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GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

Chapter 1

Financial and non- nancial performance management This chapter is provided free to OpenTuition.com More chapters
Financial and non- nancial
performance management
This chapter is provided free to OpenTuition.com
More chapters are available at www.cordwellconsulting.co.uk
One of the big dilemmas of performance management is to decide which performance
measurements to use. The regulatory framework will almost always dictate that a business will have
accounting records to record historic pro ts (and losses), the assets and liabilities of the business and
record all cash movements. It is easy, therefore, to become obsessed by these nancial measures
since they have to be produced for people outside the organisation in any case (shareholders, tax
ffi cials and so on). This also means that we are familiar with them and there’s nothing like a comfort
zone to make us all reluctant to move.
o
The issue though is this. Is the past nancial performance a good indicator of the future likely
nancial progress? For some businesses it is true that year on year “steady progress” is made and so if
the results were plotted it might look as if the world is a predictable place.
30
25
20
15
Sales
10
5
0
Year 1
Year 2
Year 3
Year 4

The graph shows that year 4 results are more or less in line with the trend of the business. But if you “stood” at the end of year 4 looking forward how con dent could you be that the past trend would continue? Many things can happen in business from one year to the next and these things can seriously a ect the nancial results. For example if you were told that in the above graph the business was involved in soft skills training. At the start of year 5 a recession hit and companies began to look very hard at their discretionary expenses and the year 5 nancial results showed a 40% fall in sales and signi cant losses.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

You might think, therefore, that the future is just unpredictable and that the best strategy is to stay exible and react to what is thrown up by the market. Whilst there are elements of truth in this idea an organisation that “sees it coming” is in much better shape to respond sooner.

The training company above might have been wise to be measuring enquiry rates from customers (a non- nancial measure of success) during the years 1 to 4. If it had it would have noted that advanced enquiries were showing signs of badly tailing oas early as June in year 4. The courses it delivered in the second half of year 4 were to customers that had booked some 4 months earlier (on average) and so it wasn’t until year 5 that the nancial gures started to re ect what was happening.

nancial gures started to re ect what was happening. In some way that’s the point. The

In some way that’s the point. The nancial results re ect the end of a series of events. Organisations that wait to see the year’s pro t before “managing” the business are playing a dangerous game. There are often other (commonly non- nancial) indicators that will give a business advanced warning of problems ahead.

Financial indicators tell you where you have been and are where you are now Non-
Financial indicators tell you where you have been and are where you are now
Non- nancial indicators tell you where you might be going

Let’s consider an example

Freg R Us Limited is a new business, selling high quality organically produced fruit and vegetables via the internet. The managers are con dent that in the modern society’s, home delivery of weekly shopping of fruit and vegetables will be successful.

The average market growth for this market is some 120% per annum although this is likely to slow to a more sustainable 70% in the future. Customers can buy a variety of di erent produce but have choice in this competitive market.

The owners were prepared for a loss-making start. This meant that cash ow would be an issue and cost control would be important.

ow would be an issue and cost control would be important. Website development was seen as

Website development was seen as important but despite this the owners decided to use an inexperienced website developer. All website development costs were written o as incurred in the internal management accounts that are shown below in table 1.

The owners spent considerable sums on launch marketing in the rst two quarters. It is not expected that the marketing expenditure will continue to be as high in the future as the company name spreads.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

The business’s trading results for the rst two quarters are shown below in table 1

Table 1 – Financial Results for rst two quarters of the business:

 

Quarter 1

Quarter 2

 

£

£

£

£

Sales

 

504,000

 

816,000

Cost of Sales

 

241,920

 

408,816

Gross Pro t

 

262,080

 

407,184

Website development

144,000

 

108,000

 

Administration

120,600

 

180,768

 

Distribution

24,916

 

39,984

 

Launch marketing

72,000

 

48,960

 

Other variable expenses

60,000

 

96,000

 

Total expenses

 

421,518

 

473,712

Loss for quarter

 

(159,436)

 

(66,528)

Loss for quarter   (159,436)   (66,528) Administration expenses above include manager’s and

Administration expenses above include manager’s and director’s salaries.

Some non- nancial performance indicators are available for the early quarters of trading. The data for the rst two quarters management reports is shown below:

Table 2 – Non nancial indicators for rst two quarters of business:

 

Quarter 1

Quarter 2

Website hits*

828,947

1,036,191

Number of orders placed

33,157

46,628

Late delivery

3%

12%

Sales returns

8%

18%

System down time

2%

4%

*A website hit is automatically counted each time a visitor to the website opens the home page of Freg R Us Limited.

The industry average conversion rate for website hits to number of orders placed is 3.2%. The industry average sales return rate for internet based fruit and vegetables sold is 13%.

industry average sales return rate for internet based fruit and vegetables sold is 13%. WWW.CORDWELLCONSULTING.CO.UK 3

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

Let us rst consider the nancial performance of Freg R Us Limited. In each case the text provides a potential interpretation of the data and then considers (in a handwriting font) the learning points that can be drawn from the analysis.

Sales Growth

Freg R Us has grown very quickly in its rst two quarters of trade. The growth between quarter 1 and quarter 2 is a staggering 62% (see working 4). This can only be seen as impressive given the stated competitive nature of the business.

given the stated competitive nature of the business. New businesses can often struggle to get going

New businesses can often struggle to get going but this does not appear to be the case here.

The industry also appears to be growing but at a slower rate. This means the Freg R Us is taking market share from the competition. Whilst this is impressive it must be recognised that high growth rates are di cult to maintain.

that high growth rates are di ffi cult to maintain. Sometimes performance management draws from experience

Sometimes performance management draws from experience. £504,000 of sales (and over 33,000 orders placed) in the first three months of business “feels” good. You have to know your subject in order to make these statements. In the real world an accountant may have worked with many different clients and therefore has the basis for this subjectivity.

Percentages are extremely useful in performance management. The sales have increased by £312,000 which is small for a multi-million £ business but huge for Freg R Us. The humble percentage conveys this well.

Performance can be measured by reference to the external market. Freg R Us has increased sales (by 61%) in a competitive environment. This makes the absolute increase more impressive. If the fruit and Vegetable market had been growing by 80% per quarter then Freg R Us’s management would be looking for solutions to their problems rather than celebrating success.

Gross Pro t

The gross pro t for the business is 52% for quarter 1 and 50% for quarter 2. We have no comparable industry data provided so no absolute comment can be made. A reduction of 2 percentage points might not seem serious; however 2% of £816,000 is over £16,000 of pro t that could have been earned in quarter 2 alone. Falling margins should be guarded against by the owners.

Falling margins should be guarded against by the owners. The cause of this fall is unclear.

The cause of this fall is unclear. Competition could be forcing down prices. If Freg R Us is also reducing its prices this would re ect on the gross pro t margin. It could also be that the cost of the fruit and vegetables are rising disproportionately. This market is subject to weather conditions for example and this can lead to volatile prices. As the business has grown so quickly, it may have had to nd new suppliers at higher prices. Delivery costs could also have risen. These could all reduce gross margins achieved.

Margin is key measure for many businesses. They buy goods in (or manufacture) and sell on in the hope of profit. The extent to which they “add value” is a key performance indicator. Equally, margins must be protected. A fall in margin means that the business will have to work harder to make the same profit as before.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

The financial performance measure (in this case gross profit (or margin)) contains no indicator of cause. In other words it is data not information. It merely shows you the end result of a problem (or a success). The performance manager has to investigate to find out why in this case the fall in margin has occurred. A financial performance assessment has therefore to be at least 90% words not just numbers. In the real world there is more likely to be a definite answer (with further analysis) in an exam you have to theorise a little and use the clues in the question.

If you are going to guess – guess smart! In the above it is suggested that a rapidly growing business such as this will be under pressure to meet demand and might therefore have to pay higher prices to obtain supplies at short notice. The growth information in the scenario guides the guesswork on possible causes.

Website development

Website costs are being written o as incurred to the management accounting pro t and loss account (or income statement).

Website development should be seen as a one o cost and should not be allowed to distort the underlying performance of the business. If we add back all website development costs the business produced a pro t of £26,036 in the rst two quarters of trade (working 5).

The wisdom of seemingly cutting back on website development is questionable. The website is a core resource and must be reliable at all times.

The regulatory framework does not apply to a businesses internal management accounts. It can, therefore adopt any accounting policy it likes in these accounts. However in the real world many organisations will be reluctant to have two systems running and so adjustments to the financial accounts may have to be made to get a true picture of performance. These adjustments are not dealt with in this chapter.

Unusual or non-recurring expenses need to be adjusted in order to produce a meaningful assessment of performance. Expenses such as website development are investments in the future of the business. It is probably wrong, therefore, to “punish” the current profit and loss statement with the whole charge. These matters are fully explored in many financial reporting standards but here the main point has been made.

reporting standards but here the main point has been made. Administration costs These are 23.9% of
reporting standards but here the main point has been made. Administration costs These are 23.9% of

Administration costs

These are 23.9% of sales in quarter 1 and only 22.1% of sales in quarter 2. This could be good cost control which is impressive given the inexperience of the management team.

Also any xed costs included in the cost will be spread over greater volume. This would also reduce the percentage of cost against sales gure. This is an example of a business gaining critical mass. The bigger a business gets the more it is able to absorb costs. Freg R Us may have some way to go in this regard gaining a much greater size than at present.

The performance management point here is that although the % cost of sales is falling this may be due to the fact that the business is growing rather than some cunning cost control plan.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

There is no doubt that accountants are uniquely placed to reveal the mystery of financial numbers. In the above an understanding of fixed costs is demonstrated. As a business grows its fixed costs will be spread over greater numbers of units reducing the percentage spend (in this case on sales) and improving margins. A good performance manager will understand this dynamic and make comment. Some organisations in some markets have to obtain a certain size in order to compete (they gain a critical mass). In others, size may not matter as much (personal services such as hairdressing for example). Again this is about knowing the market in which your business operates in and being prepared to apply your technical knowledge.

in and being prepared to apply your technical knowledge . Distribution costs This is a relatively

Distribution costs

This is a relatively minor cost that again appears to be under control. Distribution costs are likely to be mainly variable (postage) and indeed the proportion of this cost to sales is constant at 4.9%.

the proportion of this cost to sales is constant at 4.9%. The main performance management point

The main performance management point here is that not everything is worthy of detailed comment. A good assessment is a focussed one. In the real world some costs or indeed revenues may not be discussed at all. This helps reduce the volume in a financial report to (say) the board. In an exam it represents an easy way to score a mark. One sentence in a minor area can earn a mark quickly.

Launch marketing

This is another one ocost that should be allowed to distort the performance picture. Continued marketing in the future is likely but probably at a reduce cost.

This is an indicator that the businesses nancial performance is better than the loss suggests. The loss includes the launch marketing cost. This cost needs to be adjusted to get a meaningful performance assessment.

This organisation lost money but as part of the figures over £100,000 of “launch marketing” was incurred. A good performance assessment would allow for costs which are one off items in its commentary.

allow for costs which are one off items in its commentary. Other costs Another cost that

Other costs

Another cost that appears under control in that it seems to have simply varied with volume.

Again, because there is little to say avoid the padding trap and said little. Focus, focus, focus.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

However, what does the non nancial data tell us? From what has been said already we would expect to get more of an indication of the future direction of the business. Again each area is considered and then the learning points discussed in a handwriting font

Website hits

This is a very impressive start. The internet revolutionises the way new businesses enter a market. Nonetheless growth in hits is 25% between the two quarters and this is impressive. If this continued over a year the nal quarter hits would be over 1.6m hits.

Note again the use of experience and judgement. If you think it is impressive that a new business gains so much interest in its products in the first two quarters then say so. You must draw on your experience in a commentary and not be afraid to state your opinion.

The angle taken here is a little different than for the financial assessment. The “future” performance is now being talked about. Non-financial indicators of performance very often give us clues as to the likely direction that the business will take. Website hits are no guarantee of actual sales. However, they do represent an interest in the company by potential customers and if other elements of good performance are present (accessible ordering system, quality products for example) then sales may follow.

Number of orders placed

Freg’s order conversion rates are 4% and 4.5% in quarter 1 and 2 respectively. Both these gures appear to be ahead of the industry average and hence can be described as good. Freg appears competitive

Industry averages are very useful when one considers performance. They enable an assessment of relative performance against competitors. Without this angle an assessment can only focus on the trend of results. Performing trend analysis alone is dangerous. An organisation might be growing (and therefore be congratulated for good performance) but doing so at a much slower rate than the market. You must take an external view of performance.

the market. You must take an external view of performance. We can use the number of
the market. You must take an external view of performance. We can use the number of

We can use the number of orders placed to calculate the average price achieved for the orders:

Quarter 1

£504,000

= £15.20 per order

33,157

Quarter 2

£816,000

46,628

= £17.50 per order

This suggests that the fall in gross pro t has little to do with the sales price. The problem of the falling gross pro t must lie elsewhere. Perhaps the mix of products is changing with customers choosing the products they liked best in their rst few orders.

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UNDERSTANDING PERFORMANCE MANAGEMENT

Mathematical calculations are useful in performance management. The calculation of an average, a growth rate or as in this case a price can add value to the assessment. You may not be told which calculation might be useful so again experience is needed. These calculations do not have to be complicated. Using complicated calculations such as standard deviations or a covariance is often possible but if your reader does not understand the measures there is little point in their calculation. Keep it simple is good advice. The marketing spend per customer or per website hit are both straightforward and useful calculations that could have been done.

and useful calculations that could have been done. Again the calculation itself is just the start

Again the calculation itself is just the start of an assessment of performance. An interpretation would then be needed.

The marketing spend per website hit is:

then be needed. The marketing spend per website hit is: Quarter 1: £72,000 / 828,947 =

Quarter 1: £72,000 / 828,947 = £0.0868

Quarter 2: £48,960 / 1,036,191 = £0.0473

good assessment of performance would now state an opinion on this. This seems

cheap. Direct mail would cost a lot more than £0.09 per unit sent and its response rate would be unlikely (according to research) to be more than 2%. The direction of the unit cost is also worthy of comment. It seems as if the business is generating sales regardless of the marketing spend. Word of mouth, newspaper reports or repeat purchases may be a cause of this. A qualitative comment would be sensible here too! “This is encouraging!”

Late delivery

Freg is selling food and customers will require reliable delivery systems. The increase in late delivery is worrying for Freg as this could easily lose customers. Businesses can the victim of their own success in that rapid expansion over stretches resources and reliability or quality su ers.

to
to

Disappointed customers may not return a second time.

The danger signals for the future should be clear here. Non-financial measures tend to

reveal the future perhaps better than a crystal ball. Your assessment should be prepared

take this angle and hypothesise as to what might happen if what you see at the

moment continues.

Sales returns

Returns are clearly common in this industry. The customers may be unhappy with the quality or the goods might have been damaged in transit. The concern here is that the business’s return rate has jumped up in quarter 2 and is now well above the average for the industry. In other words performance is worsening and below that of the competitors.

If the business is under pressure on delivery (as shown by the lateness of delivery) it could be that errors are being made. If wrong or damaged goods are sent out then they will be returned by disappointed customers.

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UNDERSTANDING PERFORMANCE MANAGEMENT

This is clearly concerning and an investigation is needed.

Note the “worsening” and poor “competitiveness” angles taken here. Both are valid. A performance assessment can talk about trend and about relative success if the data is available.

System down time

If customers cannot access the site then orders cannot be placed. This is nancially disastrous.

Downtime could be caused by insu cient investment at the development stage (we are told that the server was developed by an inexperienced developer) or when the site is under pressure due to the growth in volumes of sales and hits.

The down time percentage has risen alarmingly and this is concerning. Ideally we would need gures for the average percentage down time achieved by comparable systems to be able to comment further.

A discussion with the website developers may well be warranted along with an inspection of

the developer’s contract.

If you are guessing as to possible cause and can think of more than one plausible possibility then be prepared to state the most likely reason for a measures result.

Note also the suggestion that the website developers may be responsible. Good business advice can come from a performance assessment don’t be afraid to give it!

Summary

Although the business has lost over £225,964 in the rst two quarters of its life, this is not as bad as it looks. The reasons for this view are:

New businesses rarely breakeven within six months of launch

The losses are after charging launch marketing and website development costs, these costs will not be incurred at such a high rate in the future

The threat to the future surrounds the fall in gross pro t percentage which should be investigated and the possible drop in quality.

should be investigated and the possible drop in quality. The business is moving in the right
should be investigated and the possible drop in quality. The business is moving in the right

The business is moving in the right direction and without website development and launch marketing they made a pro t of £56,564 in quarter 1 and £90,432 in quarter 2.

Performance assessment often starts with the detail, looking at individual costs and revenue for example. However, an overall view can sometimes be useful (as here). You should be able to draw conclusions and look at the situation at the top level. This is the sort of summary that members of a board would find very useful. Recognise that the profit and loss account of a business does always reflect its true performance.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

Workings

1.

2.
2.

Gross pro t

Quarter 1:

Quarter 2:

262,080

= 52%

407,184

= 52%

504,000

816,000

Website conversion rates

Quarter 1:

Quarter 2:

33,157

46,628

 

= 4%

= 52%

828,947

1,036,191

Website hits growth

Between quarter 1 and quarter 2 the growth in website hits has been:

1,936,191

=

828,947

1 25 = 25%

.

Sales growth between quarter 1 and quarter 2 has been

816,000

=

504,000

1 62 = 62%

.

Pro ts before website costs are

 

Q1

Q2

Total

Losses shown

-159,436

-66,528

 

Website costs

144,000

108,000

 

Revised result

-15,436

41,472

26,036

costs 144,000 108,000   Revised result -15,436 41,472 26,036 WWW.CORDWELLCONSULTING.CO.UK 10

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

The academic world’s contribution to non- nancial performance assessment

In the above example of performance assessment experience has been used to select a series of techniques and calculations. However, the academic world is full of help in this regard. The list of nancial and non- nancial assessment based potential calculations is endless. A student can concentrate on a few key calculations since a few will often be enough.

The mistake that many performance managers make is to bombard their reader with as many calculations as possible and in an exam this is disastrous. Your entire allocated time can be taken up with calculations which will earn you a maximum of 10% of the marks available for a question. A performance assessment is 90% words and so the marks will be allocated accordingly.

is 90% words and so the marks will be allocated accordingly. That having been said you

That having been said you do need to be able to do these calculations and be able to select which ones you need in any given situation.

able to select which ones you need in any given situation. Financial performance assessment calculations Much

Financial performance assessment calculations

Much depends on what you are trying to assess. Pro tability, liquidity or gearing are all possibilities.

Pro tability

Gross pro t (%) = gross pro t/sales x 100

Net pro t (%) = net pro t/sales x 100

Costs can be measured as the % increase from one year to the next or can be measured as the % of sales that is represents thus: cost/sales x 100

If a balance sheet is provided or available then other calculations are possible:

Asset turnover can be measured as sales / capital employed – this measure attempts to show how hard the assets are working for the owner. If the assets are working hard, then a high amounts of sales will be generated for every £ of assets held.

ROCE % (return on capital employed) is measured as the net pro t / capital employed x 100. This attempts to show how well the assets are generating pro t.

to show how well the assets are generating pro t. Liquidity Liquidity concerns that amount of

Liquidity

Liquidity concerns that amount of readily available cash a business has and thus indicates its ability to pay its debts.

The most commonly used ratio is the current ratio. This is measured as current assets/current liabilities and ideally would exceed 1. A “liquid” business has enough current assets to settle its current liabilities.

Since inventory can sometimes be slow moving (and hence not very liquid) a quick ratio can be used removing inventories from the current assets gure above.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

Gearing

Debt is a common enough form of nance for businesses, it has tax advantages over equity (the interest attracts tax relief ) and the interest rate is often lower than the cost of other forms of long term borrowing. However, too much debt renders a business risky. High levels of interest payments can damage dividend prospects and involve the banks (or other nancial institutions) having an active interest in the business. Gearing can be measured as:

Gearing (%) = debt / (debt + equity) x 100

be measured as: Gearing (%) = debt / (debt + equity) x 100 Comparator With all

Comparator

With all these ratios you need a comparator. Previous year gures will give the performance manager the opportunity to talk about trends. If other businesses data is available or industry averages then the conversation can turn to matters of competitiveness and acceptability (of debt levels for example).

and acceptability (of debt levels for example). It is important that the performance manager recognises

It is important that the performance manager recognises which comparator they have and makes comments as appropriate. For example if all you have is previous year gures then comments of “improvement” or “worsening” are ne but “good” is more doubtful. If a gross pro t has increased to 40% from 37% you still cannot say the 40% is good. If competitors earn a gross pro t of 48% then you can say that we are improving but still have a long way to go!

Generally speaking, despite the di culties in using external comparators (lack of consistency in calculation being the main problem) some external focus is important. No business operates in a vacuum.

the main problem) some external focus is important. No business operates in a vacuum. WWW.CORDWELLCONSULTING.CO.UK 12

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

Non nancial performance assessment

There are no rules here. Every organisation selects its own measures which it wishes to focus on and no two organisations measures will be the same. Exciting eh! In the business world this means a committee which will sit down (probably) and discuss what they consider to be important. In an exam, life is simpler. Whilst sat down (de nitely) you will have to apply a given model or set of measures to a question. Prior preparation is centred on becoming used to the models that exist (and that are in your particular syllabus) and familiar to some of the more common measures that are used.

familiar to some of the more common measures that are used. Brie y considered here are

Brie y considered here are two of the more popular models, but remember you need to apply yourself in an exam so rote learning of these models will not be enough.

The Balanced Scorecard – Kaplan and Norton

not be enough. The Balanced Scorecard – Kaplan and Norton This is perhaps one of the

This is perhaps one of the best known models, it suggests that managers should agree targets in four broad areas (they called them “perspectives” to be ash). The areas were:

Every business cannot ignore the nancial gures (despite the importance of non- nancial measures). Banks and shareholders in particular will be concerned about the current position of the business and without their support there is no future! Any of the nancial measures noted above could be used here.

An external view, a view focussed on the customer is vital for the go ahead business. “Go-ahead” - an American sounding expression for which there is an apology! A business must know how its customers feel about the products and services provided. To do that the business must measure the customers’ degree of satisfaction in some way. Measures could include:

% on time delivery

% repurchase rate by returning customers

customer satisfaction rating (a score out of 10 – see below)

Financial perspective:

Customer perspective:

rating (a score out of 10 – see below) Financial perspective: Customer perspective: WWW.CORDWELLCONSULTING.CO.UK 13

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Internal business perspective: An internal view. An organisation must operate e ciently delivering customer needs whilst controlling its costs and resources. All resources and internal processes could be covered: with targets being set for assets usage, supply chain management and customer service systems. Measures could include:

and customer service systems. Measures could include: • manufacturing build times • cost per unit •

manufacturing build times

cost per unit

machine breakdown rate (perhaps measured by breakdown hours per thousand hours)

The innovation and learning perspective: This concerns the intangible assets that a business has, primarily its people (human capital) and its knowledge (information capital). Measures could include:

employee lateness or absence rate

employee turnover

time to develop products to market

Fitzgerald and Moon’s Building Block model

This is a model probably best suited for service based businesses but could probably be adapted for others fairly easily.

They proposed that underpinning the actual targets (they grouped these in to 6 dimensions – see later) were principles surrounding standards and rewards.

Standards
Standards

They suggested that employees should participate in the setting of targets since this would encourage ownership of the target and a commitment to it. They said that the target should provide stretch making it achievable but only with e ort and that all targets should be seen to be fair by all concerned. To achieve fairness adjustments might have to be made to (say) allow for cheaper overseas rents not available in all the countries an organisation operates. In this way all divisions could be compared fairly.

Rewards

The motivation and willingness of an employee to work hard cannot be assumed. Many employers think that rewarding sta using purely a at rate (for time) is enough. They think that the employee is already being paid and should therefore give their all for the business without the need for further incentive. There are doubts as to the wisdom of this. A lower basic pay with a variable bonus element would seem sensible.

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UNDERSTANDING PERFORMANCE MANAGEMENT

Fitzgerald and Moon suggested that any reward system should be easily understood, concern conditions that are controllable by the employee and motivate them to strive for more.

In whichever model you decide is most appropriate the precise individual targets would have to be agreed by each business but they should be:

Speci c

vague targets can often be misinterpreted. If you tell an employee to “do better” or “improve” you might be asking for miracles. Most employees want better guidance. Agree a speci c improvement plan and review progress regularly.

Measurable

performance managers have to put a number on all targets which can be di cult but rarely impossible. I am happy but how happy? Am I happier now than last month? Tricky questions. But if I tell you that my happy score was 8 last month and 9 this month then I can convey some understanding to you about how I feel.

The medical profession employ this technique in triage. “How do you rate your pain on a scale of 1 -10?” patients get asked when presenting themselves at a hospital. This should enable the triage nurse to prioritise cases. There are clearly honesty issues here with patients feigning near death pain levels to be seen sooner, however that is a problem of the vested interest involved not the scoring principle.

Achievable (with a little eort.) This chapter is not speci cally dealing with motivation theories and ideas. However, it is worth noting that setting targets that stretch individuals is usually the best way to maximise output from them

targets that stretch individuals is usually the best way to maximise output from them WWW.CORDWELLCONSULTING.CO.UK 15
targets that stretch individuals is usually the best way to maximise output from them WWW.CORDWELLCONSULTING.CO.UK 15

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

Relevant

CORDWELL ! UNDERSTANDING PERFORMANCE MANAGEMENT Relevant targets need to be focussed on what is important and

targets need to be focussed on what is important and be relevant to the individual and the organisation as a whole. In other words a little thought needs to go in to which targets to set. Single targets rarely work since (sadly) employee bias can creep in. For example if a car wash business set a target solely on the speed of hand wash they could easily end up with lots of partially washed cars (and complaining customers). The car washers (probably called automobile hygiene technicians in the bizarre world we live in) need targets concerning a (small) range of areas. Wash speed, wash quality and customer handling for example. Abuse of the performance management system becomes much more di cult in this way.

system becomes much more di ffi cult in this way. Time based a target needs a

Time based

a target needs a time focus. It is easy to say “one day I will be a millionaire”. It is quite another to commit to being rich before you are 30 years old. The time based element will almost certainly galvanise more action.

SMART based targets work but fall down in even one area and the objectives may not be met.

Dimensions

Fitzgerald and Moon proposed six dimensions or areas that service organisations should set targets. Although again as each business is di erent some organisations would concentrate on which areas they felt were important to them.

Financial performance: Most of the non nancial performance models recognise that businesses cannot entirely focus on the future and so suggest measuring short term nancial performance in some way. This is a sound idea. It no good being “promising” in the way a footballer might be if in the present the player breaks a leg and can play no more. In a business context a business that goes bankrupt today can hardly do well tomorrow.

that goes bankrupt today can hardly do well tomorrow. Competitive performance: No organisation operates in a

Competitive performance: No organisation operates in a vacuum and competitors will almost always be present. Therefore setting targets on market share and sales growth is sensible.

Flexibility: An organisation needs to exible in the way it deals with its customers. The more it is able to say “yes” to a customer request the more customers it will have. This means having a sensible range of products or exibility in relation to added extras (in cars for example). In a restaurant context, exibility in booking numbers, times of booking and the range of items on the menu would all be possible measures to use.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

A word of warning here! To be a Jack of all trades (and hence flexible) can mean you are a master of none (and hence not seen as an expert and “good quality”). Balance is needed. If you say yes to everything suggested by a customer you could lose focus and the control of your business.

Flexibility can also be referred to in relation to an internal process perspective. It is not so good saying yes to every customer in a restaurant if that means the chef and his sta cannot cope with the demand. Sta ng levels, overtime worked and the mix of permanent and temporary sta could all be measured.

An organisation has to decide what quality means for it. Continuing the restaurant theme from above, a restaurant’s quality might be based around targets for food taste, service levels and waiting times for example.

!

food taste, service levels and waiting times for example. ! Quality of service: Resource utilisation: Organisations

Quality of service:

levels and waiting times for example. ! Quality of service: Resource utilisation: Organisations that have assets

Resource utilisation: Organisations that have assets often feel they ought to use them. Sales per £ of assets value is commonly used but non- nancial measures can also be used. A private hospital might have invested large sums of money into buying a MRI scanner (an expensive piece of machinery that uses magnets to produce a picture of the inside of a body). How well it uses this asset is important so it could measure the hours per week it is operational for example.

Other organisations may measure how much they are spending on R&D or the time taken between an idea being oated and a product delivered to market.

An organisation can sometimes thrive on the quality of its new ideas. Targets can be set for the number of new ideas it generates (process targets) and the successfulness of the new ideas (sales from new products).

Innovation:

• •

Targets – central points!

Too many targets can confuse people.

Single targets can easily be abused (if you ask an employee to wash cars quickly then he may do that but if this is his only target then what about quality of work and customer service? You may end up with a lot of poorly washed cars).

Be clear on what you consider to be important and focus most of the e ort there. A restaurant may be happy to keep customers waiting a little, sacri cing throughput in return for quality food cooked from fresh. This should be re ected in its targets and in this case its prices as quality will often have to come at a price.

GEOFF CORDWELL!

UNDERSTANDING PERFORMANCE MANAGEMENT

Decide in haste repent at your leisure. Whilst it can be argued that an action focus is good for business setting the wrong targets can take a business in the wrong direction and nancial disaster can follow. A car salesman might be targeted solely on number of sales made. However he can achieve this by reducing prices (and hence pro ts). Careful consideration is needed and regular review sensible. A business should not expect to get it right rst time every time but carless errors are avoidable with a little thought.

A performance manager cannot ignore the current nancial position of a business. The shareholders

and other stakeholders have to be kept satis ed. However good performance management builds for the future and non- nancial measures can move the business forward.

If
If

we consider Freg R’us again for a moment: the nancial results are very promising and the owners

are likely to be pleased with the progress made. However, there are some concerns being revealed by the non- nancials. If the sales returns continue at such a high level the costs of these will rise as will the activity involved in remedy. The future may not, therefore be as bright as the owners currently anticipate.

therefore be as bright as the owners currently anticipate. Conclusions The management of performance is not

Conclusions

The management of performance is not easy and many businesses struggle with it. However, following the many simple ideas above a business can set up balanced performance measures that will deliver better prospects and hence pro t.

up balanced performance measures that will deliver better prospects and hence pro t. WWW.CORDWELLCONSULTING.CO.UK 18

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