know how you are doing relative to:• Plan• Competition• Change pressures• Benchmarks• Targets• Commitments

Why Measure?

• To identify improvement opportunities.• To make decisions based on facts and

data that everyone agrees on and understands

• Measure changes to stakeholders wealth; put in simple terms, the value of a firm.

• To be able to adjust to changing realities.

Limitations of Financial Performance MeasuresFinancial measures tend to be lag

indicators -“After the fact”Management also needs lead

indicators -“Before the fact”Lag focuses on variance,

comparison to plan, ratios – all good and useful

Lead focuses on resilience, adaptation, risk and opportunity

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Lead indicators as value driversMany non-financial indicators can serve

as lead indicators in certain settings.Common examples are:

◦Market share, backlog (book-to-bill ratio), new product introductions, new product development lead times, product quality, customer satisfaction, employee morale, personnel development, inventory turnover, bad debt ratio, or safety

Lag IndicatorsIn contrast to lead indicators, lag indicators are

measures that point to earlier plans and their execution.

Financial performances are lag indicators.Many times, financial performances are too late

to affect future products and services.Therefore, we need multiple measures that

include both financial and non-financial measures.

Performance Measurements In a Changing World

In the global, technology-driven, decentralized environment, measuring

Financial performance, while important, is not adequate.

Even if less than precise, other measures of performance are required.

These measures should be capable of measuring multiple attributes of an organization.

Mission – What we do

Vision – What we aspire to be

Strategies – How we accomplish our goals

Measures – Indicators of our progress

The Strategy Focused Organization

Environmental Scan

Strengths Weaknesses

Opportunities Threats

Values

Mission &Vision

Strategic Issues

Strategic Priorities

Objectives, Initiatives, and Evaluation

A Model forStrategicPlanning

Strategic DirectionCreate Environment

For Change Strategic Performance Management System

Linking it all together….

Communicate StrategiesDefine ObjectivesImplement BSC

Balanced ScorecardMeasure Performance

Improve Processes

Evaluate and AdjustContinuous Improvement

Redefine Initiatives

The Balanced ScorecardWhat is it?

The Balanced Scorecard is a management tool that provides stakeholders with a comprehensive measure of how the organization is progressing towards the achievement of its strategic goals.

Balanced ScorecardManagement must consider both

financial and operational performance measures

Measures should be linked with company goals and strategy

Financial measures are only one measure among many

Uses key performance indicators

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COMPANY GOALS

CRITICAL FACTORS

KEY PERFORMANCE

INDICATORS

Examples of critical factors and corresponding KPIs

Operational

efficiency

Employee

excellence

Financial profitabili

ty

Market share

Yield rateTraining hours

Revenue growth

Customer satisfactio

n

Four Perspectives

Financial Customer

Internal Business

Learning and

Growth14

Financial PerspectiveHow do we look to shareholders?

◦Ultimate goal is to generate income for owners

KPIs: ◦Sales revenue growth◦Gross margin growth◦Return on investment◦Working capital used

Financial Ratio Analysis◦Performance relative to expectations◦ Industry comparisons

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Customer PerspectiveHow do customers see us?

◦Top priority for long-term successCustomer concerns:

◦Product price◦Product quality◦Sales service quality◦Product delivery time

KPIs:◦Customer satisfaction◦Market share◦Number of customers and repeat customers◦Rate of on-time deliveries

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Internal Business PerspectiveAt what business processes must we excel?

Three factors:◦ Innovation

KPI: Number of new products developed

◦Operations KPIs:

Product efficiency – number of units produced Product quality – defect rate

◦Post-sales service KPIs

Number of warranty claims Average wait time on phone for customer service

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Learning and Growth Perspective

How can we continue to improve and create value?

Three factors:◦1) Employee capabilities

KPIs: Hours of employee training Employee commitment and turnover Number of employee suggestions implemented Dollars per worker on Workers Compensation Sales dollars per worker

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Learning and Growth Perspective◦2) System capabilities

KPIs: Percentage of employees with online access to

customer data Percentage of processes with real-time feedback

◦3) Company’s climate for action◦ A balance of responsibility and

authority

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Performance Reports

Report financial performance of responsibility centers

Cost center Difference between actual results and budget Changes in labor dollars or hours Changes in purchased price vs. quantity

discountRevenue center

Variance due to selling more or less units than expected

Variance due to price changesProfit center

◦Focus on both revenue and cost variances20

Performance ReportsManagement by exception

◦Only material variances are investigated

Should focus on information, not blame

Some variances are uncontrollable◦Example: increase in costs due to a

natural disaster

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Performance ReportingVariances

◦ Differences between budgeted and actual amounts.

Audit◦ A systematic process of objectively

obtaining and evaluating evidence of the firm’s performance, judging the accuracy and validity of the data, and communicating the results to interested users.

Financial Ratio◦ An arithmetic comparison of one financial

measure to another, generally used to monitor and control financial performance.

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Example of a Performance Report

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Widely Used Financial Ratios

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Widely Used Financial Ratios

LIS580- Spring 2006 26

Widely Used Financial Ratios

May 16, 2006

FIGURE 14–7cG.Dessler, 2003

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Widely Used Financial Ratios

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Ratio Analysis: Factors Affecting Return on Investment

Caution

Ratios are valuable, but…..◦ They do not provide answers in an of

themselves and are not predictive◦ They should be used with other

elements of financial analysis◦ There are no “rules of thumb” that apply

to interpretation of ratios

Limitations of Performance Measures

Measurement issues◦Total asset figure in equation

Nonproductive assets Gross book value vs. net book value Depreciation may artificially inflate

measures

Short-term focus◦Figures are for a one-year time frame◦Incentive to management to cut

essential spending to increase measurement

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