FDM6 Strategic performance measurement Strategic performance measurement The importance of performance measurement Behavioural aspects What makes a system effective? Short-term performance –Developments in budgeting Long-term performance –the balanced scorecard Reading: –Management Accounting for Business 4th edition chapters 9, 10 and 15
FDM6 Strategic performance measurement The importance of performance measurement Ensures plans are achieved Monitors performance in line with strategic objectives in financial and non-financial terms Makes use of information from many sources to evaluate performance and help make decisions Focuses on external environment as much as the organisation itself Critical success factors – areas where the business must do well to succeed
FDM6 Strategic performance measurement The scope of performance indicators Long term objective may be shareholder wealth maximisation To achieve financial objectives need to consider non-financial aspects Non-financial factors are the cause of success or failure Performance targets should correspond to objectives of the organisation –Longer-term –Range of indicators
FDM6 Strategic performance measurement Behavioural aspects Risk of unintended consequences If performance is judged by success in achieving targets focus becomes how to meet them –At the exclusion of other concerns
FDM6 Strategic performance measurement Examples of unwanted behaviour Focus on short-term targets at expense of long-term objectives Neglecting non-financial issues High risk-taking Building in slack Disputes over responsibility Demotivated managers Manipulation of financial results
FDM6 Strategic performance measurement What makes a system effective? Reliability of information Timeliness Identification of responsibility and controllability Manageable quantity of information Cost-effectiveness Broad focus –need to be seen in context of external environment
FDM6 Strategic performance measurement Developments in budgeting Budget – a short-term financial plan –Used for performance measurement and management Incremental budgets – the traditional approach Recent approaches –Rolling budgets –Zero-based budgets –Activity-based budgets Beyond budgeting or better budgeting?
FDM6 Strategic performance measurement Selecting a budgetary system Should link to other parts of performance measurement system Should link to strategic planning Approach depends on needs of organisation Changes need careful planning and implementation –Need for training –Resource implications –Costs and benefits of change May make decision to continue with sub-optimal system
FDM6 Strategic performance measurement The balanced scorecard Method of looking at organisational performance developed by Kaplan and Norton Has been adopted by a large number of organisations Reflects view that progress towards shareholder wealth depends on achieving non-financial targets Uses both financial and non-financial targets Four different aspects of performance
FDM6 Strategic performance measurement Aspects of performance Financial perspective –How do we create value for our shareholders? Customer perspective –What do customers want from us? Internal (business) perspective –What processes do we need to excel at to achieve objectives? Innovation and learning (or learning and growth) perspective –How can we learn and improve and create value?
FDM6 Strategic performance measurement Implementation issues Often difficult to translate corporate vision into behaviour and actions Systems not linked to strategy Conflict between different measures Difficulties obtaining data
FDM6 Strategic performance measurement Strategy mapping Latest development by Kaplan and Norton Single diagram linking strategy to operational targets and objectives through balanced scorecard Top of map is overriding business objective Connected to perspectives of balanced scorecard by cause and effect relationships
FDM6 Strategic performance measurement Example of a balanced scorecard http://www.balancedscorecard.org/portals/ 0/PDF/Regional_Airline.pdfhttp://www.balancedscorecard.org/portals/ 0/PDF/Regional_Airline.pdf
FDM6 Strategic performance measurement Strategy mapping – the steps Identify overriding objective of the organisation Determine main way organisation will create value, given that overriding objective Identify financial strategies to support this – financial perspective Clarify customer orientated strategies supporting overall strategy = customer perspective Identify how internal processes will support strategies = internal perspective Identify skills and competencies needed to support strategies = learning and growth perspective
FDM6 Strategic performance measurement Cascading maps and scorecards Corporate-level maps describe and communicate core strategies Can then be starting point for lower levels –Business units –Functions –Departments –Individuals Question – to what extent do lower level maps and scorecards need to be consistent corporate level?