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Measuring Up: Performance Reporting and Measuring MIR 889 Andrew Graham Queen’s University.

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Presentation on theme: "Measuring Up: Performance Reporting and Measuring MIR 889 Andrew Graham Queen’s University."— Presentation transcript:

1 Measuring Up: Performance Reporting and Measuring MIR 889 Andrew Graham Queen’s University

2 Why Measure? To know how you are doing relative to: Plan Competition Change pressures Benchmarks Targets Commitments

3 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.

4 Limitations of Financial Performance Measures Financial 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 4

5 Lead indicators as value drivers Many 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

6 Lag Indicators In 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.

7 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.

8 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

9 Environmental Scan Strengths Weaknesses Opportunities Threats Values Mission & Vision Strategic Issues Strategic Priorities Objectives, Initiatives, and Evaluation A Model for Strategic Planning

10 Strategic Direction Create Environment For Change Strategic Performance Management System Linking it all together…. Communicate Strategies Define Objectives Implement BSC Balanced Scorecard Measure Performance Improve Processes Evaluate and Adjust Continuous Improvement Redefine Initiatives

11 The Balanced Scorecard What 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.

12 Balanced Scorecard Management 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 12

13 13 COMPANY GOALS CRITICAL FACTORS KEY PERFORMANCE INDICATORS Examples of critical factors and corresponding KPIs Operational efficiency Employee excellence Financial profitability Market share Yield rate Training hours Revenue growth Customer satisfaction

14 Four Perspectives FinancialCustomer Internal Business Learning and Growth 14

15 Financial Perspective How 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 15

16 Customer Perspective How do customers see us? ◦ Top priority for long-term success Customer 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 16

17 Internal Business Perspective At 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 17

18 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 18

19 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 19

20 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 discount Revenue center  Variance due to selling more or less units than expected  Variance due to price changes Profit center ◦ Focus on both revenue and cost variances 20

21 Performance Reports Management 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 21

22 Performance Reporting Variances ◦ 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. 22

23 Example of a Performance Report 23

24 Widely Used Financial Ratios 24

25 Widely Used Financial Ratios 25

26 Widely Used Financial Ratios May 16, 2006LIS580- Spring FIGURE 14–7c G.Dessler, 2003

27 Widely Used Financial Ratios 27

28 Ratio Analysis: Factors Affecting Return on Investment 28

29 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

30 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 30


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